structuring investments in canada?

4 Replies

hey canadian investors, quick question: me and a guy i know who is a canadian citizen but not currently a resident are planning to acquire some rentals in quebec, canada, to generate some cashflow. we plan to split the down payments 50:50. however, we aren't sure what would be the best way to structure these purchases. obviously, the corporation is the closest thing to an LLC in canada, but i've been reading quite a bit, and even talked to a lawyer and accountant who manage my family's finances, and they both seem to think that it would be better to start off purchasing as an individual, my friend would deposit an interest free loan into a joint account, and make the purchase from there.

this seems to go against pretty much everything i've read with regards to structuring, i know there are some advantages to purchasing as individuals, but most seem to recommend purchasing in the name of a company. do any canadians have any insight into this question, especially with regards to my unique situation (2 people, both citizens of canada, but only one a resident, splitting down payments on rentals)?

thanks

Russell

I'm a canadian citizen and have recently established a partnership just like you. We just took possession of our first unit today (June 1st).

There is a big difference between what you should do for a rental business in Canada and in the States.  My partner and I talked to a lawyer, two accountants and someone else that is very actively involved in real estate investing.  All of them said it's much better to wait until we are at a large enough scale that we need it. Until that point we're just going to be incurring higher fees to do the taxes by the accountants, (corporate versus personal taxes) and the lawyer fees would also be an extra 2-5K depending on how we wanted to structure the corp. 

Instead we wrote up a "partnership agreement" between the two of us and signed that. I would suggest you have one if you don't corporate just to protect yourself in case your partnership would/could ever dissolve. We also created a joint personal and a joint business account and registered our company name with register's office.

Speaking with our mortgage broker there is also the advantage whereby most lenders right now have a limit of between 5-8 mortgages they are willing to do with one person. So our plan is that while the mortgage may be in only one name and we can double the number mortgages we can have to between 10 -  16. 

With the  lawyers both names are on title for the property so it cannot be sold unless we both agree.

Rental units are still considered a passive income, so the biggest thing you need to do is be properly insured. Get yourself a good insurance agent that can package of Tenant insurance as well as your basic home insurance. On the topic of insurance I would advice if that you get the unit insured for the replaceable value, rather than the true value. Example: let's say you purchased a home for approx. 200K. But in your region it would cost 350K to actually replace brand new. If you get insurance only for the "true value" instead of the replaceable value.. your rental unit will get paid off in the case of a fire or some other hazard but you'll be looking at trying to sell a "tear down" lot instead of having a brand new unit.

I know that Quebec has some different laws, so I would also consult with a good lawyer who has your interests at stake (versus someone who's just happy taking your money) I would also talk with a good accountant. If you end up going the personal route it would be best to have a good accountant do both of your taxes just so they know who should claim certain expenses to capitalize on the partnerships total returns. I also have no idea how things will be structured as one partner is not a resident of Canada. That may be difficult if not very time consuming to get documents and accounts signed for.

Good luck if you have any other questions please feel free to drop me a line.

Your situation is complex, but keep in mind buy and hold corporations pay 50% taxes in quebec, personal is the way to go. If you were flipping or buying buildings with no cashflow it'd be different.

thanks for the replies. @Steve S. how are you planning to buy multiple units (you said 5-8 mortgages), your debt to income ratio must get pretty high after the first 1-2? i've read that you can scale more quickly/easily if you create a separate trust (or an umbrella trust) for each mortgage and use multiple brokers, so all your loans aren't visible. 

by tenant insurance i assume you mean insurance against tenants slipping and falling on ice, for example? i guess this is the best way to protect your personal assets in the case of purchasing as an individual?

my partner who is a citizen but non-resident makes a fairly high salary, do you know if its possible to leverage salary from someone working outside the country? probably not because they don't pay income tax in $cad...

@Philippe Busque thanks, good to know. by 50% tax you mean 50% of any net income generated by rental income? that sucks, is it different in other provinces? also, if i go personal, how do i make sure my assets/partners assets are protected in case of divorce? thanks,

Russell

@Account Closed  

1) My partner and I have a strategy to build up to 10 units over approximately 15 years. The debt to income ratio is a touch high but not so much that any product currently won't touch us, it just will take a bit of time.

When you buy a rental property you will have to discuss with your lending partner or broker who will be the "primary" for the loan. I'm not exactly sure how it will work for a citizen of Canada that currently isn't a resident. I have a feeling that you will have to be the primary and your partner may be the co-sign to make it work.

Tenant insurance/liability insurance... if these are going to be considered your personal properties and not under a corporation I would highly advise you to be well insured. Best part is as you get more units the insurance is a general policy that will cover all units in your name or in the name of the company/partnership.

With a partner who is out of the country, if they are now on title and on the mortgage they WILL have to pay some amount of taxes even if they're not a resident of that country. Your best bet is to get a good accountant on your team and they can answer all the specifics on how you two should proceed to the greatest benefit of your business and how you will have it structured.

I didn't know corporate tax was so high in Quebec! I know for certain items the tax rate is pretty high for a corporation that has properties that operate on a buy and hold... so it's not advantageous for us in that respect. However if you did have a business of "Russel's rock walls and landscaping" which did generate income, incur expenses and perhaps even employed some people the tax rate on what the business makes (not which you claim as your income but that stays within the business account) is actually pretty low.