Time to Make a Business: LLP vs Corperation

6 Replies

I'm buying three rentals in wetaskiwin, I just realized i should look into incorporating or LLP's. after this I will have a total of 4 properties and 5 doors. I was curious on what might be the best methold of structuring the business?

In Canada we don't have LLC's, that's a US term. You can set up a Company (Sole Proprietor or Partnership), or you could go Corporation (Inc, Ltd. Corp.). Pros and cons to both, talk to your accountant. I went with a Corporation for my RE as I have had other businesses before in Corps and there are really good tax advantages, but the cost of setup and accounting fees are much more than a Company. The taxes for a Company will be much higher. Your accountant may have a preference too.

Originally posted by @Dallas Trufyn :

In Canada we don't have LLC's, that's a US term. You can set up a Company (Sole Proprietor or Partnership), or you could go Corporation (Inc, Ltd. Corp.). Pros and cons to both, talk to your accountant. I went with a Corporation for my RE as I have had other businesses before in Corps and there are really good tax advantages, but the cost of setup and accounting fees are much more than a Company. The taxes for a Company will be much higher. Your accountant may have a preference too.

Company is a common term for a corporation and not generally for sole proprietorship or partnership, which may be "doing business as" a named entity.

On the tax front, an investment corporation in Canada is deemed to earn passive income by the CRA and is taxed at the full corporate tax rate (it is not eligibly for the small business reduced tax rate available to an corporation that earns "active" income).   As a consequence, a corporation holding real estate and earning {passive} rental income will frequently pay a higher tax rate than if you held the property in your own name (sole proprietorship) and included the rental revenue in your personal income.

The term 'company' is used for both Corporations and Partnerships/Proprietorships. A person who is a plumber/electrician/dog groomer etc. can set up their company either way. 

I am not an accountant at all, but from what my accounting firm has explained to me about Corporations has nothing to do with passive or active income. Walmart, Esso, Loblaws are all Corps and mainly earn active income. The difference are the Tax rates. Generally 10-15% for corps, whereas a Partnership/Sole Proprietary type of company gets taxed similar to an individual, generally 25-40%. We have had 4 Partnerships and 2 Corporations. Corps are always less. 

Originally posted by @Dallas Trufyn :

The term 'company' is used for both Corporations and Partnerships/Proprietorships. A person who is a plumber/electrician/dog groomer etc. can set up their company either way. 

I am not an accountant at all, but from what my accounting firm has explained to me about Corporations has nothing to do with passive or active income. Walmart, Esso, Loblaws are all Corps and mainly earn active income. The difference are the Tax rates. Generally 10-15% for corps, whereas a Partnership/Sole Proprietary type of company gets taxed similar to an individual, generally 25-40%. We have had 4 Partnerships and 2 Corporations. Corps are always less. 

Colloquially company may be used in such a manner and perhaps more so in some regions than others.   It is more commonly used as a synonym for corporation - at lease here in the east whereas "business" is used more generically.

A corporation can have active income, passive income or both.  It is true that in all scenarios they are still corporation, but from a taxation lens, they are not seen the same.

A Canadian Controlled Private Corporation (CCPC) who primarily earns passive income, such as an investment company / holding company,  is in-eleigible for the small business tax rate reduction afforded most CCPCs which earn their income from an "active" business.  This reduction amounts to 17% federally plus 3 - 12% provincially (varies from province to province) on the first $500,000 of income.   

As a consequence, it is possible for an individual to pay a lower rate of income tax if the property is held in their name and the income taxed in their hands versus if the property were held in a corporation and the corporate tax rate were paid.

Corporations are not always less.

You are correct, but my Corps are/were not passive, so I have not come across that scenario. Thanks for bringing up the numbers. If someone were to hold a property in their personal name, then yes, they will get taxed at that person's tax rate. That number could be high or low, but for the most part is usually higher than 17%, as most working Canadians are taxed higher than that in my experiences. 

Originally posted by @Dallas Trufyn :

You are correct, but my Corps are/were not passive, so I have not come across that scenario. Thanks for bringing up the numbers. If someone were to hold a property in their personal name, then yes, they will get taxed at that person's tax rate. That number could be high or low, but for the most part is usually higher than 17%, as most working Canadians are taxed higher than that in my experiences. 

 Passive corporate income is taxed at 38% (federal rate) + an 11 - 15% provincial rate ... many Canadians are not taxed 49+% 

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