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

With any financial concept or strategy, one needs to do a cost–benefit analysis to determine whether a solution makes financial sense – and if it does, by how much.  

A financial solution that makes sense but provides only marginal benefits may not be worth the effort. This article looks at this type of analysis in the context of setting up a registered pension plan for a Professional Real Estate Corporation (PREC). 

GVR offers the Personal Pension Plan (PPP) to any REALTOR® who:  

• operates through a PREC 
• is under age 71 
• takes some compensation from their PREC in the form of T4 income as salary or bonuses 

The program allows the PREC to make tax-deductible contributions and have that retirement cash invested to generate returns. 

As with any financial product, it comes with an annual fee of $2,800, which is tax-deductible to the PREC. For a PREC paying corporate tax at 26 per cent, and claiming the annual fee as an expense, the actual cost is $2,072 (since the PREC can receive a tax refund of $728). 

Any Canadian borrowing money to invest with a reasonable expectation of generating profits has the right to claim a tax deduction for the interest paid back to the lender.  

Such deductions reduce total personal income tax owed and, for those who have already prepaid their taxes, can even lead to a refund from the Canada Revenue Agency. 

The main questions are: 

1. Where can one secure a loan or line of credit at a reasonable rate of interest? 
2. Once secured, can this loan be invested in private real estate? 

In Canada’s banking system, the cheapest borrowing typically comes from secured loans, where a mortgage protects the lender’s investment in case of default. A re-advanceable mortgage or a segmented line of credit tied to a traditional mortgage is a quick way to access such funds. 

A shareholder’s loan from the Realtor who owns a PREC is another source of cash. When a PREC refunds a shareholder loan, it’s a tax-neutral transaction – meaning the shareholder does not need to declare these returns of capital as taxable income. 

Once financing is secured, the Realtor can use this capital to acquire private real estate (e.g., a condo, house, or land) for investment purposes. 

The repayment of interest to the lender creates a personal tax deduction, which can trigger a tax refund. That refund can then be used to pay down the loan principal or re-establish borrowing room for further investments.  

Over time, non-deductible debt is replaced with deductible debt, increasing equity growth from the investment. 

Realtors with a PREC capitalized partly through a shareholder loan have the added advantage of using those dollars within the tax-sheltered environment of a PPP. Not only are PREC contributions to the PPP tax-deductible, but any future growth within the PPP is also sheltered from ongoing taxation. 

Since a PPP can invest in private real estate, the asset class can be developed in an even more tax-advantaged way than under a traditional Smith Maneuver. As a bonus, taxes a PREC may have prepaid to the Canada Revenue Agency on commission or business income can be refunded to the PREC because of tax-deductible pension contributions. That refunded money can then be used to repay the shareholder loan – without creating personal taxes in the hands of the Realtor.

Click here for previous articles about the pension plan.