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

REALTORS® who use a Personal Real Estate Corporation (PREC) face two choices as they prepare for retirement:

• Use your PREC as if it were a pension plan and save within their corporation, or
• Set up a Personal Pension Plan (PPP) and save through a registered account.

This choice is vital because it has long-lasting and material tax consequences in terms of how much money is being put to work to generate retirement income.

This approach exposes you to a number of taxable events that gradually erode the savings you can ultimately build.  These are:

• Active business income tax: earned on commissions collected by the PREC.  This can be 11 per cent if the PREC’s income is below $500,000 and 26.5 per cent when taxable income is above $500,000.
• Passive corporate income tax: when the PREC generates interest income or foreign dividend income, this corporate passive income is taxed in excess of 50 per cent. If the PREC earns passive income in excess of $50,000, the low rate of 11 per cent eventually increases to more than 26 per cent.
• Personal tax on dividend: when you need income from your PREC and declare a dividend, you’ll owe personal income tax.
• Departure tax: if you opt to become a non-resident, the wealth in your PREC is treated as a capital gain.
• Death tax:  if you pass away, the value of the shares of the PREC must be valued and taxed on any increase in value since incorporation.

This approach shelters the maximum amount earned by your PREC thanks to these rules:

• Contributions from pre-tax commission income made by your PREC is sheltered from taxation - no 11 per cent or 26 per cent upfront tax on contributions.
• All passive income earned within your PPP is taxed at zero per cent since it’s a tax-exempt account.
• Passive Income Tax rules don’t apply to passive growth within your PPP account since it is separate from the corporate assets of the PREC. There’s no risk of reducing the $500,000 small business deduction allowance accordingly.
• There’s no departure tax since the pension assets are considered “Exempt Assets.”
• There’s the potential to bypass death taxes if your children are employed by your PREC and made members of the plan. Even if your children aren’t employed by your PREC, there’s potential for income splitting on the death benefits payment to designated beneficiaries.
• Personal taxation only happens in retirement and could be as low as 15 per cent.

There are many roads that lead to retirement, but one strips significant value along the way, whereas the PPP route preserves scarce cash for very long periods of time, enabling capital to compound while sheltered from ongoing taxation. 

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