Canadian Corporate Structure - How to setup a corporation for B&H Rentals?

10 Replies

Hey All,

I've perused through the Canadian section and there doesn't seem to be a great deal of info on this topic. I'm looking for some information on how one can go about purchasing a rental home in Canada under a corporation (for liability purposes) while obtaining a conventional mortgage.

I guess we should go back to the basics: 

  • Does it make sense to incorporate in Canada for holding rentals? My gut says yes, for liability issues etc.
  • Is a corporation the type of company that makes the most sense? From my research, again yes, corporations have similar characteristics to the LLC in the states in terms of limited liability. There are also tax implications some of which are beneficial.
  • Can you obtain a conventional mortgage through the company as I am sure they would want the personal guarantee of the person purchasing the home vs a shell corporation?
  • If no, are there other ways around this? (purchase the home and then lease it to the corporation to rent out, or something like that?)

Hopefully I am asking the right questions, but I am looking for a bit of insight from those familiar with the Canadian mortgage and corporation laws. 

Thanks!

Jesse

Hey Jesse, I definitely don't have the answers for you but I would recommend talking to Tom Thurmeier at the Small Business Legal Centre here in Calgary. 403-269-7252 

He has actually taught classes to real estate investors on this subject. 

Thanks Cal, I'll give him a shout!

@Jesse Shields ,

I can't speak to the financing aspect but I've also considered incorporating my rental business recently.  Hopefully, I can also learn more from subsequent posters on this thread as well.

I have 11 rental units in the Greater Toronto Area. I'm in Ontario.

I'm not incorporated.

I see 2 main potential benefits to incorporating (I'm sure my accountant knows more): 1) tax advantages and,

2) limited legal liability.

LEGAL LIABILITY

I prefer to minimize risk through insurance instead - mine and tenant's.

I've only been investing full-time for one year so I'm not perfect.  Some of my tenants have tenant insurance, some don't.

My mandatory rental property insurance (I'm using Square One) includes $1M Premises Liability which covers personal injury cases where the injury was caused by some type of unsafe or defective condition on my rental property. While my insurance covers my asset - the building, my possessions therein - it doesn't cover tenant's possessions or potentially stupid irresponsible acts.  

That's where tenant insurance comes in handy.  For a few dollars per month, depending on the policy chosen, it can provide additional levels of liability and premise insurance to the tenant, it protects the tenant's possessions in case of fire, theft, natural disaster (u never know, some be storing expensive gear, clothing, bling, in my units), it insures against accidentally injuring others (including their guests) on the property, and some policies even continue paying the tenant's rent if it happens that the tenant(s) loses his/her job during their tenancy. If the tenant didn't have this, the probability of him/her suing the landlord if something bad happened would be much greater IMHO 

Thus, I've been advised to by my accountant, who also invests in RE (both in US/Canada) to require all future tenants to get tenant insurance and minimum $2M liability at that :)

TAX ADVANTAGES:

The corporate income tax rate for rental income is the same as the highest marginal tax rate—so there are no tax savings. The exception is if your business has at least five full-time employees. That makes it an “active business” and it qualifies for the small-business tax rate, in the 15% range. At this point can only hope, prey, and imaging my rentals cash-flowed hard enough to pay 5 people a full-time salary.

Mike

@Jesse Shields

There are several threads on this very topic Here are a couple to get you started:

Setting up your real estate business;

Canadians investing in the U.S.A.

Looking at your questions:

  • Does it make sense to incorporate in Canada for holding rentals? My gut says yes, for liability issues etc.

The answer is maybe.   It will depend on where your business plan is to take you and what your have for assets and other sources of income.  If you only plan to hold a few properties and you are in a middle tax bracket, a holding company may not be the best fit.  On the other hand, if you are in an upper tax bracket or have lots of other tangible assets, then having a holding company starts to make more sense.  There is also the longer term to consider: income splitting with a spouse or adult children; a family trust, etc. 

You should really brain dump your short, medium and long term goals into a point form document and/or develop your business plan, then sit down with an accountant and attorney who understand real estate and figure out what degree of ownership structure makes sense for you in the beginning and as your investing business grows.  They will also help you identify how and when to transition from simpler (i.e. in your own name) ownership structures to more involved (holding company(ies)) with minimal tax implications.

  • Is a corporation the type of company that makes the most sense? From my research, again yes, corporations have similar characteristics to the LLC in the states in terms of limited liability. There are also tax implications some of which are beneficial.

In Canada, we do not have the equivalent of an LLC ... it is pretty much the simplicity and convenience of a sole proprietorship with some of the liability benefits of a corporation (depending on how it is set-up). In Canada, you have a choice between a sole proprietorship (i.e. in your own name) or an incorporated entity (provincially or federally). Where investment income is considered passive income, a holding company will pay income taxes at the full corporate tax rate and is ineligible for the taxation benefits of a CCPC. [Note: Once/If your real estate company grows to a size where you have 5, or more, full time employees, you will be considered an operational company and will be treated as a CCPC.]

  • Can you obtain a conventional mortgage through the company as I am sure they would want the personal guarantee of the person purchasing the home vs a shell corporation?

