Should I Incorporate My Real Estate Business?

Advantages and Disadvantages – Consider the entire picture!

When talking with real estate investors, our most popular question is, “Should I incorporate?”

To get an entire picture of incorporating your real estate business, read this article to the end. We will explore both the advantages and disadvantages. Understanding your short, mid, and long-term objectives is essential. Before you choose a corporate structure, you should be sure that it aligns with the objectives. Incorporating will mean registering your business as a separate legal entity; its assets will be separated from personal assets. Shareholders will now own the business, and directors will run it.

The following questions are, therefore, very critical:

* Is your business exposed to legal liability? Are you personally in need of protection?

* Is a large amount required for your personal living?

* Are you contributing money towards your retirement in your business?

* Are you in need of your cash flows now?

* Could your business qualify for an LCGE (Lifetime Capital Gains Exemption)?

* Do you have any person who can split income with you?

* Do you have a small business?

It's important to lay out all the information and discuss the above questions with the experts so that they can provide critical structure and guidance for your unique situation.

Reasons for incorporating

A.1) Legal Issues – Protection of Personal Assets

From a legal aspect, the corporation is a separate legal entity. Personal assets are protected from settling business liabilities. Buying assets with a corporation has the benefit of possibly reduced liability – with the exemption of personal gross negligence and personal guarantees.

In contrast, operating as a sole proprietor, your business and personal assets are not legally separated. If you are unable to pay your business liabilities, your personal assets can be liquidated to pay back the liabilities.

If you have a corporation, you can keep personal and corporation separate bank accounts. Owning several pieces of real estate may make accounting, legal liability, and transparency cleaner with corporate entities because of the disclosure requirements required.

A.2) Strategic tax & Estate Planning

Incorporating your real estate business will have little to no effect on the amount of income tax you have to pay personally in Canada. Canada’s tax system is currently structured so that the combined corporate and personal tax paid on business income earned through a CCPA would be about equal to the tax paid on income earned by an individual.

Tax deferral is the key benefit to carrying on a business within a corporation. Personal tax can be paid when the dividends are declared, allowing the capital to be reinvested inside the corporation.

A corporation eligible for the small business deduction (SBD) in Ontario would pay 12.2 % on its active annual business income up to $500,000 and 26.5 percent after that. Therefore this would leave 87.8% of every dollar of income to grow your business further vs. paying 53.53% tax at the highest bracket for a sole proprietor in the highest tax bracket, assuming that funds will be left within the corporation. Please note passive income is taxed at approx. 50%.

Incorporating the business will result in a 41.33% tax deferral on active income and not tax savings because, finally, the personal tax will become payable so that the accumulated corporate savings can be withdrawn. The corporation’s after-tax benefits are distributed to shareholders who pay capital gains tax on the distributions.

Other tax advantages are as follows:

* Pulling cash out of the company as a repayment of the loan rather than the income distribution.

* Depreciation on paper of an appreciating asset reduces taxable income.

* Lower tax rate with dividends payments (T5) than personal income (T4).

* Flexibility on when to declare and therefore pay taxes on income.

* You may transfer corporate benefits (cash, equity) by transferring shares between one identity/person to another without selling the property.

* It can provide greater ownership flexibility, especially in the context of estate planning as well.

A.3) Flexibility

A corporation provides flexibility:

How, who, and when to compensate owners?

Disposal and timing of disposals.

It will allow you to work with partners who add skills to grow the business.

A.4) Scaling Your Operations

If you have plans to grow your real estate business, you may need employees, suppliers, and an office. Your corporation will be the entity, image, and brand with which the market will associate. So employees can protect the company brand and grow the company.

A.5) Personal Privacy

Suppose you were to own your multi-family building in your personal name. In that case, you might soon find agents, tenants, suppliers, managers, and visitors finding your name, phone number, and home address and contacting you for various reasons. Incorporating will make you look more professional, and more people will trust you, adding credibility and ultimately attracting high-quality clients. U will take your business more seriously.

A.6) Advantageous Financing Options

If you’re buying under the corporation, you may be able to qualify for the business operations. There may also be opportunities to have limited and reduced personal guarantees on your loan if the corporation owning the real estate asset already has a substantial positive balance sheet and income stream. As the portfolio increases, corporate loans will become easier and will not involve personal guarantees. Remember that getting the right advisors to guide you can and will make a massive difference as the numbers get bigger. Remember that personal guarantees result in a claim over personal property in case of inability to pay business liability.

Drawbacks of incorporating

B.1) Costs for compliance

Compliance with frequently changing tax rules is critical whether you're a sole proprietor or corporation. Corporate tax rules tend to be the more complex of the two — and, therefore, may require support from qualified accountants and lawyers. Since we are here for the same purpose, you will not have to worry about how to comply because we do it at relatively low costs.

B.2) Financing

With the guidance of your mortgage broker representative, consider the impact of the potential structure on obtaining financing for current and future properties. For example, various financing programs often favour personal ownership. As the owner, control over the business resources is also separated.

Conclusion

Are you having more questions about how to incorporate your real estate business? Do you want to earn more in real estate by incorporating your business? Reach out to Pivot Strategy CPA to review your business structure. Our experts can ensure your setup is structured correctly and taxed efficiently to fit your current and future needs. There is a time when it makes sense to incorporate your real estate business – and if you check off some or all of these boxes discussed above, it may just be time for you. We are ready to provide the best possible solution without hesitation.

Are you looking for a real estate accountant? Contact us for a consultation.

The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.

By: Kamal Gawri, CPA, CA