PREC pension - the fallacy of the RRSP refund
Contributor: Pension lawyer Jean Pierre Laporte, BA, MA, LLB. (Jp.laporte@integris-mgt.com)
Last week, we reviewed the concept of the RRSP double dip, where a REALTOR® operating a Personal Real Estate Corporation (PREC) who takes some compensation from the PREC as T4 income can set up a pension plan and make an RRSP contribution.
Personal tax rates are significantly higher than the corporate tax rates levied on the active business income of a PREC. Knowing that, you’d think contributing to an RRSP for a personal tax deduction is a smarter and more financially efficient plan than having the PREC contribute the same amount to your pension plan.
Not so fast. There’s actually no tax advantage – here’s why.
A case study
Let’s say you, operating as a PREC, made $500,000 last year, and you want to keep $150,000 for yourself. You also want to save $30,000 towards your retirement, with the rest of the earnings reinvested.
Considering a personal tax rate of 50 per cent compared to a rate of 11 per cent for your PREC, it’s clear there’s no advantage to saving solely through your RRSP over using a PPP.
| RRSP | Personal Pension Plan (PPP) | |
|---|---|---|
| Total salary paid (gross) from PREC to get $150K net | $330K ($30K to RRSP and $300K taxed at 50 per cent to yield $150K net) | $300K taxed at 50 per cent to yield $150K net |
| Balance of PREC revenues subject to 11 per cent tax | $170K ($18,700) | $500K (less $30K pension contribution, less $300K gross amount) equals $170K ($18,700) |
| Retained earnings | $151,300 | $151,300 |
| Savings | $30K | $30K |