Should you use a corporation for your next real estate investment

For many incorporated business professionals, being able to help them accumulate wealth through unique solutions and strategies is a top priority at our firm. One of the avenues that entrepreneurs use to grow their wealth is by purchasing investment properties. As a matter of fact, purchasing an investment property that generates rental income is a popular way of earning passive income for these entrepreneurs.

When faced with this decision, business owners are presented with the option of using personal or corporate dollars for the transaction. While each avenue has its pros and cons, this blog is centered around what to consider before using your incorporated business for your next real estate purchase.

When Is It Ideal To Use A Corporation?

If you plan on flipping properties for a profit, there might be a case for using a corporation to make the purchase.  By using corporate dollars, any income that’s generated from the transaction is taxed as business income which means that your taxes could be as low as 9% - 12% (rates differ by province). If someone decided to go the alternative route of using personal dollars, then you could find yourself paying taxes as high as 54% depending on the income and provincial territory.

It can also be compelling for business owners to use existing savings within a corporation to buy the property without withdrawing money as a salary or dividend and paying personal taxes on that income to buy the same property personally. By using a corporation, the fewer taxes paid mean more retained corporate profits that can be used for your next property investment.

It might also make sense for business owners to establish a separate corporation for the purpose of buying property to be used for the business. The main reason for using this strategy is to insulate the property from the creditors of the primary business or so that it continues to remain a separate asset if the business is ever sold. One of the added benefits of using this strategy is that money can be moved from one corporation to another without triggering personal taxes. This is extremely advantageous for business owners because they can use the accumulated saving from one corporation to fund the operations of another corporation.  Another added benefit to holding your real estate portfolio in a corporation is losses on one property might be used to offset gains on another.

For real estate investors thinking about using their corporate dollars to fund their next purchase, it is important to consider the cost and benefits of using a corporation. Firstly, the government and legal fees to establish a basic corporation may range from $1,500 to $2,500. On top of that, there are annual legal and accounting costs that could leave a huge dent in your wallet. Having a well-rounded idea of what your carrying costs are will help you make the best long-term decision for your business.  

When Is It Not Ideal To Use A Corporation?

One question we often get is if business owners can use their corporation to purchase their family home. The biggest drawback with purchasing your home using corporate dollars is, at the time of sale, the property can not qualify for the principal residence exemption. For individual taxpayers, the exemption allows you to allocate one property as your principal residence and, upon sale, the gain will be exempt from taxes.

If the investment is a secondary property that will be used for short-term rentals, there may be a case for buying it corporately. But even then, it might be more difficult to secure the same mortgage financing for a corporation as compared to buying the property personally. This is because the corporation is a separate legal entity from the business owner. This in turn means that the owner is protected from any liability which is great for them but not ideal for potential lenders to the corporation. Additionally, individuals have credit ratings and history whereas when dealing with a corporation, lenders have fewer ways to assess the creditworthiness of the business.

Closing

Before deciding to use a corporation when buying real estate, I would caution investors to seek professional advice from your Legal and Tax team. Being able to make a well-informed decision on what avenue best fits your business profile can go a long way in helping you accumulate wealth and save taxes. If you happen to be in the market for a new investment property, our team of advisors has extensive experience in helping business owners navigate commercial acquisitions. To learn more about how we could help click here.

-Kondwelani Kalinda, Licensed Assistant

Kondwelani Kalinda is a Licensed Assistant at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Kondwelani Kalinda who is a Financial Planning Assistant for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

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