This summary compares the attributes of investing in real estate in your personal name vs through a Corporation. Many commercial real estate investments, whether they are development projects or rental properties, are structured in the form of Limited Partnerships (LPs) or co-tenancies/joint ventures; as such, the attributes laid out in the table below apply to those forms of investments as well as investments directly in properties.
All tax rates and capital gains inclusion rate used are those in effect as at November 2020.
|Ownership||Corporation is the owner of the property (or property investment). There can be multiple shareholders of the corporation including trusts, individuals and other corporations.||Direct ownership by an individual in the property (or property investment).|
|Passive income and taxes
(Rental of units (commercial or residential) will generally be considered passive income unless significant services are provided to the renters in addition to the property.)
|If the investment is generating passive income, the income earned is retained inside the corporation and taxed at the corporate investment tax rates (50.17% in Ontario, with 30.7% being refundable upon the payment of a dividend from the corporation to the shareholders).||No difference between active and passive income for personal tax purposes, the income is taxable at the marginal personal tax rate of the owner (highest rate in Ontario is 53.53%).|
|Active income and taxes
(If the investment is a development project or if the rental property has more than 5 employees the income will generally be considered active income.)
|If active income is being earned the income is subject to corporate business tax rates (26.5% regular rate or 12.2% for small business income up to $500,000).||No difference between active and passive income for personal tax purposes, the income is taxable at the marginal personal tax rate of the owner (highest rate in Ontario is 53.53%).|
|Capital gains||Capital gains earned on the sale of the investment are ½ taxable at the corporate rate. The other ½ of the capital gain is added to the Capital Dividend Account (CDA) and, in most situations, can be paid out of the corporation to the shareholder on a tax-free basis.||Capital gains earned on the sale of the investment are ½ taxable at the individual’s marginal personal tax rate.|
|Losses||Losses incurred are trapped inside the corporation. Losses can be used to offset other forms of income, however if there are no other forms of income, the losses can be carried forward until a time where the corporation is profitable.||Losses on real estate investments can be used to offset any other form of income earned by the
individual. Unused losses can be carried forward to apply against future income.
|Depreciation||Where there is a direct investment in real estate or investments in
co-tenancies, the corporation is able to claim depreciation (or
“Capital Cost Allowance”) on the capital assets (i.e. building). However, this deduction is limited to the income from real estate (cannot create or increase a real estate loss as a result of depreciation). Where there is an investment in an LP, the depreciation is taken at the LP level.
|No different from investing through a corporation.|
|Cash flow to investors||Distribution of cash (which could differ from taxable income) from the investments flows to the corporation. In order for the investor to extract cash from their corporation, the corporation would declare a dividend to the shareholder. The dividend will be subject to personal tax to the shareholder and may result in a refund of refundable tax at the corporate level.||Distribution of cash (which could differ from taxable income) from the investment flows to the investor directly.|
|Liability||Liability is not extended to the shareholders of the corporation, but limited to the assets of the corporation (except in certain situations where the shareholders have provided personal guarantees on financing).||Direct investment in real estate results in unlimited personal liability to the investor. For LP investments liability is limited to their net contribution to the LP (as long as the investor is not part of the control and management of the partnership).|
|Financing||Taken out at the corporate level. Only guaranteed by owner if needed.||Taken out personally and may need to be secured against other personal assets of the individual.|
|Funding the investment||Where the investor has another corporation (particularly an active corporation), after tax funds (subject to 26.5% or 12.2% small business tax rates) from that corporation can be loaned to the corporation for the purpose of making the investment, leaving more after-tax dollars to be invested in projects.||Investment is made with after-tax dollars. If the investor is in the top tax bracket, less funds are available to invest.|
|Splitting income||Potential to split income with multiple shareholders, subject to meeting the Tax on Split Income (TOSI) exclusions. Allows for planning flexibility.||No ability to split income.|
|Estate planning||Potential to freeze an individual’s interest (value) at a point in time to limit their terminal tax liability.
Potential to avoid probate through a multiple Will strategy.
|No potential to implement a freeze of the individual’s interest (unless a corporation is created at a later date). No opportunity to avoid probate taxes.|
This is meant as a high-level comparison and the choice in structure will depend on the facts of each particular situation.
This summary has been provided for information only. This does not provide specifics. If you have questions or if you would like to discuss specifics of your particular situation, please contact your Welch LLP advisor.