Jared Pilon
Have you ever wondered if you should hold real estate personally or through a corporation? There are a number of factors that should be considered when making a decision about how to hold your real estate portfolio.
If you want to review an in-depth discussion about accessing small business tax rates within a corporation in respect of your real estate portfolio, please read our last blog post, ‘Pay Less Tax on Rental Income’. https://www.legacyllp.ca/resources/news/pay-less-tax-rental-income
Liability protection
One of the factors that should be considered when determining how to hold your portfolio is liability protection. Holding real estate within a corporation provides you with limited liability protection. In many circumstances, this is the leading reason for holding a portfolio within a corporation, instead of personally. This is especially true when your portfolio grows or at minimum includes multi-unit properties. Having a corporation hold the property(ies) limits your exposure to personal litigation, therefore reducing your likelihood of debt or bankruptcy.
Taxation
As mentioned in the article above, there are tax savings and deferral opportunities when holding real estate within a corporation. It is important to understand that a corporation will result in additional professional fees to meet compliance requirements, so the tax savings/deferral needs to exceed any associated fees.
Corporations can be used for estate planning purposes allowing the original shareholder to fix his/her value, associated with the company, and the introduction of new shareholders (children, grandchildren, etc.) into the corporate structure. This can be done via a trust or shares can be held directly by the new owners. Either way, the children/grandchildren can then share in the growth of the company, most notably through the expansion of the real estate portfolio.
Transfer of real estate to a corporation
If you currently hold your real estate portfolio personally, there are a number of items that should be considered prior to transferring the property to a corporation.
Capital gains tax
Generally, property is transferred from an individual to a corporation based on the property’s fair market value (FMV) at the time of the transfer. This would typically result in an accrued gain being realized and you being responsible for tax. This is not an ideal situation as the building is not actually being sold and you may not have the liquid assets needed to pay the necessary tax liability.
The tax on the accrued gain can be deferred if you and the corporation jointly elect to transfer the property via a ‘rollover’ provision with the Income Tax Act. It is important to consult with a tax professional to ensure that the applicable conditions for the transfer are met and that the prescribed form is filed by the applicable deadline.
Transfer of mortgage
Prior to seeking advice from a tax professional, it is important to touch base with your lender (if applicable) to determine if they will allow the transfer of the mortgage from yourself personally, and into the corporation. Most lenders will be willing to work with you in this process, but you’ll want to identify any potential transfer fees or penalties.
Land transfer tax
Depending on where your real estate property is located, a transfer from personal to corporate ownership may attract land transfer tax. It is important to determine whether this applies to your situation and if yes, the expected amount of tax owing on transfer. Depending on the transfer tax liability, it may not be prudent to transfer the property into the corporation.
Sales tax
GST/HST typically does not apply to the sale of residence housing if it is occupied as your personal residence. Transfers of commercial property, however, will generally be taxable for GST/HST purposes. This will result in the transferee corporation being responsible for GST/HST on the elected transfer price.
The Excise Tax Act includes provisions that provide relief from charging & remitting GST/HST if certain conditions are met.
- The purchaser is GST/HST registered.
- The purchaser must be using the real estate property for commercial activities.
If the conditions are adhered to, the purchaser must ‘self-assess’ the applicable GST/HST on the return in which the transfer occurred. The self-assessed amount is offset by claiming an input tax credit (ITC) resulting in a NIL GST amount on the return.
Fair market value
The FMV of the applicable real estate property should be determined and then transferred to the corporation at this amount. As the transferor, you will receive consideration equal to FMV in return for the property. This can be made up of the existing mortgage, cash, note payable and a minimum number of preferred shares in the corporation.
A price adjustment clause should be added to the transfer agreement, especially in the case where an independent valuation is not obtained. This clause provides some protection to both parties should CRA subsequently review the agreement and determine that they do not agree with FMV transfer value that you determined.
Consulting an expert
If you hold a real estate portfolio personally and you are considering whether it would be beneficial to transfer it to a corporation, Legacy Accounting LLP LLP can help you navigate the transfer process.
Feel free to reach out to use at to schedule a meeting to review your unique legacy building plans today!
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Posted: 9/7/23
