structuring investments in canada?

[Account Closed]

hey canadian investors, quick question: me and a guy i know who is a canadian citizen but not currently a resident are planning to acquire some rentals in quebec, canada, to generate some cashflow. we plan to split the down payments 50:50. however, we aren't sure what would be the best way to structure these purchases. obviously, the corporation is the closest thing to an LLC in canada, but i've been reading quite a bit, and even talked to a lawyer and accountant who manage my family's finances, and they both seem to think that it would be better to start off purchasing as an individual, my friend would deposit an interest free loan into a joint account, and make the purchase from there.

this seems to go against pretty much everything i've read with regards to structuring, i know there are some advantages to purchasing as individuals, but most seem to recommend purchasing in the name of a company. do any canadians have any insight into this question, especially with regards to my unique situation (2 people, both citizens of canada, but only one a resident, splitting down payments on rentals)?

thanks

Russell

[Steve S.]

I'm a canadian citizen and have recently established a partnership just like you. We just took possession of our first unit today (June 1st).

There is a big difference between what you should do for a rental business in Canada and in the States.  My partner and I talked to a lawyer, two accountants and someone else that is very actively involved in real estate investing.  All of them said it's much better to wait until we are at a large enough scale that we need it. Until that point we're just going to be incurring higher fees to do the taxes by the accountants, (corporate versus personal taxes) and the lawyer fees would also be an extra 2-5K depending on how we wanted to structure the corp. 

Instead we wrote up a "partnership agreement" between the two of us and signed that. I would suggest you have one if you don't corporate just to protect yourself in case your partnership would/could ever dissolve. We also created a joint personal and a joint business account and registered our company name with register's office.

Speaking with our mortgage broker there is also the advantage whereby most lenders right now have a limit of between 5-8 mortgages they are willing to do with one person. So our plan is that while the mortgage may be in only one name and we can double the number mortgages we can have to between 10 -  16. 

With the  lawyers both names are on title for the property so it cannot be sold unless we both agree.

Rental units are still considered a passive income, so the biggest thing you need to do is be properly insured. Get yourself a good insurance agent that can package of Tenant insurance as well as your basic home insurance. On the topic of insurance I would advice if that you get the unit insured for the replaceable value, rather than the true value. Example: let's say you purchased a home for approx. 200K. But in your region it would cost 350K to actually replace brand new. If you get insurance only for the "true value" instead of the replaceable value.. your rental unit will get paid off in the case of a fire or some other hazard but you'll be looking at trying to sell a "tear down" lot instead of having a brand new unit.

I know that Quebec has some different laws, so I would also consult with a good lawyer who has your interests at stake (versus someone who's just happy taking your money) I would also talk with a good accountant. If you end up going the personal route it would be best to have a good accountant do both of your taxes just so they know who should claim certain expenses to capitalize on the partnerships total returns. I also have no idea how things will be structured as one partner is not a resident of Canada. That may be difficult if not very time consuming to get documents and accounts signed for.

Good luck if you have any other questions please feel free to drop me a line.