Is Holding Real Estate in a Corporation Less Taxing?

When it comes to making real estate investment decisions, a key choice that investors face is whether to invest personally or through a corporation. Although a corporation can provide many benefits including tax advantages, improve investment options, and increase flexibility, it’s not without its drawbacks. To help investors better understand the risk and opportunities involved from a tax standpoint, we will highlight the advantages and disadvantages to consider when investing through a corporation below.   

Please ensure you obtain professional tax advice before making use of tax strategies as they can vary based upon your personal circumstances.

Advantages 

1. Deferred Taxes – One of the main benefits of holding your real estate investments in a corporation is the ability to defer your tax liability. When the investments generate a return, the profits can be held inside the corporation and withdrawn at your discretion. Ideally, this would occur when you’re in a lower tax bracket, for example upon retirement, resulting in substantial tax savings. This is unlike personal investments, where the income generally must be taxed the year that it’s earned. 

2. Income Splitting – When you do decide to withdraw your earnings, another tax advantage corporations provide is the opportunity to income split. Any profits earned could be distributed to family members such as your spouse or adult children, in the form of a salary or dividends depending upon your share structure. Strategically allocating this income can significantly reduce your total tax obligations through leveraging lower tax brackets. 

3. More Investable Capital – For current business owners who are thinking about reinvesting their retained earnings, keeping it in your corporation could be much more beneficial. Taking out capital to invest personally would result in an additional layer of taxation. This would lower the capital available for you to invest, reducing your investment opportunities and returns. 

4. Capital Gains Exemption – Corporations who have been active in the business of operating and owning real estate, and have at least 50% of assets invested in real estate, may be eligible for the capital gains exemption. When property held in the corporation is sold, you may be able to defer capital gains on sales of shares belonging to qualified corporations. Please seek professional advice as the capital gains exemption can be a complicated to navigate! 

Disadvantages 

1. Higher Capital Gain Inclusion Rates – Compared to personal taxes, corporations have a higher capital gains inclusion rate. This would be 66.67% of any capital gains earned for corporations, whereas individuals would have a $250,000 threshold at 50%.  

2. SBD Grind – As small business owners; the Small Business Deduction (SBD) is a major tax advantage available to Canadian Controlled Private Corporations (CCPC’s). The first $500,000 of active business income earned are subject to significantly lower tax rates. However, this only applies to active business income, which differs from income that would be earned passively through investments. Not only is passive income not eligible for the deduction, but it can grind away the limit. For every dollar of passive income over $50,000 that your corporation earns, the SBD is reduced by $5 and fully phases out at $150,000. Without the SBD, corporation would be prone to exceptionally greater tax obligation. It is important to strategically consider the income sources in your corporation! 

3. Double the LTT –  The decision to hold your property in a corporation should be made prior to purchasing the property to avoid duplicating your land transfer tax (LTT), liability. If you make the decision to hold the investment in a corporation once you already own the property, you will likely need to pay an additional layer of LTT, even if you are the ultimate owner in both scenarios. Once when you purchase the property initially, and again when you transfer ownership to the corporation. Instead, directly acquiring the property through your corporation would only require one layer of LTT.  

If you’d like to explore more on how incorporating your real estate investments can benefit you click here to book a complimentary consultation. Please ensure you obtain professional tax advice before making use of tax strategies as they can vary based upon your personal circumstances. Our team at Finalyze CFO Services are pleased to help you crush your goals!