I currently own 2 income properties and closing in on a 3rd. Properties are not owned by a corporation and therefore rental income earned and taxed as personal income. It is my understanding that real estate revenue is not considered Active income until you employ more than 5 people, otherwise they consider it passive and tax it at a much higher rate. If 5 employees if the tipping point when it is tax advantageous to own rental properties in a corporation, why are there so many buy and hold investors that do it? I must be missing something?

Brandon:

See my PM to you.   Any Canadian company whose income is primarily/exclusively from "passive" sources (rental income; interest, dividends, bonds, mortgages, etc) does not qualify for the small business tax rate afforded "active" CCPCs.   As a result, it pays income tax at the full corporate rate - which is equivalent to a top personal income tax rate in most provinces.    

As you stated above, there is a condition in the income tax act under which a corporation whose revenue is from passive sources is deemed an "active" business if it employs 5 or more full-time employees during the course of its fiscal year.   Ironically, this would probably be about the point where revenues would be above the "small business" threshold.

Another approach you can entertain is to hold your properties in one company and have a second company which provides property management services.   The management company would be considered an "active" business.    Naturally there is considerably more overhead with this approach and you would want to have several {time} more than three properties before adopting such a structure.

@Brandon Fictorie don't overlook the asset protection feature of a corporation. If someone slips and falls they are suing for everything under your name including your car. If each property is owned by separate corporation they can only sue the corporation owned by the property they slipped on..

The added costs for entity and annual filing is just added insurance and peace of mind.. 

Originally posted by @Hai Loc :

@Brandon Fictorie don't overlook the asset protection feature of a corporation. If someone slips and falls they are suing for everything under your name including your car. If each property is owned by separate corporation they can only sue the corporation owned by the property they slipped on..

The added costs for entity and annual filing is just added insurance and peace of mind.. 

Hai:

I really think that aspect of corporation is greatly overemphasized - particularly in Canada where things are not a litigious as in the U.S.A.

Additionally, placing properties in individual companies will not necessarily limit your liability to that particular asset - it really comes down to the details of the situation ... ie. the officers of a company can still be held personally accountable for explicit wrongs (negligence, illegal activity) carried out by the company.

Originally posted by @Roy N. :

Originally posted by @Hai Loc:

@Brandon Fictorie don't overlook the asset protection feature of a corporation. If someone slips and falls they are suing for everything under your name including your car. If each property is owned by separate corporation they can only sue the corporation owned by the property they slipped on..

The added costs for entity and annual filing is just added insurance and peace of mind.. 

Hai:

I really think that aspect of corporation is greatly overemphasized - particularly in Canada where things are not a litigious as in the U.S.A.

Additionally, placing properties in individual companies will not necessarily limit your liability to that particular asset - it really comes down to the details of the situation ... ie. the officers of a company can still be held personally accountable for explicit wrongs (negligence, illegal activity) carried out by the company.

@Roy N.

Thanks for input. I have a friend who uses a US LLC to purchase everything in North America primarily for asset protection and tax purposes.. When purchasing in Canada his structure is obviously a whole lot different on the back end. I would like to hear your thoughts on using a US LLC in Canada and the protection it would add vs Federal or Provincial Corp..

I appreciate everyone’s input on the topic. If I manage property and ensure negligence or any other criminal activity is not committed, how much better protected am I then I would be by my insurance policy’s $2M liability?

Originally posted by @Hai Loc :

.....

Thanks for input. I have a friend who uses a US LLC to purchase everything in North America primarily for asset protection and tax purposes.. When purchasing in Canada his structure is obviously a whole lot different on the back end. I would like to hear your thoughts on using a US LLC in Canada and the protection it would add vs Federal or Provincial Corp..

 Hai:

I have never contemplated using a foreign domiciled corporation to own real-estate here in Canada, so have no insight or value to add.

However, if I were to explore the idea, I would first want to fully understand the tax implications before acting.  I would also be concerned with limiting access to conventional financing. 

As a relate observation, if one were to use a foreign domiciled corporation to hold Canadian assets, I suspect there are several countries which would provide more tangible benefit than the U.S.A.