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Many owners have a rental property that is part of their existing home in the form of a duplex, triplex or simply a basement apartment that has been rented out.\u00a0 In this case it probably doesn\u2019t make sense to incorporate (unless part of some more sophisticated tax planning) since you risk losing your principal residence exemption which can be a significant tax savings on any appreciation of the value of the home upon its eventual sale. <\/p>\n
The principal residence exemption in Canada allows you to sell your home without paying any tax on the capital gains. <\/p>\n
If you decide to purchase the property with someone else (including a spouse) it might make sense to incorporate as this gives the co-owners\/partners a separate legal entity clear beneficial ownership \u00a0in the corporation based on whatever proportion that is decided at the outset.\u00a0 For example, if two co-owners decide to contribute an equal portion of the down payment then the ownership percentage can be allocated at 50% each.\u00a0 <\/p>\n
It is important to draw up an partnership agreement between co-owners that outlines the % ownership, who handles the difference \u00a0management aspects of the property , how any major repairs down the road will be handled and who will pay for them, who takes care of the accounting and tax reporting etc. <\/p>\n
If you believe that there is a risk of litigation\/ lawsuits with respect to the property you\u2019re purchasing, then it might make sense to incorporate to provide limited liability protection. This means that the shareholders of the corporation can only lose up to the amount of their investment thereby protecting your personal assets. \u00a0<\/p>\n
There is also the option to replace the limited liability protection of a corporation with liability insurance if you decide to buy it personally. <\/p>\n
Before incorporating, it is important to verify with the seller and you bank if there are any restrictions about selling the property to a corporation.\u00a0 Some properties may only be sold to individuals.\u00a0 <\/p>\n
Also, a bank may have different criteria with respect to the mortgage financing to an individual vs a corporation or in many cases a bank may require a personal guarantee from the purchaser of the property. <\/p>\n
There are one time costs involved with setting up a corporation.\u00a0 There are several online incorporation services that can be used or you can get a lawyer to set it up.\u00a0 In Canada, a low fee option is Ownr, which is owned by RBC. (you can use my partner link to get 20% off<\/a>)<\/p>\n To save costs you can also do it yourself but it is important to make sure that it is done correctly.\u00a0 More information is available at Industry Canada for a federal corporation or if you are registering the corporation in Quebec<\/a> or another province, you would want to go the provincial website for details on how this is done and the various fees involved. <\/p>\n Once you have set up a corporation, you are required to prepare a corporate tax return on an annual basis for which an external accountant is recommended.\u00a0 The fees for a corporate tax return can be anywhere from $750 to $3000 per year depending on the accountant and the\u00a0services that you require.\u00a0 <\/p>\n Additionally, if your rental property is profitable and you want to withdraw funds from the corporation as a dividend, there are additional administrative requirements as T5 slips<\/a> have to be prepared.\u00a0 <\/p>\n Finally if the property purchased is a commercial property (where a corporation is usually recommended) you are required to charge sales taxes (GST\/HST and QST)<\/a> for which there is additional reporting.\u00a0 <\/p>\n Regardless of whether you are incorporated or not, you want to make sure that account for the revenue and expenses of the rental property<\/a> and properly report them on your tax return. Accounting for a corporation can be a little more complicated and should be discussed with your corporate accountant. <\/p>\n Owning a rental property in a corporation does not unfortunately provide much in the way of tax benefits and can in fact result in higher taxes than if you owned it personally.\u00a0 The tax rate on passive income earned in a corporation, which may vary depending on the province, is approximately 50% \u00a0 The only way to reduce the tax rate is to have more than 5 full time employees which essentially turns it into an active business.\u00a0 <\/p>\n Note that a portion of the taxes paid are refundable and can be recovered if you pay yourself a dividend<\/a>, which must then be declared on your personal taxes.\u00a0 If your personal tax rate is lower than the top tax rate, the net taxes payable will likely be lower than in the corporatioin.\u00a0 <\/p>\n That being said, often rental properties don\u2019t generate significant amounts of net income after deducting mortgage interest and other expenses including property tax, insurance and repairs.\u00a0 There is also the option to take depreciation on the property which defers the taxes payable to when the property\u00a0 is sold.\u00a0 Not all advisors recommend taking depreciation as this could result in a significant tax bill down the road when the rental property is sold. <\/p>\n If you only plan to have one rental property, then it might not make sense to incorporate.\u00a0<\/p>\n However, if you plan to build a portfolio of properties then having a corporation can be significantly more beneficial as it provides limited liability and the administration costs are spread over various properties.\u00a0 <\/p>\n Additionally losses on one property can offset gains on the other.\u00a0 Of course, some property owners have a separate corporation for each of their properties to further limit their liability but this again depends on your specific situation.\u00a0 <\/p>\n You might already have an existing property that you want to transfer.\u00a0 If this is the case, you generally have two choices: <\/p>\n a. You can transfer the property at its fair market value.\u00a0 In order to do this you would need to get an independent appraisal of the property by someone certified to do this.\u00a0 Once the property has been appraised you would reflect the difference between the original purchase and the fair market value as a capital gain (or loss) on your personal tax return and pay the associated taxes. <\/p>\n b. You can use a section 85 rollover to transfer the property at its original cost.\u00a0 This is can be a complex transaction and it is advisable to speak to an accountant.\u00a0 \u00a0 <\/p>\n The decision to invest in a rental property can be a significant step towards wealth creation but there are a number of business and tax implications<\/a> that should be considered before taking the plunge. <\/p>\n<\/div>\n7.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Do you plan to buy more rental properties?<\/strong> <\/h2>\n
8.\u00a0<\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0 Should you transfer an existing property to a corporation?<\/strong> <\/h2>\n