Most conventional lenders will provide residential and commercial mortgages to the corporation.  They will require a personal guarantee ... at least until the corporation has sufficient capital and track record to borrow on its own performance.

  • If no, are there other ways around this? (purchase the home and then lease it to the corporation to rent out, or something like that?)

No need to further complicate it.

Feel free to post other questions, there are several Canadian investors, flippers and real estate professionals investing both here at home, in the U.S.A. and elsewhere who can provide you with some of their experience.

@Michael Chow

We have 4 rentals purchased under our names in Ontario and have been advised that transferring ownership to a corporation will be considered a sale and will trigger land transfer tax, which for us is a $12k hit right away.  You may have a higher rate in Toronto.  For now we've decided to get additional umbrella liability insurance and buy any further properties directly in a corporation. 

@Jesse Shields

I forgot to mention in my above post, there is a small book I often recommend to newer investors which provides an overview of the different approaches to acquiring, owning and disposing of real estate.   Drop into your local book store or search Amazon or Chapters/Indigo online for  Steve Cohen & George Dubé's "Legal, Tax & Accounting Strategies for the Canadian Real Estate Investor".

@Jennifer Pereira

Your post above illustrates precisely why it is advisable to consult with an accountant and attorney and plan before purchasing your first rental.  You may still purchase those first properties in your own name ... or you may elect to incur the overhead of a holding company from the start.   Either way you will have a plan to mitigate your taxes due as you change ownership structures.   

In your instance, there would indeed be a sale to the corporation and, in addition to the land transfer fee/tax, you could also be faced with capital gains and Capital Cost Allowance (CCA) recapture.

Originally posted by @Jennifer Pereira :

@Michael Chow

We have 4 rentals purchased under our names in Ontario and have been advised that transferring ownership to a corporation will be considered a sale and will trigger land transfer tax, which for us is a $12k hit right away.  You may have a higher rate in Toronto.  For now we've decided to get additional umbrella liability insurance and buy any further properties directly in a corporation. 

Yup, title transfer on properties in the city of Toronto are subject to Ontario Land Transfer Tax and the City of Toronto Municipal Land Transfer Tax.  This is distinct from the Greater Toronto Area  (where I invest) which includes the Regions of Peel, Halton, York, and Durham and all the municipalities therein (Brampton, Ajax, Markham, Oshawa, Richmond Hill, New Market, Oakville, Burlington, and more) where, currently, only provincial land transfer tax is required.

Also, just curious to know, by setting up the corporation, are you anticipating a windfall of cash and/or acquisitions in the near future?  How do you justify paying higher taxes on the rental income, assuming you don't have 5 full-time employees? I checked, and for $3-5/month, I was able to increase my current Premise Liability amount 3x.  That's in addition to tenant insurance in case I need to sue the Tenant to collect for lost rent, e.g., for burning down my rental :)  

However, I speak from experience with small multifamilies only. Is it a lender and/or JV partner requirement to incorporate in your case?

Originally posted by @Michael Chow :

Also, just curious to know, by setting up the corporation, are you anticipating a windfall of cash and/or acquisitions in the near future?  How do you justify paying higher taxes on the rental income, assuming you don't have 5 full-time employees? I checked, and for $3-5/month, I was able to increase my current Premise Liability amount 3x.  That's in addition to tenant insurance in case I need to sue the Tenant to collect for lost rent, e.g., for burning down my rental :)  

Michael:

 One might be expecting to grow beyond a handful of properties and decided to incur the overhead (filing, accounting) of a corporation from the start.    

When it comes to taxes, as I stated in my post above, the rate of taxation may or may not be greater depending on your personal tax bracket.   Even if you were paying a higher rate of income tax on the rental income, the delta from holding the properties in your own name may pale compared to the capital gains and CCA recovery incurred if you transfer the properties into a corporation at a later time.   

It is all about laying out your roadmap before you get too far along the journey.  It is also best to consult with a knowledgeable accountant and attorney when drawing up that roadmap.


Your post above illustrates precisely why it is advisable to consult with an accountant and attorney and plan before purchasing your first rental.  You may still purchase those first properties in your own name ... or you may elect to incur the overhead of a holding company from the start.   Either way you will have a plan to mitigate your taxes due as you change ownership structures.   

In your instance, there would indeed be a sale to the corporation and, in addition to the land transfer fee/tax, you could also be faced with capital gains and Capital Cost Allowance (CCA) recapture.

We are Canadian CAs and I have read that book you recommended (although dear lord it is DRY - only a lawyer or accountant could like reading that!) We weren't sure when we started if we were going to buy more than one or two properties and had determined that the administrative costs and hassle of a corporation weren't worth it until about the 4th property. We're looking at the US market now so will be setting those up in a corporation. 

@Michael Chow

We're already in the highest marginal tax bracket and in any case the taxable rental income isn't high, we only put down 20% on each property and haven't owned them long. We don't have JV partners, we actually have quite a lot of capital that we want to transfer from stocks (USD taxable accounts) to real estate over the next 3-5 years.

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