How to Qualify for Best Mortgage Terms Using Corporations

Many of you would have known, English is my second language.

It shows in my writing style, it shows when I talk.

My mother tongue is Cantonese.  I can speak both Cantonese and Mandarin. 

I learned English in Hong Kong, but no one really spoke English to me, naturally it wasn’t great. 

I just didn’t realize how bad it was until I landed in Canada and couldn’t understand a word on CP24, the popular 24/7 news channel on TV. 

When I watched movies in the last two years of high school, I understood maybe 50% of it.

It isn’t easy to learn a second language.  I remember I would read Toronto Star every day to improve it.  When I say I read it, I truly mean that I read it out loud.

When I first started writing these blog posts, I had a huge mental block thinking that people wouldn’t appreciate my writing given that my grammar isn’t perfect. 

I braved it out anyway.  The worst-case scenario was that they would unsubscribe. 

For the longest time, I’ve avoided doing videos to share tax tips.  For one, I’m still a bit self conscious of my accent.  For two, who’s going to be interested in some boring tax tips?

I braved it out once again.

Sometimes, even Erwin would tease me about my occasional accent.  I used to get irritated. 

I’ve learned over the years that my accent is my advantage.  Not having perfect English means that I must use simple English to explain the difficult tax concept. 

People understand my simple English.  People can understand difficult tax impact. 

Today, after one year of doing videos, I received the very first critical comment on my Youtube asking me to work on my English.  This video is about red flags that would trigger an audit.  😊

While I feel that this comment is completely rude and unnecessary, it doesn’t bother me.  

Sharing with the world the red flags that would trigger an audit is way more important to me than perfecting my English.  My priority is straight. 

For those of you who are truly interested in finding out the red flags that would trigger an audit, here’s the link to the Youtube video.  (Sorry, for the record, English isn’t perfect.  Hope you guys understand! 😉 It was one of my earlier videos, I was probably nervous too.)

Now, onto this week’s topic.

Julio sent in a question about the pros and cons of buying properties under your personal name and then move to corporation after. 

(If you have general question and can’t find your answer on my blog’s search function, I am happy to answer some of your questions in my blog/vlog.)

Corporation provides flexibility in terms of tax planning.  It also provides additional liability protection as well.  Some even use corporation to leave assets to their next generation tax efficiently.

But sometimes, the banks don’t like to work with corporations. 

What can you do then?  Specifically, can you buy under your personal name and then move to the corporation after?

It really depends. 

For investors who invest in commercial properties, such as office buildings, commercial plazas, industrial buildings/condos, and multi unit residential building (>6 units), chances are, most major banks allow you to register the mortgage directly in the corporation’s name.

Most of the time, the banks would still like you, as an individual shareholder/director, to sign off as the guarantor to guarantee the mortgage. This is something to keep in mind when you consider a private mortgage lender option available to you.

For investors who invest in single family home and small multi unit residential properties, most banks do not like to deal with corporation owners.

Even if they are willing to work with the corporation as the applicant, the rates are usually higher, and the terms are usually less favourable compared to qualifying for mortgage directly in personal names.

On top of that, you, as an individual shareholder/director, would still need to sign off as guarantor to guarantee the mortgage.

Best option is to work with the banks that understand business and tax planning.  There are banks that would work with corporation owner and offer similar terms on the mortgage as individuals.

Another option that was raised by Julio was to purchase the property in the personal name and then move to corporation after.

It’s doable but this may trigger tax impact.  

If Julio purchases the property in his personal name, arguably, he owns the property personally.  He qualifies for mortgages personally, and then transfer the property to the corporation.

It can trigger land transfer tax when he “transfers the property to the corporation”.

It can also trigger capital gain tax, depending on when the “transfer” happens.

Also, when the “transfer” happens, technically speaking, the lawyer is required to notify the bank.  The bank likely won’t agree.  He’s back to square one.

Some investors use the legal concept called beneficial ownership to bypass some of these hurdles. 

If the beneficial ownership is properly documented and executed, an individual taxpayer can purchase a property in trust for its corporation. 

This allows the corporation to report ownership, liabilities, income and expenses of the property on its financial statements.

With proper documentation and careful execution, when the individual decides to transfer the legal title to the corporation, land transfer tax can potentially be avoided.

What about the bank?  I’m not a banker and can’t advise you on the bank rules.  Maybe it is acceptable by the bank, maybe it isn’t.  Be sure to check with a professional.

Of course, if it is disallowed by the bank, Julio is back to square one. 

A team of professionals, including investors focused accountants, mortgage brokers and lawyers, can help you navigate through all these hoops. 

Make sure you consult with the entire team before you make the decision. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant