Canadian real estate has several tax benefits, including allowing you to lay claims on unlimited principal exemption when a property’s value rises. But there are instances where this is not applicable. For example, you may not be able to claim the unlimited principal exemption on lands more than half a hectare in size, except if and when the minimum municipal lot size of the property at the time of purchase is more than its current size, or you can convincingly show that you require a larger lot size to get the best out of the property.
Corporation-owned properties are another exception. A corporation is an incorporated company owned by its shareholders. However, when filing its tax returns, the corporation is a separate legal entity from its shareholders – this is a standard business framework in Canada. While real estate owning corporations is permissible, laying claim to a principal residence exemption is not permissible. And this is a reason not to use a corporation in owning a home if you plan to sell it in the future, without paying tax.
Income Property Acquisition via a Corporation
Buying a rental property using a corporation is pretty common in Canada. However, despite the popularity, Ottawa Certified Financial Planners have recommended considering the costs and benefits before setting up a corporation with the sole purpose of buying a property. Apart from spending between $1500 and $2500 as legal fees for establishing a basic corporation, another huge amount goes into legal and accounting fees annually.
Although rates differ per province in Canada, you can still expect to pay up to 50% tax on net rental income and 25% tax on rental property capital gain as a corporation. A top-rate taxpayer that owns a property personally will likely pay similar amounts in tax. Therefore, owning a rental property personally rather than corporately is a go-to option for many people; after all, they pay less tax without footing the costs and dealing with the corporate structure intricacy.
But there is an exception, especially if you buy and flip properties. Buying and selling a property to generate profit from sales instead of renting it out qualifies it as a business; hence, it is taxed as business income. The tax payable here depends on the taxpayer’s income and the province of residence. For example, personally flipping a property may cost up to 50% in tax, while taxes on a corporation’s business income can be as low as 9% to 15%, depending on the province.
Buying an investment or business property using an existing corporation is a more favorable option. This is because the retained corporate profit of such corporations can serve as the purchasing capital, saving you from the personal tax that would have come with withdrawing money and buying the property personally.
It is common to see business owners set up a distinct corporation solely to purchase a property for the use of the business or a general rental property. They do this to ensure creditors of the primary business cannot access the property or sell it alongside the business if the need ever arises. It is possible to move money from one corporation to another while avoiding personal tax.
Secondary Property Acquisition via a Corporation
Although you can purchase a vacation property or any secondary property using a corporation, you should be aware of the possible hindrances involved. Perhaps, the biggest is the need to pay the corporation fair market rent annually. Alternatively, you can do this by adding the same amount as a taxable benefit on your T4 slip, which will reflect as income on your personal tax return. Likewise, buying the property as an individual may be easier compared to securing the same mortgage financing.
We have seen snowbirds buy a U.S. property via a corporation to help them avoid the U.S. estate tax, which otherwise remains payable on death. With the U.S. estate tax exemption for Canadians currently at 11.58M USD, only a few Canadian residents are subject to the U.S. estate tax. Buying a U.S. property via a corporation as a Canadian does not exempt you from the potential fair market rent payment or taxable benefit income inclusion. Opting for alternate structures can be a better move in some situations, especially for high-net-worth buyers subject to the U.S. estate tax. One of such structures is the cross-border trusts.
Despite a zero-levy estate tax in Canada, you must pay probate fees or estate administration tax, which can be pretty high in some provinces. That said, corporations owned by a shareholder with a secondary will can bypass probate or estate administration, but joint partner or alter ego setups are better avenues for avoiding probate than setting up a corporation just to buy real estate as an individual.
You can transfer a personally-held real estate to a corporation on completing the purchase while deferring the accrued capital gains tax. However, you must be ready to pay the applicable land transfer taxes.
Finally…
Holding real estate via corporations may be ideal in some circumstances. But in most cases, the complexity and cost can be major valid drawbacks. Always consult your Ottawa CFP for professional help and guidance before property purchases.
