Our clients who purchase rental properties often ask us the best way to hold them: under a corporation or under their name. Which is best depends on both the kind of property and your tax situation.
A Canadian corporation is a separate legal entity that is treated as a person under the law. When you hold rental properties through a corporation you are distancing yourself from the property which can be good for liability reasons but does not always offer a tax advantage.
Since the corporation is considered a separate legal entity, it, and not you, is legally responsible for most mishaps. Any tenant that decides to sue would have to sue the corporation instead of yourself, which means that your other assets, like your stocks and personal home, are often protected. That may not be such a concern for an investor who’s looking to buy a new condo with a single tenant who has good insurance, but it’s definitely a concern if an investor is buying a 20-unit apartment building with old radiators and a superintendent.
Not only is there often no tax advantage to holding property within a corporation, but it may also, in fact, end up costing you. You’ll be paying around a 50% tax on earnings, which is close to the highest tax bracket a Canadian individual would pay. Depending on your other income and marginal tax rate, you may end up paying more tax within the corporation than outside. However, the exception is an incorporated property holder who employs more than 5 full-time staff, these corporations can access the small business deduction leading to a corporate tax rate as low as 13.5%. Essentially, the more complex your property transactions and the more they resemble an actual business the more useful incorporating will be to you.
Another segment of the population who may find incorporating quite useful are small business owners who are stockpiling cash within their corporation to defer taxes. They may need something to do with all that money, and getting the corporation to buy property may be a smart move. The strategy works like this: You save your after-tax earnings (if you don’t need them to live on) and use that capital toward a down payment on a property. You’ll have more money for the down payment than if you had first paid yourself from your corporation, paid personal tax, and then used those dollars (now significantly reduced from taxes) toward a down payment. You’ll be able to buy properties much quicker when you don’t have to pay the CRA additional personal taxes.
But someone who used this strategy would have to first be an owner of a small business making good money, be wealthy enough to be able to leave funds inside the corporation and be really focused on building wealth. This strategy requires planning by a good tax accountant or lawyer as laws were introduced by the Liberal government to limit the benefits to such a structure.
Basically, there’s almost no good reason for the average Canadian property investor of a few condos or houses to go through the hassle of incorporating. Incorporating only becomes something to look into when you have a property empire, or for small businesses that are looking into sophisticated tax-deferral strategies.
At Campanella McDonald LLP we help hundreds of real estate investors and small business owners, like yourself, properly structure their real estate portfolio to optimize their tax savings. Give us a call today and we will book an introductory meeting to get you on the right path to growth and tax savings.