Buying investment property with personal income vs. corp $ in CA?

Question

Newbie here.

I run a small business and it's generating healthy revenue.

Looking to invest in my first investment property and was wondering if I should purchase with my personal income or buying it through corp?

I am confused with the information shared online (multiple sources).

For example.

- My accountant told me not to invest using corp $ because I will be tax'ed heavily?

- I am a fan of "Rich Dad, Poor Dad" (Robert. K), and he said to invest with corp $ because I can get a lot of exemption from the government and significantly reduce my tax? (not sure if it applies to Canada?)

- Then from another source, I read that one should never buy investment property under my personal name because of insurance reasons. Just in case something happens, I can get sued etc.

Very confused. Any suggestions or advice would be great!

Brian Dean · Answer

Hey @Kim Wu, good question! I'm not an expert on the subject (at all) but have been looking into this same question, as it seems far more complicated in Canada then in the States. Rich Dad Poor Dad is American, so he's definitely referring to their system when talking about the tax advantages of buying through a corporation.

Buying in Canada does seem more specific to your situation, but I'll try to share the overall themes I've discovered (and people are welcome to correct me if I'm wrong on any points).
-There are essentially two types of corporations in Canada; passive and active. Most business's are active, and get taxed at a relatively low corporate tax rate. Most investment properties unfortunately fall under the passive company category in Canada (unless you have five full time employees). A passive company gets taxed at 50% on money left in the company, however there is a 30% tax rebate when dividends are issued.  So this makes it hard to save up money in the business, which makes it hard to pool cash flow to buy other properties.  However if you take out dividends, the effective tax rate is 20%, and you'll have write-offs too, which can lower it. Definitely reach out to a real estate accountant if buying property through a corporation, as they may even recommend how a tax lawyer should structure the company. Keep in mind that a company will have more yearly fees to maintain than buying personally.
-If you buy rental properties in your own name, you pay income tax at your personal marginal tax rate. You can write off the expenses, including the interest part of your mortgage.  Overall if you're in a lower bracket, it might make you more inclined to buy the property personally. If you're in a higher bracket, it's more reason to buy through a corporation.
-On a liability standpoint, you should always have good insurance in place, but yes, it is safer to buy in a corporation.
-In regards to qualifying for mortgages, if you buy personally, then the lender will be looking at your personal income/expenses/debt/etc. They don't factor in the rental income as much as you might like.  Over time, this can make it hard to grow the portfolio, especially because Canadian banks have varying limits of how many mortgages you can hold at a time. When you buy in a corporation, your personal finances do still matter as you back up the corporation, but often a corporate mortgage takes into consideration the investment more, and it's likelihood to be profitable and cover expenses.

My personal overall summary would be that if you plan on buying one or two properties for relatively low amounts of money, it is far more simple to buy in your own name, and just make sure you have good insurance in place. However if you plan on growing a portfolio of properties over time and can afford to properly set up and maintain the a corporation yearly without it eating most of your profits, then that is the better route.  As mentioned, generally you do get taxed higher in a corporation unless you take out dividends.

Hope that helps

Marcelo Luz · Answer

@Roger Paczkowski is right, you would want to create a holding company and make that holding company own both the real estate corporation and your current Professional Corporation. That way both corporations can funnel money up into the Holding company as inter-corporation dividends (which are tax free). From the holding company you can then pass the money back down into either corporation (to buy more properties or expand your active business) or take it out as personal dividends.

This is the same situation i'm in, the reason your accountant said not to buy through the corporation is because its not a real estate company, you want to keep things seperate. Plus from a legal stand point if anything happens to the real estate property whatever corporation owns it is liable, so if you buy it through your professional corporation you put that entire company at risk.

But run everything through a real estate accountant, and potentially even a real estate lawyer.

Julie Toh · Answer

Hi @Brian Dean She advises my clients that have substantial real estate portfolio on tax planning. She's in a public practice, would this be a hindrance to you? She offers a free one hour consultation to my clients.

Brian Dean · Answer

Hi @Julie Toh, I'd be interested in your recommendation of a CPA with real estate expertise in Vancouver.  Do they fully specialize in this>

Julie Toh · Answer

@Kim Wu As @Brian Dean and @Marcelo Luz explained, your current business is an operating corporation. To hold real estate investments, you could create a holdco i.e. a Holding Corp. If it makes sense for your particular situation, you could create a holdco for each real estate property you own.

When I purchased my first property some 15 years ago, I purchased it in my name. Subsequently when our portfolio expanded to multiple properties and the total value exceeds $1mm we created a holdco for protection and tax efficiencies.

If you need a CPA with real estate expertise, I can recommend you one in Vancouver.

Roger Paczkowski · Answer

Look at creating a 2nd corporation under your current active one. Maybe create a holding company owned by your current business where dividends can flow to the active. I would recommend seeking advice from an accountant on this.

Gagan P. · Answer

The CRA qualifies real estate as "active" income if you have "greater than 5 full time employees", meaning six or more. This doesn't depend on income.

For example, you can have five 50-100 unit buildings and 5 full time employees, it's passive income. However, you have 10 SFRs and 6 full time employees, it's active income.

Not too logical, but it's a pretty strict criteria.

Brian Dean · Answer

@Kim WuGlad it was helpful!  For my answers below, best to check with a tax lawyer or accountant, but I'll let you know what I think is correct as a non-professional.By passive income, I believe it is referring to money made in a corporation through investments, dividends, interest and 50% of capital gains.  So if you were to buy an investment property, it would generate rent, which is seen as passive investment.  It's not about how much you make, it's about whether you are a company creating jobs, or if you're a company investing your cash and generating income from it.  As far as I know, if you were to buy the rental property in your other company, on your taxes the investment income would still be in a 'passive' category, and taxed differently than your primary business.  So it doesn't particularly help to buy through your active company.

In your example of a passive organization, if you generated $200,000, and left $150k in the business and took out $50k, the whole thing would be taxed at 50%, however you would get a rebate of 30% of the $50k when you took it out, so the $50k effectively was taxed at 20% and the $150k left in the business is taxed at 50% (with potential for future rebate if you take it out as a dividend). The details are far more complicated, and I believe there is a $50,000 passive income threshold.  But you'll need to consult an expert.

Kim Wu · Answer

@Brian Dean

Thanks for the info!

They are very helpful.

Questions

1. How does the CRA define active and passive corporation? Is it based on the # of employees or the annual revenue etc.?

2. The business I am running is properly 'active'. So if I purchase a property under the existing company, would that be wise? (or would that be stupid because Robert K. said it would be risky - if the corp gets sued, I will lose everything?)

3. OK... I am not sure if this makes sense at all. Let's say if my company generates $200k profit per year.And if I pay myself 50k through dividends. This means the corp is now left with 150k in the bank.The corp get taxed at 20%;

And I can then invest the remaining amount in a property?In conclusion, this means the investment property will then be under my 'active corp' and I will also be taxed at a lower rate?

P.S: I know some say 'Rich Dad, Poor Dad' does not offer good financial advice. However, that's the only 'financial' book I read to date (will learn as I go). So that's why I keep using them as an example.

Thank you

Roy Cleeves · Answer

You are best to trust your own accountant as they will understand your specific situation.

I have most of mine in a corporation so that it will be easier to pass along the ownership to my sons when I pass away.

And in the meantime, it seems to provide a lower tax rate than if I was to add the income to my personal income.

If you don’t have an accountant now, then look for one that deals specifically with clients with rental properties.

Buying investment property with personal income vs. corp $ in CA?

Most Popular Reply