Updated: Jul 21, 2022
I am going to start this post with a big disclaimer: I am a real estate investor, not a lawyer or an accountant. It is best to always check with the law and tax professionals on your team prior to making any big decisions.
With that off my chest, here are a few guidelines and points to consider when deciding whether to close on a new property within a corporation.
Should I Buy My Next Property Within a Corporation?
Let’s dive into some of the tax implications here. If we’ve learned anything about tax laws they are anything but simple, however let’s try to make things as clear and as simple as possible. In general terms when it comes to real estate, the corporate tax rate in Canada depends on the source of the income. If you are flipping houses, running an Airbnb or wholesaling properties, it is considered to be active income. Active income within a corporation is taxed at a lower rate than passive income. The current general corporate tax rate is 11.5%.
If you are buying long term buy and hold properties, the income (rent) from these types of properties is considered to be passive income, which is taxed at a rate of around 50%. However, when the corporation pays out a dividend to its shareholders (you), it gets a rebate from the government of $1 for every $2.61 that it pays out as a dividend. This lowers your effective tax rate within the corporation. (Of course, there are some nuances here. Your accountant will be able to go into detail).
It is a good idea to separate your personal assets from your business assets. In the case of lawsuits, negligence or any other legal issue that could arise, you don’t want your personal assets such as your home, vacation properties, vehicles, and income to be at risk in an impending lawsuit that was raised over a business venture in real estate. Of course, you could always be named personally in the lawsuit as well. Liability insurance and sound legal advice are key here. (Talk to your lawyer).
To Incorporate Or Not To Incorporate?
The decision on whether to incorporate when buying an investment property is a personal one. It is going to depend on how many properties you plan on buying, what your current income (tax rate) is, if you are buying the property solo or with a joint venture partner and a host of other considerations. In general terms, the first few properties (up to 2 or 3) can be done in your personal name. After that, it is good to incorporate. A joint venture partnership should also generally be kept separate from your personal assets. If you are in the highest tax bracket, or close to it, it is also good to incorporate. If you plan on pursuing a more active income strategy, such as flipping houses, buying those properties within a corporation can be a very good idea. Remember, active income in a corporation is taxed at a very low rate. You can essentially spread a large income from one year out over many years if the income was generated within a corporation.
Buying a Property Within a Corporation
If you decide to purchase a property within a corporation, there are a few things to look out for. First, many Canadian banks won’t work with you. There are a few that will, such as TD, CIBC and Scotiabank. However, there may be delays when trying to close a property within a corporation. For instance, TD will not guarantee a turn around time when trying to apply for a mortgage under a corporate name. If you are going to go this route, you will have to have a long or flexible closing (at least a few months) to even get a mortgage. If you are working with a broker, they will sometimes charge you up to 1% of the mortgage value as a fee when trying to close within a corporate name. You should also be prepared to personally guarantee the loan, as banks will not loan to a new corporation without it.
An alternative to this is something called a bare trust agreement. You can purchase the property in your name, which is easier and oftentimes cheaper to do, and create a bare trust agreement that basically states that you are holding the property in trust for your corporation. Effectively, even though your name is on title, the corporation is the true and beneficial owner of the property. This should be done on closing and all debits and income should go through the corporate account to set the precedent that the property is corporate owned. A set up like this enables you to take advantage of the ease of getting a mortgage in your personal name and the tax benefits of having the property in a corporation. A word of advice here is to use one lawyer for closing and a different lawyer to draw up the bare trust agreement. The reason for this is the lawyer who took care of closing has a fiduciary responsibility to the bank and to you during this transaction. Legally, he is obligated to notify the bank of the trust agreement which can complicate funding your deal. It is best to keep these two transactions separate.
A benefit to having a bare trust agreement in place for your corporation rather than having it under t he corporate name directly, is the ability to open a Home Equity Line of Credit (HELOC). If it is directly under the corporate name, it can be difficult to open a HELOC to pull equity out of your deal. If you are personally on title, it can make the process much smoother.
The Bottom Line
Corporate and personal tax laws and mortgage rules are a complicated thing that seem to change very frequently. It is best to speak with your bank, mortgage broker, accountant and lawyer when deciding on how to structure your next deal. There are costs to setting up and maintaining a corporation that can be several thousand dollars per year. The increased accounting fees and set up fees should be considered when deciding on the best structure for you to use.
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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