[CANADA] Entities Questions

[Devon Cornwall]

Hey everyone,

I'm a Canadian investor that is looking to start a 3-tiered corporate structure to enable greater tax savings. The issue I've had is in entity creation and legal rights for funds.

My aim is to create a RE company, a holding company, and a PM company. Basics on that one.

My desire is to have a fund in the RE company that is backed with investors. I've been struggling to find the appropriate attorney to consult with about the regulations in place and was wondering if anyone knows of an attorney in the Windsor, ON area that might be able to give me advice.

I am also hoping that someone can answer some of my questions here on the forums, such as:

- When purchasing a property under a company, does the company need to qualify for the mortgage or can I sign as guarantor?
- How does a CCPC (Canadian Controlled Private Corporation) protect me as far as liabilities go?
- If I own property personally can I transfer them to the CCPC or do I have to have some kind of contract of purchase in place?
- If my CCPC owns a property, can the title be moved to my name at the completion of the mortgage pay down?
- If I use a fund to purchase properties and intend to pay dividends out to the investors of the fund, do they gain equity in the company or can I maintain 100% equity and simply pay them based on their equitable contribution to the fund?

I understand that these might be accounting questions that follow:

- If my RE company is taxed at 50% on my investment income and 30% is held to pay off my dividend payouts, is that money that I receive at the end of the tax cycle?
- If I pay a fee from my RE company to my PM company, can I then pay myself from my PM company?
- How do the transfers work as far as dividends payout from the RE company to the Holding company?

I realize that I have asked a lot and any help you can give would be greatly appreciated.

Thank you all,

[Roy N.]

Devon:

Lots of questions and you would be best served having a chat with your accountant and attorney before heading too far down this road.

When you are just starting out, the overhead (accounting, reporting, fees, taxes) of such a corporate structure probably outweighs the benefits.

If you hold a rental property within a company (CCPC), the revenue is consider passive and is ineligible for the small business reduction afforded to active income - hence, the company will pay income tax at the full corporate tax rate.   For this reason, unless you are personally in a top income tax bracket, it is typically more beneficial to own the property personally and have the revenue taxed in your own hands until you reach a certain size.

When you do reach that size, you can transfer property you own into a holding company (that is 100% owned by you) with no real taxable consequence (there is a provision for this which you should review with your accountant).  If the property has other owners, the property will be deemed to have been sold by you and acquired by the company - creating a taxable event for you personally.

If you do acquire property under a company, lenders are going to require you to personally guarantee any financing (for residential lending).   It can take quite some time for a company to establish sufficient assets and financial history that it can borrow without a personal guarantee.

Your notion of a third company for the purpose of pooling investor funds treads into a whole other area of regulation and you will need to consult with an attorney experienced with private placements / private REITs / mortgage pools to fully understand the legal & licensing requirements and costs of such an approach.

Alternatively, if you form a company with 2-3 other folks (known to you: friends, family, co-workers), who all contribute capital, you do not enter into the world of private placements / REITs, etc.    Again, you will want to have this discussion with your attorney.

As for your questions about paying yourself through a path of holding and operating companies, I go back to the consult with your accountant refrain, but keep in mind that the overhead of maintaining the organization and the costs of moving capital from one to the other will quite possibly negate any tax benefit you foresee (until you reach an appropriate size of operation).