Should I put my seven rental properties in a corporation? PF responses

There may not be any annual tax savings by adding rent to a corporation, especially if you are a well-paid employee

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By Julie Cazzin with Allan Norman

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Q: I have seven rental properties in my name. Should I put them in a business structure? What is the benefit (if any) of doing so? Are there better options? Currently, I report income and losses on these on my personal tax return. —Mason, London, Ont.

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PF responses: Mason, there are many things you need to consider when deciding if a numbered company makes sense, including creditor protection, estate planning, capital cost allowance (CCA), money withholdings, tax benefits possibilities and the cost of setting up the company ($2,000 or more).

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There will also be accounting and legal fees to properly transfer properties into a corporation, annual corporate tax returns to be paid, a separate bank account to maintain, a register of important documents to keep, mortgage transfers and rights of real estate transfer to be taken into account. , as well as other requirements.

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Creditor protection is one of the benefits of moving your tenancies to a numbered company. With seven rental properties – representing, I suspect, a significant portion of your net worth – extra protection can be a good thing if you ever get sued personally.

There may not be any annual tax savings by adding rent to a corporation, especially if you are a well paid employee. Corporations pay a low corporate tax rate on active business income, not passive income, which is most likely what your rental income will count.

I recommend you consult with your accountant and confirm the tax rate differential between your personal income and your proposed rental company and help identify any tax savings.

In contrast, business owners with active business income are more likely to have rents in a holding company. They can rack up the down payment for a new property much faster than you personally could.

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For example, earning a dollar of active income leaves you with about 85 cents to invest after tax, whereas you might only have 50 cents left after tax if you earn that income personally.

As your operating company earns excess money, you can send it as dividends to your holding company for investment purposes, such as investments in rental properties. Estate planning is another reason to consider transferring your tenancies to a corporation. In other words, to defer capital gains tax and avoid probate.

If you leave your rentals to your children, there will be capital gains tax payable on your death, whether or not the properties are sold. Capital gains tax on rents can be deferred if you hold them in a corporation at the time of your death, but you could face a larger capital gain when transferring your corporation shares to your children if the value of rents has appreciated. An added benefit to consider is avoiding probate fees by placing a second will on your corporation.

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I’m curious, Mason, what are you doing about capital cost allowance? If you haven’t already, explore this with your accountant, even if it’s just for your own knowledge.

Generally, you can deduct 4% of the value of your building from your taxable income each year, the first year being an exception. It’s a nice tax saving, but there’s a catch, and it’s called the “clawback”. Selling a property that has not depreciated, for which you have claimed CCA, means paying back the amount claimed.

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For example, if you’ve deducted $100,000 over 20 years and the property hasn’t depreciated 4% each year, you’ll have to pay back the $100,000, but inflation is your friend in this case. Would you rather pay a dollar today or the same dollar in 20 years? It is often better to defer because the value of a dollar decreases over time.

CCA can be claimed whether your rentals are privately or corporately owned. If you’re considering claiming CCA, which is optional annually, make sure you understand how it works over the term of the lease by working with an accountant who can handle the numbers for your particular case.

Also consider a cash hold, especially now that interest rates are rising. In general, cash damming is a strategy for converting personal debts (on which interest is not tax-deductible) to the company’s debt (interest is deductible). This only applies to people with large non-tax-deductible debts, such as a mortgage or a large car loan.

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The basic approach is to use your monthly rental income to pay off the mortgage on your non-tax-deductible debt (i.e. your personal mortgage). Then you borrow funds to pay off the mortgage on your rental property. Essentially, you are converting non-tax-deductible debt into tax-deductible debt.

Mason, I’ve given you some guidelines, but there’s no easy answer. Speak to a lawyer, accountant, or financial planner experienced in this area to work out the details.

Allan Norman provides certified fee-based financial planning services through Atlantis Financial Inc. He is also registered as an investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or [email protected]

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