Irene, a long time friend of mine, came by to visit a couple weeks ago.
Together with Jason, we were in the same study group when we wrote the Uniform Final Exam (UFE) 10 years ago!
We all graduated from the same Bachelor of Mathematics from University of Waterloo 10 years ago!
You may ask – who would have graduated from UW majoring in mathematics and chartered accountancy?
I am not shy to admit that we played Euchre (a card game) every single day during our Master of Accountancy program and the one month study break before the exam.
And what do we do as a reunion?! Of course the latest Escape Room at Casa Loma.
For those of you who don’t know Escape Room, it is basically a game that would lock you up for an hour and you have to solve multiple puzzles to get out within the time limit. The Paranoia Quest escape room atlanta is a great example of one!
We were super close of getting out but unfortunately we missed the last puzzle. 🙁
I didn’t feel too bad given that only 20% of the teams actually got to get out from the game within the one hour time period.
We still had lots fun!
Last week, we discussed the first four questions you would ask yourself to decide whether you should incorporate. Here are the last three questions to help you make a decision.
- What are your long term goals? Are you planning to buy more than one property?
As much flexibility as a corporation can give you, there is still an annual filing cost and initial setup cost that you have to invest in to get these benefits. As a real estate accountant, I often advise new investors to buy their first investment property in their personal names (unless they are doing flips). Of course you should seek advice from accounting business services before making any such decision, as it can make a lot of difference for your business. At the end of the day, how do you know if you are committed to investing in real estate long term? For some people, one is more than enough to handle. Setting up a corporation for simply one property is probably not worth it, unless it is a bigger project. Depending on the size of the investment and the projected income, one single-family home inside one corporation may not be worth the benefit a corporation can provide.
On the other side, if you have a 75 unit apartment building, that can be a different story.
My advice? If your long term goal is to buy more than one property, then consider incorporating.
If this is your very first one and it is a single family rental, don’t worry about it. 🙂
- Are you planning to leave your assets to your kids?
Corporation provides a lot of flexibility in terms of estate planning. For those of you who don’t know, the tax man would still come after you for one final time at death. This means that you have to pay taxes on any capital gain you have accumulated on the assets you have owned. You would have deemed to dispose all the assets at the fair market value at death. Your children may not want to sell the properties at that time but they may not have a choice if you have accumulated a significant amount of gain on them. Corporation allows some tax planning to be done. It can pass on the growth of the portfolio to future generations and limit the taxes at death.
It may even allow you to limit the probate taxes.
- The cost of changing your mind can be costly!
It’s expensive to change your mind.Many investors asked me if they would be allowed to transfer their properties over to the corporation at a later date when they do decide to incorporate.The answer is always a yes, but it is just a matter of how much $$$ we are talking about.For one, you will be incurring land transfer tax. In Ontario, if you sell your properties from yourself to your corporation, the ownership has changed and hence Ministry of Finance would charge you the Land Transfer Tax. If your property is located in City of Toronto, the land transfer tax is doubled! And that’s just land transfer tax alone.
When you “transfer” the ownership of the property to the corporation, Canada Revenue Agency treats that as if a third party sale has occurred, unless you file a special election to defer the capital gain until the corporation sells the property to a third party.
This basically means:
- You pay taxes on the cumulative gain at the time of the transfer, which is dumb because there’s essentially no change of ownership.
- You pay the accountant to file the election for you, which is generally from $1,000 and up.If you look at the cost of changing your mind, comparing to the cost of simply setting up the corporation and paying for the filing fees for a couple of years, you may still be ahead by setting up the corporation early!
Incorporating or not is often a personal decision. Definitely consult an experienced real estate accountant to make sure you are maximizing your tax benefit.
Until next time, enjoy your summer holiday!
Cherry Chan, CPA, CA
Your real Estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.