In October 2020, the Province of Ontario joined British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, and Nova Scotia, in allowing Real Estate Agents to establish a Personal Real Estate Corporation (PREC), that would allow their remuneration from their brokerage to be paid to the PREC. Without a PREC, most Agents would receive T4A income. By receiving the income directly to their PREC an Agent has a few options as to how to flow the income to themselves. There is an ongoing debate amongst tax professionals as to what form that income should take. It is important to consider any spreads in tax rates between dividends and T4 and it is also imperative to note that by providing T4 income to oneself, it can open the door to many planning opportunities.
For CRA purposes, an employment relationship is established from T4 income; dividends would be considered profits that flow from the PREC. This is an important distinction, especially as it pertains to employee benefits. Solely receiving dividends would impact access to health and dental plans on a tax-deductible basis to the PREC where the benefit is received tax free. CRA would view health benefits received by the PREC where the Agent has not received a reasonable salary from the PREC, as a taxable shareholder benefit. For those Agents with young families or those who have health expenses for themselves, the inability to tax efficiently flow these benefits to themselves by only receiving dividends is a significant cost.
For example, an Agent with a PREC, if they provide a T4 of $100,000 or more, by using a Health Benefit Plan (HBP) or a Health Spending Account (HSA), can expense up to $20,000 in health and dental benefits for their dependents, annually. An HBP is a self-administered benefits plan that allows the Agent to cover these expenses on a tax favourable basis.
For retirement benefits, T4 income allows the Agent to accrue not only RSP room, but also the ability to establish an Individual Pension Plan (IPP). For Agents over the age of 40, that are high income earners, the IPP provides a more tax efficient and elegant means to fund retirement. For example, a 65 year old earning T4, can fund more than 65% into the IPP versus an RSP. The IPP provides the Agent the ability to receive a pension in line with many public sector workers. All expenses associated are deductible to the PREC as an expense. This includes contributions, any top up funding, administrative fees, and any investment fees. Within an RSP, investment fees are not deductible.
The IPP also allows the Agent to backdate the pension to the date of incorporation of the PREC, which is another positive and can create significant funding room. These are just a few doors that receiving salary inside a corporation open, and these are staples of sound retirement and benefit planning.
Founded in 1995, GBL is a leading provider of retirement and health solutions for business owners across Canada. For more information on our services and strategies contact: firstname.lastname@example.org or 403.249.1820 and follow us to learn how we can help Build Your Future.