Contributor: Pension lawyer Jean Pierre Laporte, BA, MA, LLB. (Jp.laporte@integris-mgt.com)

REALTORS® who have incorporated a Personal Real Estate Corporation (PREC) often wonder: what's the best way to take money out of your PREC – salary or dividends?

Since each payment mechanism comes with its own rules and tax consequences, this week we’ll break down these two primary withdrawal methods.

The simpler approach is to declare a dividend after the PREC has paid its active business income tax. Here’s how that works:

• PREC pays corporate tax first:
  • 11 per cent on the first $500,000 of income
  • 26.5 per cent on income above that
• When you pay yourself a non-eligible dividend, you’ll also owe personal income tax (currently 40.39 per cent in BC).

One of the perceived advantages of using a purely dividend approach is that, in the absence of employment income, you don’t make contributions to the Canada Pension Plan.

As well, many feel that the dividend approach is administratively simpler for the PREC’s accountant since regular withholdings at source on employment income are not required.

Under this approach, your PREC pays you a salary (T4 income), typically as the PREC’s president. This salary is a corporate expense that becomes tax-deductible, reducing the amount of active business income taxed up front. 

In turn, you pay personal tax on the T4 income you receive from the PREC at graduated progressive tax brackets.  This means the more salary paid out in T4 income, the higher the percentage of tax owed.

The payment of T4 income does trigger a requirement to also make contributions to the Canada Pension Plan, both coming from the employer/PREC and the employee/president. 

Since regular withholdings of personal tax need to be remitted to the CRA, many feel the use of a salary is more administratively demanding.

Here’s a simplified example based on a PREC earning $500,000 in commission income. The Realtor wants to take out $200,000:

• Last week's article: To PREC or not to PREC?
• What’s a REALTOR® trying to save for retirement to do?
• Make your best retirement plan with GVR and INTEGRIS
• The Critical Path podcast – REALTOR® pension plan with INTEGRIS CEO JP Laporte