Are you unsure whether to buy an investment property using your personal name or a corporation? We’re here to help you out! Join us as we team up with a real estate tax expert to break down the pros and cons of each option. Let’s dive into the details!
Breaking Down the Costs of Starting an Ontario Corporation
When an individual is considering purchasing a property through a company in 2023, there are additional costs to take into account.
Here’s what it might cost to create a corporation:
- Startup Ontario Incorporation Fee $300+
- Startup Name Search Fee – For Named Corporations $30+
- Startup Professional Fees $1,500+
For individuals seeking the assistance of an accountant, there can be additional costs each year:
- Annual Tax Filing Services $1,500+
- Bookkeeping Services $30+ per hour
Tax Benefits of Incorporating Real Estate Ownership
As a friendly reminder, we provide insights for informational purposes only and are not accountants or legal professionals. Always seek advice from qualified professionals, including accountants and legal experts, before making financial or legal decisions.
Flexibility in Tax Splitting
When you buy a property through a corporation, you can allocate that income and capital gains strategically among family members. This smart approach can help reduce your overall tax bill.
Probate Tax Savings
If your corporation owns real estate and doesn’t go through the court process, you can avoid probate taxes which are approximately 1.5% of the value of the estate.
Estate Freeze Tax Benefits
By using an estate freeze, you’ve effectively limited the taxable gains when you die. This strategy allows your heirs to inherit the property with a reduced tax burden.
Tax Drawbacks Of Incorporating Real Estate Ownership
Potentially Higher Tax Rate
Investing in real estate through a corporation falls under passive income, with taxes on income and capital gains at around 50%.
This rate might be higher compared to what you’d pay with personal ownership, depending on your individual tax rate.
How Can You Lower Your Taxes When Buying In A Corporation?
Investing in a corporation might seem taxing (pun intended), but we’ve got strategies:
Use Depreciation To Defer Income Tax
By deducting part of your building’s value each year as a depreciation expense, you lower your rental income and pay lower ongoing taxes. The taxes you save are put off until you sell the property. When you do sell, the deductions are added back to your income.
Allocate Income To An Active Small Business
Creating a separate corporation for property management can cut down on your corporate rental income tax. When you pay your property management corporation, that portion is active business income for a small business and ends up getting taxed at a much lower tax rate of around 15%.
Qualify The Entire Corporation As An Active Small Business
As your investment portfolio gets bigger, and your corporation hires over 5 full-time employees to handle properties year-round, your business corporation may be seen as an active small business.
At this stage, choosing a corporation becomes more advantageous because you can be taxed at a much lower rate of around 15%.
Getting A Mortgage With A Corporation
It’s usually quicker and simpler to get a mortgage in your own name with a residential mortgage (under 5 units), with some potential perks like better cash-back incentives and potentially better rates.
And even if you use a holding company on title, the bank will very likely ask for your personal guarantee. This will show up on your personal credit report and might limit your future borrowing capacity and portfolio growth.
For bigger residential properties (5 units or more), the terms and approval times are often similar whether you buy it personally or through a corporation.
Big banks might ask for a higher downpayment of 35%, but if you choose an insured commercial mortgage, you could get away with as low as 5% down.
The major benefit of purchasing through a corporation is that, even if you have to provide a personal guarantee for the mortgage, it usually won’t appear on your personal credit report. This offers better scalability, especially if you’re aiming to expand your portfolio.
Can a Corporation Limit Personal Liability?
If lenders don’t need a personal guarantee, buying a property through a corporation can safeguard your personal assets from creditors.
But in many cases, banks ask the owners to provide a personal guarantee when applying for a corporate mortgage, so this isn’t as big of an advantage anymore.
What Are The Fines For Gross Negligence?
Corporations face higher penalties for gross negligence under RTA (Part XVI). You should also keep in mind that even though the owners’ personal assets may be shielded from this, directors may be held accountable for severe negligence by the corporation.
The maximum penalty for gross negligence (as of November 2023):
- Corporations maximum penalty: $500,000
- Individuals maximum penalty: $100,000
If you want to know who owns a property, you can easily check at the local land registry office.
But if a corporation owns the property, it’s less clear because the search only shows the corporation’s name, giving more privacy to the owner’s details.
When you rent out a property through a corporation, it keeps things private between you and the tenant. The lease only shows the corporation’s name as the landlord, keeping personal details confidential.
For more privacy, it’s a good idea to have separate email and mailing addresses for your corporation, different from your personal ones.
Deciding how to invest in real estate, either personally or through a corporation, is not a straightforward choice. It’s like putting together a puzzle where your investment type, goals, plans, and personal income are the pieces.
Think about what works best for you. Whether you go with your name or a company, take the time to understand how each option fits your unique situation. This way, you can make a decision that sets you up for success in the world of real estate.
What Toronto Real Estate Investment Is Right For You?
Check out our complete Toronto real estate investment guide for all the details and real-life examples. If you’re ready to dive in, just book a call with us!