Our office has been flooded with phone calls on realtor incorporation and I completed our very first realtor incorporation webinar last night.  

Thanksgiving is just around the corner.  There’s so much to be grateful for, despite part of Ontario is moving back to modified Stage 2 closure. 

If you don’t know, according to Harvard Health, “gratitude is strongly and consistently associated with greater happiness”. 

I used 5 Minute Journal, a gratitude journal that requires you to write down three things you’re grateful for in the morning and three things you’re grateful for at night. 

When I first started my accounting practice, days were tough, especially with young babies.  In those days, I would wake up, wrote down that I was grateful for getting a good night of sleep.  It’s such a simple thing, but it shifts our mindset to focus on the smallest thing that makes us happy. 

At night, just before I go to bed, I also write down 3 things I am grateful for.  It can be as simple as getting home early to have dinner with my family.  

It took me years to keep this habit up, took me years to turn from a somewhat negative and judgmental person to a happy person who always chooses to look at life from the positive angle. 

I even do this with my 5 year old and 6 year old.  I always ask them what they are grateful for before they go to bed.   

I want to take this opportunity to thank my entire team, who’s behind the scene, answering phone calls, preparing for our realtor webinar, and also preparing all the follow up series.  Without you, I would not be able to do so much.  I’m truly a blessed person. 

Speaking of the Realtor Incorporation webinar, one of the questions I get asked a lot, especially with personal real estate corporation (PREC), is whether you can own rental properties inside an active business company

  1. Do you want to mix the business risk with the risk of operating your rental portfolio?

Whether you are operating a PREC as a real estate agent, or simply carrying out a consulting business, there’s no law/guideline that prohibit you from buying an investment property inside the same company. 

Your real estate commission or consulting income you get are taxed at the 12.5% active business rate, while the rental income is taxed as specified investment business income.  

One important thing you need to consider is the risk of being sued.  If you operate in a business environment that you have a high likelihood of being sued, you may not want to put all your eggs in one basket, mixing the rental portfolio or investment portfolio with your business. 

If you own everything in one corporation and get sued from your business, the credit can go after everything within the same corporation.  This means that they can go after  your rental properties as well.  

Probably not a good idea if your business is at a higher risk of being sued. 

  1. Do you have someone to split income with?

Income splitting via dividend is somewhat limited within PREC or an active business these days (thanks to Justin Trudeau who introduced the new tax law in 2017).  

You can structure your investment holdings in a separate corporation and split income with your low income family members legitimately.  

If your plan is to split income (or at least have the option to split income) with your lower income family members, it’s often advisable to setup a different corporation to achieve this purpose. 

Make sure you consult with a professional accountant before you implement this strategy. 

  1. Are you planning to sell your business?

As a Canadian tax residents, we’re all entitled to a lifetime Capital Gain Exemption in the amount of $880K in 2020.  

You can only qualify to apply this lifetime capital gain exemption on sale of qualified small business shares.  

One of the criteria to qualify is that the company must have at least 50% of assets used in active business.  

If you are building a team of realtors working for you, and one day you are planning to sell the business to someone else, owning rental properties that are not used in your business would jeopardize your ability to qualify for the capital gain exemption. 

  1. Do you need a mortgage with your property investments?

As an accountant who’s also a realtor and a real estate investor, I can share a bit of an insight with you. 

Earlier this year, I was trying to refinance my property that’s owned directly in the corporation’s name.  

We were very close in getting the deal done at an A-lender.  At the last minute, they pulled back because they noticed that we reported a small amount of consulting income in the corporation.  

It turns out that certain banks are only willing to lend money to you to purchase a rental property if the corporation owner DOES NOT have any other active income.  It has to be 100% holding company that earns investment income, but nothing else. 

You would have thought that earning some extra income in the corporation would help you qualify for financing.   It turns out that the bank backed out because we reported $2K of consulting income.  ☹  boo!

When you decide whether you want to hold a rental property in a PREC, it’s a good idea to check with the bank to make sure they are okay to lend money to a corporation that also earns active income. 

I’m speaking from personal experience – if you know something different, I’m always here to learn. 😊

Until next time, happy Thanksgiving everyone and happy Canadian Real Estate Investing. 

Cherry Chan, CPA, CA

Your Real Estate Accountant

P.S.  Thank you for those of you who joined me last night on my realtor webinar.  If you still have questions, the best way to get all your questions answered is by scheduling a consultation with us.  Visit RealtorTaxTips.ca to get started.  Our schedule is filling quick and our sale will end this coming Monday.

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