Corporation Structure, Commercial Rates & Taxation

[Andrew Pettitt]

I've been researching how I should structure my real estate investments. I currently have all my assets under my personal name. As I grow my portfolio, I want to reduce risk, taxation and free up my personal cash vested. The best way to do that seems to be setting up an incorporated company. I'm interested in hearing other recommendations or thoughts on the below structure.  

Here is what I'm contemplating..

Corporation A - Holding Company (Passive Corporation) 

Each property under this corporation requires its own, separate corporation. This limits liability - For example, if you had someone sue you due to an incident/injury at Property #1, they cannot come after the value of property #2 as it is in a separate corporation.  As you purchase new properties, keep adding them into new corporations under the main, passive holding corporation. 

• Corporation A.1 - Property #1
• Corporation A.2 - Property #2
• Corporation A.3 - Property #3

Corporation B - Property Management Company (Active Corporation)

This corporation maintains your properties and provides invoices to each Corporation/Property for services. Usually 10% of the monthly rent. You can also look to pay the corporation in dividends. Dividends paid between connected corporations are often non-taxable. Corporations are connected when one corporation owns shares, of the other, that represent more than 10% of the votes and more than 10% of the corporation’s value.

To set this up, I am assuming mortgages need to change from residential mortgages into commercial mortgages. This will increase mortgage rates (usually around 2%) changing the profitability of each property. If you've done this, I'd love to hear the details of your experience. I've read that some lenders will take 10% down payments. If acquired, this could free up 10% of your cash as Canadian real estate requires a 20% down payment on secondary residential mortgages. Who doesn't want 10% of their investments back into their pocket? 

Taxation

It seems the best way in terms of taxation is through dividends otherwise there is a 38% (active) and 50% (passive) taxation rate on corporations in Canada. Is there some sort of arbitrage that can provide a financial benefit through receiving 100% dividend income? The rate varies based on a person's overall taxation but its an average of around 29%.