Should I Hold my Real Estate in a Corporation?
Should I hold my real estate inside a corporation?
If you own or are contemplating purchasing real estate property for investment purposes, then you should consider the tax and non-tax issues that arise from holding such property in a corporation. Below is a brief discussion of some of the major issues you should consider.
The tax laws will categorize the income you earn from real estate as either business income or investment income. Generally, the criteria to establish business income would require that you as the landlord provide services to your tenants through at least six full time employees (i.e., maid and cleaning services, providing meals, building maintenance, etc.) If that condition is met, then such rental income would qualify as business income. In addition, other real estate operations that generate business income would include building real estate property for the purpose of sale or rent and buying and selling real estate as inventory. Under these circumstances, the incorporation alternative would provide beneficial tax treatment by way of the small business deduction.
For the majority of owners that hold rental property however, the rental income from such property would generally be classified as investment income for tax purposes. The Canadian tax rules for investment income are designed to be neutral with respect to whether the investment income is earned by the individual or through a corporation. In effect, an individual in a higher tax bracket paying 46% on rental income will pay approximately the same amount of tax if the rental income was earned in a corporation. That being said, tax planning opportunities may arise depending on the facts of your situation. These may include opportunities arising from estate planning, income splitting and assessing your current tax bracket based on the pre-rental income you earn.
Two of the more significant advantages of incorporating your real estate include limited liability and financing. Limited liability safeguards your personal assets and only the assets in the corporation are at risk if a lawsuit arises in relation to your real estate operations. In addition, when you apply to borrow for a larger real estate purchase, such as a multi-unit residential building, many financial institutions may require or ease lending standards if your real estate is held within a corporation. These issues are significant and may ultimately override any tax considerations.
In summary, real estate property earning business income should generally be incorporated. The decision to incorporate real estate property earning investment income will depend on the facts of your situation from a tax perspective in addition to considering the non-tax issues mentioned above. As Chartered Accountants in Toronto and Mississauga we recommended you seek professional advice to help you determine whether you should incorporate you real estate investments. Contact a Chartered Accountant for more tax tips by email at firstname.lastname@example.org or call us at 647-725-2537 to discuss what option is best for you.