Have you, as a realtor or real estate agent, found yourself with the question, “Should I pay myself a salary or dividend from PREC?”
Well, you’re not alone. Many of my realtor clients have been asking which one is better suited to them. Although it’s not a simple one-answer-fits-all kind of question, I may be able to simplify your situation for you with these 4 deciding factors!
Now that you set up your PREC, should you pay yourself a salary or a dividend from PREC?
As we all know, Personal Real Estate Corporation is considered a separate legal entity. PREC can own assets, buy real estate, owe liabilities, sign contracts, etc. PREC is essentially a legal person.
This also means that the PREC must file its own tax returns.
It also means that, when you, as the owner of the corporation, draw money out from the corporation, there can be tax impact.
There are three ways to draw out money from your personal real estate corporation
- Repayment of shareholder loan
Repayment of shareholder loan
When you first start your personal real estate corporation, you would have lent some money into the corporation to get it started.
This can include a direct deposit of funds to your corporation bank account to cover the initial expense before the first paycheck comes in.
This can also include payment of incorporation fees, etc. that you pay personally on behalf of the corporation to get your PREC going.
As a result of these advanced payments, your personal real estate corporation may owe you money.
Your PREC can repay you, the shareholder, the amount that you have invested into the corporation, tax-free withdrawal from your personal name.
When you own your real estate agent business inside a corporation, there’s always a tax impact when you take the money out from the corporation.
There are two common ways to do so – one is by way of salary and the other is dividend.
Salary vs. Dividend and PREC
What’s the difference between the two of them?
- Salary is a deductible expense in a PREC and a dividend is not
Let’s use an example to illustrate. Say a personal real estate corp makes $400,000 before paying a salary.
Say the corporation pays $100,000 to the shareholder as a salary, the corporation is taxed on $300,000 at 12.2%. The individual who receives the salary will then pay tax on the $100,000.
You, the realtor, will be paying personal taxes on the $100K salary.
Now, if the corporation decides to pay the dividend instead, the corporation would first get taxed for $400,000 at 12.2%. The individual then receives the $100,000 as dividend.
The realtor pays a lower tax amount on the $100K dividend received, as the corporation already pays 12.2%.
In a nutshell, there’s no difference in terms of the tax paid.
Personal tax on salary would more or less equal the combined corporation tax and personal tax on the dividend of the same amount. That’s called tax integration. This is how the Canadian tax system is designed.
- There’s an additional cost involved, such as CPP when you pay a salary
When paying a salary, the PREC is required to withhold taxes, employee’s portion of Canada Pension Plan and pay the net remaining amount to you, the employee realtor.
Personal Real Estate Corporation, the employer, in this case, the corporation, is also required to make the same amount of contribution to CPP.
Personal Real Estate Corp is then required to remit the withholding taxes, employee and employer portion of CPP on a monthly basis to CRA.
Maximum CPP contribution required in 2022 is $3,500 for employer and employee. This means that you will incur a total of $7,000 extra cost when you pay yourself a salary.
At the end of the year, you also have to reconcile with CRA by filing a T4 information return.
By paying yourself a salary, you get to contribute to your CPP. If you continue to contribute to CPP, when you reach the age of retirement, you can be eligible to receive your CPP.
Amount of CPP you receive when you retire will be based on the amount of CPP you have contributed.
- Salary can give you RRSP contribution room & enable you to deduct child care expense
Although the costs seem to be higher with salary, there are some other benefits from paying a salary, for example, RRSP contribution.
Canadians are only allowed to make RRSP Contribution up to the RRSP contribution limit. RRSP contribution limit is calculated as a percentage based on earned income. Salary is earned income but dividend isn’t. If you want to save money in your RRSP account, paying yourself via dividend won’t work.
Salary creates a bigger RRSP contribution limit. Dividend doesn’t. You can still contribute based on the unused RRSP contribution limit carryforward from prior years. But once that contribution limit is used up and you are not creating extra contribution room with dividend, you will no longer be able to contribute to your RRSP.
If you have childcare expenses, you can deduct the childcare expenses against salary, but not dividend.
Dividend income is not part of the definition of earned income but salary is. In another word, if you make $100,000 dividend income, you’re the lower income spouse and you also incur $8,000 of childcare expenses, you will NOT be able to deduct the $8,000 expense in your personal tax return.
Have a proper consultation with a professional accountant that understands your tax picture.
- You are entitled to an additional employment amount (as a personal tax credit) if you are paid a salary
When you earn a salary, you get another $1,257 employment amount as non-refundable personal tax credit in 2021.
Calculated on the base personal tax rate, this is equivalent to $1,245 x 15% = $189 (in 2021) non-refundable tax credit.
Unfortunately, this isn’t available when you earn dividend income. Self-employed individuals are not eligible to claim this amount unfortunately.
Now, it is not a simple black or white kind of answer, is it?
If I were you, I’d speak to a professional accountant that knows my personal situation before deciding. And, I wouldn’t forget to consider all of the above when making my decisionQ
Feel free to reach out here and book a consultation. We’ll be happy to help you decide if you should go ahead with paying yourself a salary or dividend from your PREC.
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant