Will putting my rental properties into a corporation save taxes?

Pay less tax on rental properties

By Evelyn Jacks, RWM, MFA, MFA-P, FDFS on October 6, 2017
Estimated reading time: 3 minutes

Here are the pros and cons of putting rental properties into corporations.

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Q: I have five rental properties in my name. Should I switch them to a numbered company? –Travis A: Hi, Travis. Incorporating a holding company to own rental properties has some advantages and disadvantages depending on the objectives you have in mind in both the short and long term. However, you should first speak with a tax accountant about any tax ramifications both personally and corporately to ensure as perfect an integration of the two systems as possible. Then speak with a legal advisor to draft up the appropriate corporate structure before making the transfer. From a tax point of view, there are two things to consider. While the transfer of real property held personally should qualify for a Section 85 election to rollover the properties at their cost base, you will want to be sure the CRA will not consider your properties to be held as “inventory”; that is property, held primarily for resale rather than rental. If so, they will not qualify for a tax-free rollover or capital gains treatment. Therefore, the transfer could trigger unexpected tax consequences. Your history of receiving rental income from the property will help you avoid this. Second, you’ll also want to understand the difference in taxation rates both inside and outside of the corporation. Recent tax changes may have made it less desirable to own passive investments inside a corporation, depending on where you live in Canada. Some advantages of incorporation include limited liability and creditor protection. However, if you are holding mortgages, most financial institutions will still require personal guarantees. Corporate directors and officers can also be held liable on default, so proper insurance protections for these instances is critical. From a retirement planning point of view, incorporation may provide more flexibility as to when income is taken as dividends. It could help you to avoid personal taxes or spikes into the next tax bracket, and benefit from the recovery of refundable taxes in the corporation. Consider also that there will be costs for setting up and annual reporting of the holding company. Transferring the properties from the taxpayer to a holding company may have tax consequences, other than income taxes. If your province has a land transfer tax (or equivalent), you may have to pay the land transfer tax when the properties are transferred. The bottom line is this: you’ll want to be thoughtful about the transfer, and you’ll want to match your investment objectives and desired tax outcomes as closely as possible. Evelyn Jacks is a tax expert, author, and founder and of Knowledge Bureau in Winnipeg.

About Evelyn Jacks, RWM, MFA, MFA-P, FDFS

Evelyn Jacks is the best-selling tax author of 55 books, an award-winning business leader and the Founder and President of Knowledge Bureau, an online financial education institute.

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Comments Cancel reply

Lou says:

April 19, 2020 at 1:26 pm

I’m interested in a property in another country
I want a company name
And most inexpensive way to do so

Reply
Russ Alfreds says:

September 25, 2020 at 9:20 pm

I have a rental property in a holding company. The rent is $24,000 per year. I live in BC how much tax will I have to pay? The net profit is $20,000. If I pay tax on the $20,000 and I then take a dividend of $20,000 how much tax will i have to pay? It seems to me I will be taxed twice. Once for the holding company and once on the dividends. My income is $50,000 plus the dividends,

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1. Sandra E. Martin says:
  
  September 28, 2020 at 1:08 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
  Reply
Nadia lee says:

February 1, 2023 at 3:40 pm

Is property corporated taxed more than individual?

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1. MoneySense Editors says:
  
  February 6, 2023 at 10:37 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists.
  
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