The opportunity to claim an unlimited principal residence exemption on property value appreciation is one of the key tax benefits of Canadian real estate. One exception may be if the land is more than half a hectare (1.24 acres) unless the minimum municipal lot size at the time you bought the property was more than that or you can show that you needed the bigger lot size to use and enjoy your home.
If a property is owned by a corporation, that is another exception. A corporation is a company that is incorporated and owned by the shareholders. It’s a common framework for doing business in Canada, and it’s a legal entity separate from its shareholders that files its own tax returns. Corporations can own real estate, but unlike individuals, they are not eligible for the principal residence exemption. That is why using a corporation to hold a property that you could otherwise sell tax-free in the future can be inefficient.
Purchasing Income Property as a Corporation
To buy a rental property, some people use a corporation. If you don’t currently have a corporation and want to form one just to buy the property, weigh the costs and benefits. Forming a basic corporation might cost between $1,500 and $2,500. Annual costs for legal and accounting fees may be similar or even higher.
Corporations pay roughly 50% tax on net rental income and 25% on rental property capital gains (rates differ by province). This is comparable to what a top-rate taxpayer would pay for the same home. Many people would save money on taxes and avoid the hassle of forming a corporation by owning rental property personally.
Buying and selling properties may be an exception. If a taxpayer buys and sells properties for a profit rather than to rent them out, the profit may be taxable as business income. Personal property sellers could face a 50% tax rate, depending on their income and province or territory of residence. Business income tax rates for corporations range as low as 9% to 15%. (rates differ by province).
Using a corporation to buy an investment or business property makes sense if one already owns one. This is because retained corporate profit can be utilized to acquire property without having to withdraw money and pay personal tax.
Often, business owners form a separate corporation to buy a rental property or a business property. This is done so that the property is not available to the primary business’ creditors or does not have to be sold with the business. Money can be exchanged between corporations without triggering a personal tax.
Purchasing Secondary Property as a Corporation
It can be utilized to buy a holiday home, but there are drawbacks. Most significantly, you must pay the corporation annual fair market rent for the property or record an equivalent amount as a taxable benefit on a T4 slip. It may also be more difficult to obtain the same mortgage funding.
Canada has no estate tax, but some provinces charge substantial probate or estate administration taxes. Alter ego or joint partner trusts may be more effective methods to avoid probate than establishing a corporation for personal use of real estate.
Personal property can be transferred to a corporation, although there are usually transfer taxes. However, accumulated capital gains tax can be deferred.
In some cases, holding real estate through a corporation makes sense, but the added cost and complexity may be disadvantageous. Buying property requires tax and legal guidance and this is where IDM Professional Corporation CPA can help you. Book a consultation with us!
