The article “Should You Buy Real Estate Through A Corporation?” was originally published on MoneySense on September 25, 2020.
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 the shareholders. It is a common framework in which to do business in Canada, and is a separate legal entity from the shareholders that files its own tax returns. Corporations can own real estate; however, unlike an individual, a corporation cannot claim a principal residence exemption. This can make it inefficient to use a corporation to own a home you could otherwise sell in the future tax-free
Some people consider using a corporation to buy a rental property. If you do not already have a corporation and you are setting up a corporation solely to buy the property, it is important to consider the costs and benefits. The legal fees to establish a basic corporation may range from $1,500 to $2,500. The annual costs for legal and accounting fees may be similar or even 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). 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 to own a rental property personally instead of corporately, and could also avoid the cost and complexity of the corporate structure.
One exception may be in the event someone was buying and flipping properties. If a taxpayer buys and sells a property not for the intention of renting it out, but for generating a profit on the sale, that income could be taxed as business income. As such, someone flipping a property personally could pay tax at about 50%, 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 15% (rates differ by province).
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 and incurring personal tax 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 is done so that the property is not available to creditors of the primary business or does not need to be sold along with the business if it is ever sold. Money can generally be moved from one corporation to another without triggering personal tax.
Using a corporation to buy a secondary property
A corporation can be used to buy a secondary property, such as a vacation property, but there are drawbacks. Most importantly, you must personally pay the corporation fair market rent each year for the property or include an equivalent amount as a taxable benefit on a T4 slip to be reported on your personal tax return as income. It may also be more difficult to secure the same mortgage financing compared to buying the property personally.
Some snowbirds consider using a corporation to buy a U.S. property. The goal is usually to avoid U.S. estate tax otherwise payable on death. The current U.S. estate tax exemption for Canadians is $11.58M USD, so most Canadian residents are not subject to U.S. estate tax. Canadians using a corporation for a U.S. property still have the same potential fair market rent payment or taxable benefit income inclusion issue mentioned previously. Alternate structures like cross-border trusts may be more suitable in some circumstances for high net worth purchasers exposed to US estate tax.
Canada does not levy estate tax, but probate fees or estate administration tax can be high in some provinces. Corporations may bypass probate or estate administration if owned by a shareholder who has a secondary will, but alter ego or joint partner trusts may be more effective tools to avoid probate than establishing a corporation for personal use real estate.
Personally held real estate can be transferred to a corporation after purchase, but land transfer taxes generally apply. Accrued capital gains tax may be deferred, however, on transfer.
Corporations may be suitable structures for holding real estate in some situations, but in others, the cost and complexity may not be worthwhile, or could even be detrimental. Tax and legal advice should be considered prior to property purchases.
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.