Should You Buy A Property Using Your Personal Name Or A Corporation?
Are you wondering whether you should buy an investment property through a corporation or your personal name? It’s actually more than a single line answer and we wanted to give you a better picture with a complete analysis. Keep reading if you want to learn all of the pros and cons associated with each structure!
What are your costs?
When you purchase a property with a corporation, you incur startup costs and on-going costs. Startup costs include incorporation fees and name search fees (if you go with a named company). Although you can incorporate a company on your own, we recommend getting it done professionally with a lawyer or accountant to avoid potential costly mistakes. The setup process also requires time on your end, including getting your documentation and paperwork in order and setting up bank accounts. Once the corporation is setup, you will also require to prepare annual corporate tax returns which are separate from your personal tax returns.
When you purchase a property with your personal name, we still recommend that you create a separate bank account for each property to make transactions cleaner for your own accounting and tax filing purposes. Unlike creating a new corporation, you avoid costs associated with startup and corporate tax filing for properties purchased in your personal name.
Costs For A Corporation (Estimated for 2020):
- Startup Professional Fees $1,500
- Startup Ontario Incorporation Fee $360
- Startup Name Search Fee – For Named Corporations $40
- Annual Professional Fees $1,500
How Much Income Tax Do You Pay?
Generally, real estate investments are considered specified investment businesses for corporations. If you’re in Ontario, it is taxed at the highest rate of 50.17% (2020). Once your investment portfolio gets bigger and you hire more than 5 full-time employees (employed by the corporation throughout the year in the rental business) in your corporation to manage the properties, your real estate investments can become active business income, which is taxed at a lower rate of 12.2% (2020). When you reach this point, owning properties under a corporation can reap great tax benefits, with a major deferral of tax (38%) if money is not taken out of the corporation.
Since it’s difficult for one corporation to hire more than 5 full-time employees, this test can be met by combining efforts with other investors. For example, you can create a pooled ownership of multiple properties, or have multiple interests in one large property.
Investment properties purchased under your personal name are taxed at individual marginal tax rates based on your total taxable income. This means that most people generally pay less taxes with an investment property in their own name, unless your taxable income exceeds $214,368. At that income level, your personal marginal tax rate exceeds the corporate tax rate for passive income.
- Corporate Tax Rate: 50.17% for passive income, 12.2% for active business income (2020)
- Personal Tax Rate: At your individual marginal tax rates based on your income
A major benefit of holding rental properties personally is the ability to deduct rental losses against other sources of income, such as employment income and investment income. As an individual, you need to be aware that CRA could audit you if you report rental losses every year. CRA could potentially take the position that there is no reasonable expectation of profit and as a result the rental losses may be disallowed. The onus would be for the individual taxpayer to demonstrate that the business is being operated in a commercial manner and is not merely a hobby. For example, showing that you did your due diligence when buying the property, deciding on what to charge, not renting to a relative at below-market prices, etc. It is important to note that this should only be used for as a defensive strategy since this may limit your borrowing capacity and real estate portfolio growth potential.
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How Do Mortgages Compare?
Not all mortgage brokers work with corporations because it is more complicated and requires more of their time. You’ll need to provide your articles of incorporation, at least two years of financial statements and T2 Corporation Income Tax Returns. Unless your business is well established, banks will require personal guarantees from owners so they also need to see your personal T1 income tax returns. Despite the additional work and documentation involved, banks have harder qualifiers for corporations, including extra covenants, higher debt-service ratios, higher down payments, and higher interest rates. On the plus side, you may get a larger total borrowing capacity because corporate mortgages don’t show up in your personal credit report when set up properly.
Getting a mortgage in your personal name tends to be much easier and faster. Generally, you can qualify for a lower downpayment of 20% and better rates compared to corporate mortgages. However, you may find yourself with a lower total borrowing capacity as you grow your real estate portfolio, especially if properties don’t cash flow well.
Documentation
Corporation: Corporate + Personal if personal guarantee
Personal: Personal only
Approval Time
Corporation: Longer
Personal: Shorter
Liability
Corporation: Corporate + Personal if personal guarantee
Personal: Personal only
Qualifiers
Corporation: Harder
Personal: Easier
Downpayment
Corporation: Typically 35%+
Personal: Typically 20%+
Interest Rate
Corporation: Higher
Personal: Lower
Borrowing Capacity
Corporation: Larger
Personal: Smaller
What About Liabilities?
In most instances, banks require a personal guarantee from the owners for corporate mortgages. In situations where creditors don’t require a personal guarantee, your personal assets are shielded from creditors when you purchase a property through a corporation.
Despite creditor protection, it is important to note that owners and directors may still be liable for gross negligence on behalf of the corporation. If you are convinced of an offence under the Residential Tenancies Act, 2006, the maximum penalty (2020) under a corporation is much higher at $100,000, compared to a lower $25,000 penalty for an individual.
Protection
Corporation: Protection of personal assets if no personal guarantee Personal: No protection of personal assets
Liability for Gross Negligence
Corporation: Corporate + Personal
Personal: Personal only
Penalties for Gross Negligence
Corporation: $100,000 Maximum
Personal: $25,000 Maximum
Finally, What About Privacy?
When someone wants to look up who owns a property, they can easily perform a search from a local land registry office. As a corporation, there is less transparency of ultimate ownership since the search results will only disclose the corporation name. Moreover, there is more privacy in the tenant and landlord relationship since the standard lease will only display your corporation name as the landlord.
- Corporation: More privacy of ownership from public records and tenants
- Personal: Less privacy of ownership from public records and tenants
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