Jared Pilon
When managing a corporate real estate portfolio, the decision to move your rental properties into a corporation can have a significant financial impact on your rental operation. Understanding both the benefits and drawbacks of this process will enable you to make informed decisions suited to your circumstances and goals. Let’s look at the key insights and considerations of incorporating your real estate portfolio as you navigate this complex topic.
Why Incorporate Your Real Estate Portfolio?
Liability Protection
Incorporating your real estate portfolio offers a critical layer of liability protection. Your assets could be put at risk through a potential lawsuit due to an incident at one of your properties if they are personally owned. Moving your properties into a corporation creates a layer of separation between your business assets and your personal assets, which helps protect them.
Tax Planning Opportunities
Incorporation can provide opportunities for strategic tax planning if you are currently or planning on managing more than one property. Rental income held within a corporation is taxed at corporate tax rates, which can be lower than personal income tax rates (if your rental operation qualifies as active per CRA guidelines). You can defer taxes by retaining profits within the corporation and reinvesting them. This will enable more opportunities for you to grow your portfolio efficiently. Another strategy you may benefit from is income splitting and dividend distribution to family members.
Positioning for Future Growth
Incorporating your real estate portfolio creates a structured framework that will ease the process of scaling and building legacy assets. A corporate structure helps attract investors, secure financing, and manage larger operations as your portfolio expands. This approach ensures your business is well-prepared for sustainable growth and increased profitability.
Drawbacks to Consider
Increased Administrative Costs
Running a corporation requires additional accounting, legal, and administrative work. These include filing corporate tax returns and following strict compliance requirements. While these costs are manageable for larger portfolios, they may outweigh the benefits for smaller ones.
Potential Mortgage Challenges
Mortgage lenders view corporations as separate legal entities, often requiring personal guarantees for loans. Newly established corporations without credit history may face difficulties securing favourable financing terms, which could limit your ability to grow your portfolio. You may also be subject to potential cancellation fees since you are moving the mortgage from your personal name into your corporation’s.
How to Incorporate Your Real Estate Portfolio
Determine Fair Market Value
To transfer a property into a corporation, you need to establish its fair market value first.
Depending on the complexity of the case, you may need to get a third party real estate appraisal conducted. However a recent municipal property assessment will usually suffice if you are just transferring it from your personal name to a corporation. It is important to consider protecting the fair market value you establish should CRA ever challenge it in the future.
Use Section 85 Rollover
A Section 85 rollover under the Income Tax Act allows you to transfer properties into a corporation without immediate tax consequences. This defers the recognition of any accrued capital gains until the property is sold in the future. It is highly recommended that you consult an accountant to avoid pitfalls and to advise you in this complex process.
Plan for Land Transfer Taxes
Land transfer taxes can significantly impact the cost of transferring properties into a corporation. These taxes are calculated based on the fair market value of the property at the time of the transfer. Depending on your location, the rules and rates will vary. Some jurisdictions may offer exemptions or rebates for certain types of transfers. Understanding these costs upfront can help you avoid unexpected financial burdens.
Making the Most of Incorporation: Active vs. Passive Income
The treatment of taxes on rental income depends on whether it is classified as active or passive. Income earned from a rental property will be classified as passive if the property is not managed as an active business. Passive income for a corporation is typically taxed at a higher rate. Active income on the other hand may qualify for deductions, especially for small businesses, resulting in lower taxes. Here are some strategies you can take to help simplify the shift from a passive to active income.
- Employ at least six full-time staff members within the corporation, such as property managers, maintenance workers, or administrative personnel.
- Engage in active management of your properties, such as frequent tenant interactions, marketing, and maintenance.
- Diversify your offerings to include short-term rentals or vacation properties, which often involve more hands-on management.
Is Incorporation Right for You?
When to Hold Properties Personally
If you own one or two properties and have no immediate plans to expand, holding them personally may be simpler and more cost-effective. Personal ownership helps you avoid administrative burdens and higher tax rates associated with passive income in a corporation.
When to Incorporate
If you plan to grow a substantial portfolio, incorporation can provide significant advantages, including liability protection and tax benefits. It’s particularly beneficial for those looking to build long-term wealth or transition to full-time property management.
Next Steps: Consult the Experts
At Legacy Accounting LLP, we offer comprehensive consulting to help you make informed financial decisions about your real estate properties. Whether you’re just starting out or managing a flourishing portfolio, our team can guide you through the complexities of incorporation and tax planning.
Contact us today at to schedule an appointment. Let us help you protect your investments, maximize your returns, and plan for a prosperous financial future.
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Posted: 1/8/25
