Advertisement
It can make sense to purchase rental or vacation properties through a corporation, but often it's simpler—and less risky from a tax perspective—to own the real estate personally.
One of the main tax benefits of Canadian real estate is the ability to claim an unlimited principal residence exemption on the property value appreciation. One exception may be if the land is more than half a hectare (1.24 acres), unless the minimum municipal lot size at the time you purchased the property was more than that or you can demonstrate the need for the larger lot size to use and enjoy your home.
Another exception is if a property is owned by a corporation. A corporation is a company that is incorporated and owned by shareholders. It is a common way to do business in Canada, and it is a separate legal entity from the shareholders. Corporations file their own tax returns.
A corporation can be used to buy your home or a secondary property, such as a vacation property, but there are drawbacks. For one, you must personally pay the corporation fair market rent each year for the property or include the equivalent amount as a taxable benefit on a T4 slip to be reported on your personal tax return as income.
The biggest drawback is that the home will not qualify as a principal residence. A corporation cannot claim a principal residence exemption like an individual taxpayer. As a result, it is hardly ever advantageous to have your corporation buy your home.
Since you can claim a principal residence exemption for a cottage or other property you use occasionally, having your corporation own it can also negate future tax savings.
If the property is a secondary property that will also be rented out significantly—for short-term rentals, for example—there may be a better case for buying it corporately.
If you do not already have a corporation and you are setting one up solely to buy a rental property, it is important to consider the costs and benefits. The government and legal fees to establish a basic corporation may range from $1,500 to $2,500. The annual costs of legal and accounting services may be $1,500 to $3,500 or more.
Corporations generally pay tax at about 50% on net rental income, and at about 25% on a rental property capital gain (rates differ by province or territory). This is similar to what a top-rate taxpayer might pay if they owned the same property personally. Therefore, many people would pay less tax by owning a rental property personally instead of corporately if their income is less than about $220,000. They could also avoid the cost and complexity of the corporate structure by owning personally.
One type of buyer who might benefit from using a corporation is someone who plans to flip properties for profit.
If a taxpayer buys and sells a property not with the intention of renting it out but to generate a profit on the sale, that income could be taxed as business income. As such, someone flipping a property personally could pay tax as high as 54%, depending on their income and province or territory of residence. By contrast, a corporation’s business income could be taxed as low as 9% to 12% (rates differ by province or territory).
If someone has an existing corporation with accumulated savings, using a corporation to buy an investment or business property becomes more compelling. This is because retained corporate profit can be used to buy the property without withdrawing money as a salary or dividend and paying personal tax on that income to buy the same property personally.
Often, business owners will establish a separate corporation to buy a rental property or a property to be used for the business. This may be done so that the property is not exposed to creditors of the primary business, or so that it remains a separate asset if the business is ever sold. Money can generally be moved from one corporation to another without triggering personal tax.
It may be more difficult to secure the same mortgage financing for a corporation compared to buying a property personally.
One reason is that a corporation is a separate entity from the individual who owns the corporation. This provides a degree of liability protection that is beneficial for the owner of the corporation, but it is not as appealing to a potential lender to the corporation.
An individual also has a credit rating and credit history. Lenders have fewer ways to assess the creditworthiness of the corporation.
Finally, interest rates for corporate mortgages tend to be higher than those for personal mortgage loans.
Some snowbirds consider using a corporation to buy a U.S. property. The goal is usually to avoid U.S. estate tax otherwise payable upon death. The current U.S. estate tax exemption for Canadians is USD$12.06 million, so most Canadian residents are not subject to U.S. estate tax.
Like Canadians using a corporation to buy a property in Canada, those using a corporation for a U.S. property may need to make fair market rent payments to the corporation or include the equivalent amount as a taxable benefit when filing their personal tax returns. Alternate structures like cross-border trusts may be more suitable in some circumstances for high-net-worth purchasers exposed to U.S. estate tax.
Canada does not levy estate tax, but probate fees or estate administration tax can be high in some provinces and territories.
Corporations may bypass probate or estate administration if owned by a shareholder who has a secondary will. This can be advantageous to speed up estate settlement and can save thousands in probate fees in some provinces and territories. However, alter ego trusts, joint partner trusts, or bare trusts can also avoid probate without the same fair market rent requirement or taxable benefit issues, so may be preferable in some cases.
Personally held real estate can be transferred to a corporation after purchase, but land transfer taxes generally apply. However, accrued capital gains tax may be deferred on transfer.
Corporations may be suitable structures for holding real estate in some situations, but in others, the cost and complexity can be deterrents. Tax and legal advice should be considered prior to property purchases or transfers.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
Affiliate (monetized) links can sometimes result in a payment to MoneySense (owned by Ratehub Inc.), which helps our website stay free to our users. If a link has an asterisk (*) or is labelled as “Featured,” it is an affiliate link. If a link is labelled as “Sponsored,” it is a paid placement, which may or may not have an affiliate link. Our editorial content will never be influenced by these links. We are committed to looking at all available products in the market. Where a product ranks in our article, and whether or not it’s included in the first place, is never driven by compensation. For more details, read our MoneySense Monetization policy.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Canadians with no children or siblings must consider estate planning alternatives. Here’s why trust companies can be a good...
Which ETFs should you invest in? Which ones best suit your risk tolerance? What about personal ethics? Check out...
The Trump effect and Trumponomics, Shopify’s huge earnings beat, it’s sunny days for Suncor shareholders and more.
Here’s how to get your free ticket to attend two MoneyShow virtual expos.
Should you be paid as a power of attorney? Learn about the compensation rules in Ontario and how to...
You started investing in your 20s, and you feel pretty good about doing it. But now what? Consider impact...
Want an idea of how much tax you paid—or will be paying—for 2024? Here are the federal and provincial...
The federal government’s capital gains inclusion rate increase has yet to become law. There’s a slight chance it may...
I was living in common law relationship from last 15 years. I booked preconstruction condo in 2016 in other city. The condo is ready to occupy but my common law partner does not want to move. So i am moving and we will not be amy more in common law relationship. She will be still living in ottawa.
Can i claim my new home as my principal residence and get exempt from GSt.
How long I have to live there to claim as principal resident.
The current property is ownership is 50% each party.
How the capital gain will calculated when she sell the prooerty.
In 3 years.
I lived there 15 years.
We sell it in 18 years.
Best regards
Gus
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.
I own a inactive farming corporation in alberta ,can i purchase a condo and rent it at a fair market market value to myself
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.
Initially, the corporate tax on rental income is around 50%, however a large portion of that is refundable when the company pays out taxable dividends to the shareholders (@ 38.33% of the dividends paid).
Effect of the refundable dividend tax is that a BC corporation owning a rental property pays just 20% tax on the net rental income.
For those who use Personal Pension Plans to save for retirement there is also the option of buying real estate through a tax exempt Pension Real Estate Holding Corporation. That way, when the underlying real estate is sold or generates income, there is no corporate tax payable.
Hi there, can you expand on what you mean by “However, accrued capital gains tax may be deferred on transfer.”
I’m considering selling my house to my corporation, would I lose the capital gains exemption?
I think the paragraph where you discuss owning personal use property inside a corporation leaves out a critical issue. Namely that if you use corporate earnings to buy the personal use property you will have a large shareholder draw and 15(2) issue. I am assuming 15(2.4) does not apply. Your idea only works if the taxpayer transfers the family property into the company at FMV and pays tax on it personally. Any other way and you will have a draw and have to pay personal tax. You are correct, that the corp will have to charge FMV rent, but this is not the entire story.