The article “Should you buy real estate through a corporation?” was originally published in MoneySense on September 12, 2022. Photo by Sebastian Staines on Unsplash.
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.
Can a corporation buy a house in Canada?
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.
Should I use a corporation to buy an income property?
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.
What if I intend to flip houses?
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.
Getting a mortgage for a corporation
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.
Using a corporation to buy a U.S. property
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.
Can using a corporation to buy real estate avoid probate fees?
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.
This article was originally published on Sept. 25, 2020. It was updated on Sept. 12, 2022.