How to setup a real estate investment company in Ontario Canada?

[Brian Law]

How to setup a real estate investment company in Ontario Canada to attract foreign investors?

My business partner and I have been purchasing properties since 2008, mostly single family dwelling and some 2-6 plexes in Ontario. Recently, a group of wealth Asian investors approached us indicating interest in these sorts of projects in Canada, primarily due to higher yield (compared to their countries).

I have a few options that I am thinking about

• Setup an incorporation in Ontario/Federal with them being a shareholders (foreign)
• Setup an incorporation in Ontario/Federal (called it ABC Inc) and another incorporation (call it XYZ Inc) in their country with them being a shareholder. And XYZ becomes shareholders in ABC
• Setup an incorporation in Ontario/Federal and take their investment as a loan vehicle with a promise to pay xxx%/annum

I am looking for insights from individuals that have done this before. Most importantly, I want to learn about the procs and cons, and potential tax issues.

Thanks for your time.

[Matt Geerts]

Option 3 seems to be putting all of the risk on you.

[Taylor Servais]

There are a lot of potential scenarios from the above options, but I'll outline things to consider for each option. Please speak to your tax accountant on these issues (ideally someone who specializes in this).

- Setup incorporation in Canada with the foreign investor being a shareholder. If the foreign shareholders have significant influence, control, or ownership (>50%) there may be tax issues with regards to the corporation losing its Canadian Controlled Private Corporation (CCPC). Losing capital gains exemption, small business tax rate, ABIL, etc. Do a Google search on losing CCPC stats and the disadvantages of so. I've added a link for your review (http://www.taxspecialistgroup.ca/public/taxtips.as...).

- For them having an investco owning shares in the CAD/Provincial corp. would most likely trigger the same issues as above.

- For the loan, you two aren't really partners. You are equity holders and they are debtors, which may or may not be fulfilling your partners goals of ownership, but may fulfill the income.

I would look into the co-ownership structure. Each investor would have an interest in the property either personally or through another legal entity. You could incorporate yourself and your foreign partner could incorporate in Canada, while each of you would report your respective share of income, CCA, and deductions on your own returns. A co-ownership agreement would lead to greater transparency between everyone (who does what, fees, who contributes what - labor, capital, etc.). I would take a look into this.

The information above should be verified by a professional tax accountant, but a quick Google search on this would most likely give you a decent foundation of understanding when a professional would talk to you about these issues.

[Roy N.]

@Brian Law

You really need to consult an accountant and attorney with experience on business entities and foreign investment rather than taking advice from folks here - myself included - as our situations and experience may not be a precise fit with your situation.

When you do meet with your advisors, float past them the idea of having your foreign investors create their own corporate entity and then have that entity invest with your company - either as a lender or investor (consider preferred shares with a guaranteed return but no voting rights).  This may be sufficient to mitigate the tax implications of foreign investment for you. 

@Taylor Servais   - investment companies are not eligible for the small business tax rate, due to having passive income, regardless of whether they are 51% Canadian controlled {this changes once you have 5 full-time employees}.   A good primer on tax and accounting considerations when investing in Canadian real estate is Steve Cohen and George Dubés "Legal, Tax and Accounting Strategies for the Canadian Real Estate Investor"

[Mike Oliveira]

I'm also looking to start an investment company to pool together funds, any advice would be greatly appreciated