This is not financial advice.
The most relevant thing to know about real estate held in a corporation is the fact that in 2021, Canadian Controlled Private Corporations rental incomes are taxed at 50.2% (38.7% federal + 11.5% provincial). This is because Canada considers rental income to be passive income.
Canada taxes its private corporations a lot more for this passive income, perhaps because they wish to de-incentivize corporations from investing in anything other than their own companies.
An individual who owns real estate while working a full-time job making $100K/year will have their rental income taxed at the same marginal tax rate as their employment income – about 43%.
All the expenses that someone could claim as a corporation can also be claimed if the business is run as a sole proprietorship.
So, it is likely that incorporating to own real estate will not make sense for many people, because they will actually be taxed more, plus they will have to pay the expenses of maintaining a corporation (annual reporting, tax return, etc.)
But let\’s say that you\’ve heard about this 3-tier corporate structure that some Canadians are using the own real estate. You might be wondering \”will that help me?\”
Let\’s look at an example. If you own a property management company that charges your real estate company (the company that owns the real estate), then you can only charge about 5% of the gross revenue. So, let\’s assume you have a 50 unit apartment building and it brings gross revenue of $500K/year. Your property management company will charge 5% x $500K = $25K.
Now let\’s say you have expenses (including mortgage) of of $400K/year on this property. This means that the income property generates a net income of about $100K/year.
$100K minus $25K = $75K of rental income will be the amount taxed at the high tax rate of about 50.2%.
$25K of property management fees will be the amount taxed at the low tax rate of about 12.2%.
And so the average/effective percentage taxed across your full $100K is about 38%.
Now compare that to the 43% tax you might pay as an individual. Is it worthwhile to have a corporation to save 5% tax? And is it worth it to run a property management company?
If your net corporate income is $100K like in this example, maybe not. Remember that it could costs $5K to maintain the corporation(s).
Now that we\’ve looked at the tax implications, we should mention that there are other benefits to having a corporation.
Liability protection is very important to some people who want to isolate their personal property from being exposed to a lawsuit. Corporations are their own \”entities\” and while they are controlled by individuals, the law protects those individuals from lawsuits. The government may have done this to encourage businesses to seek out profits regardless of the risks.
Lawsuit attempts can still be made against individuals though. For that reason, it may make more sense for individuals to get a liability insurance policy to protect themselves in case of a lawsuit.
It makes more sense for people to incorporate once their net income is in excess of $150K. But when they do, it won\’t make sense to move their properties into the corporation because they will get hit with a land transfer tax.
It makes more sense for people to incorporate if they are using other people\’s money (OPM) because then there can be multiple shareholders.
References:
https://www.taxtips.ca/smallbusiness/corporatetax/corporate-tax-rates-2021.htm