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

Incorporated REALTORS® who use a Personal Real Estate Corporation (PREC) can sponsor a Personal Pension Plan (PPP) and make use of past salaries paid by the PREC to create corporate tax deductions. 

Sometimes, family wealth is no longer in the PREC, having been moved into a holding company (HOLDCO). This creates a mismatch: the entity with the tax deductions (the PREC) no longer has the cash since it now sits in HOLDCO. The question is, can a pension plan still provide any benefits in this situation? 

Usually for creditor protection, business owners who generate income within an active corporation (the OPCO or PREC) transfer retained earnings not needed to run the PREC into a HOLDCO via tax-free intercorporate dividends. 

In turn, HOLDCO may wish to invest these intercorporate dividends in capital assets through a non-registered corporate investment account. One reason for doing this is to prevent exposure to ongoing passive corporate taxes over time. The logic is that as long as the capital asset purchased by HOLDCO isn’t sold, there are no realized gains—only unrealized gains that aren’t subject to taxation. 

While using a HOLDCO to create a liability shield and protect the PREC from creditors is prudent, it does create a mismatch when a pension plan is introduced. Pension laws only allow the entity paying T4 income (for example, salary or bonuses) to make a tax-deductible contribution to the pension plan. 

Since HOLDCO does not pay T4 income to the REALTOR®, it’s not eligible to contribute to the pension plan or claim any tax deductions. The flip side is that while the PREC can make a tax-deductible contribution, it cannot do so because it has already transferred all of its wealth to HOLDCO via intercorporate dividends. 

A corporate loan from HOLDCO to the PREC is possible but comes with its own complexities and is only a partial solution. A better approach is to rely on Section 85 of the Income Tax Act (Canada), which provides “rollover” provisions for related entities. 

Since the PREC and HOLDCO are normally Canadian-controlled private corporations related to one another (with HOLDCO a shareholder of the PREC), they can jointly elect—using CRA Form T2057—an agreed amount that will be the tax cost of the property being transferred from HOLDCO to the PREC. This tax cost becomes the basis for any future capital gains calculation when the PREC eventually sells the transferred property.

Once the property is rolled down into the PREC, the PREC can sell it to trigger a taxable capital gain. While this could create a tax issue, it doesn’t have to. If part or all of the cash from the sale is contributed to the pension plan sponsored by the PREC, an offsetting corporate tax deduction is created. 

This deduction eliminates any taxable capital gain, making the transaction tax neutral to the PREC. The cash will now grow without ongoing taxation while it’s within the pension plan. HOLDCO will never have to pay tax on that property since it has been rolled over to the PREC. 

The upside of this solution is that under current tax laws, only 50 per cent of the capital gain generated by the PREC is taxable. The other 50 per cent is credited to the PREC’s Capital Dividend Account (CDA). 

If the PREC contributes half of the sale proceeds to the pension plan (to negate the taxable capital gain), the remaining cash can be used to pay the shareholder a tax-free capital dividend. 

The main goal—matching the cash with the entity capable of using the deductions—has been achieved in a tax-effective way, thanks to Section 85.