Real estate investors usually start investing in their personal names.
It’s easy, simple and the cheapest form of ownership.
Once they test the water, many of them decide that they will continue their investing journey.
Some investors even take it to the next level by turning investing into a full-time career.
For the majority of us, we keep our day jobs/businesses and we invest on the side to build our long-term wealth.
However, owning a large portfolio in personal names is often not advisable for liability protection reasons. If a tenant/stranger sues you on your portfolio, your home and your RRSP and TFSAs can all be at risk.
And of course, a corporation provides flexibility in terms of structuring your portfolio deals. In some cases, it can even be used to minimize your tax.
What if you already own a large rental portfolio in your name, what are the tax impacts to move them into corporations?
This can be a tricky question and it’s usually the most common question investors have.
- Will I need to pay capital gains tax when I transfer the properties to my corporation?This depends.
If the properties are held as the long-term buy and hold, chances are, you can avoid paying the capital gain tax with the proper election form filed.
This election allows you to defer the capital gain when the corporation eventually sells to a third party.
Costs are associated in filing the form with CRA.
If the property you transfer has been your primary residence up until the point of transfer and you have always lived in the property during the years of ownership, chances are, there are no capital gain tax. You can claim this property as your primary residence.
Be sure to consult a professional before making the transfer.
- Are there any land transfer tax impacts?We, as accountants, rarely deal with them.
Having said that, the general rule of thumb is that if there is a transfer of ownership from an individual to a corporation, Ontario land transfer tax would apply.
If your properties are in Alberta, there is no land transfer tax. ?
- Can the land transfer tax be avoided?There are some instances where the land transfer tax would not be applied. Be sure to consult an experienced real estate lawyer to confirm the land transfer tax impact.
- What are the other impacts of transferring the properties to a corporation?More often than not, you will need to notify the banks who give you the mortgage on the property.
Major banks, for some reasons, do not like to take most residential mortgages with corporations.
And yes, this means that they have the right to pull the mortgage.
Most banks, however, consider 5 multi units and up commercial mortgage. They are less concerned who holds the title for this type of mortgage. This includes commercial plazas, office buildings, industrial buildings and manufacturing plants.
We would still advise our clients to speak to their banks before making the transfer.
- What are the other costs associated with the transfer?Land transfer tax is seemingly the biggest expense.
You will also incur some accounting fees for the rollover and tax planning.
In some cases, a valuation must be done prior to the transfer. An appraiser may be engaged.
And of course, you cannot really do an ownership transfer without the lawyers. Legal fees can vary from one lawyer to another.
You may wonder if there is any reason to move your portfolio to the corporations given all these proposed tax changes currently happening.
The objective of Bill Morneau’s proposed tax changes is to discourage small business owners paying only 15% tax on their corporate income to invest and grow their portfolio faster.
In another word, if you use after-tax income in your personal names to purchase properties, the proposed tax changes should not be applied to you.
However, we will still have to wait until the next Federal budget date to find out how these changes will be implemented to see if there are unintended consequences.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant