In real-estate driven economies like Vancouver, and throughout the rest of British Columbia, there are many questions that need to be addressed, surrounding the purchase of real-estate. One of these questions that business and corporation owners in Vancouver and Canada need to ask is whether or not they should buy real estate with corporations – instead of personally.
The answer to this question starts with asking if you are talking about real estate for personal use or for investing purposes. By personal use we mean your primary residence and possibly a vacation home or cottage. Investing purposes includes purchasing real estate to hold, rent or flip.
When talking about purchasing your principal residence, it may actually make more sense for you to purchase your home outside of your corporation. The reason for this is, is that when you sell your home in the future, there will be a tax benefit.
This tax benefit is that you can claim a principal residence exemption on the property value appreciation. There are some rules in place as to what your principal residence is. This includes that you can only claim one home per family and you need to (typically) live in the home. As well, the purpose of the residence cannot be to earn income and there are some restrictions regarding the size of land.
As always, CRA does have stipulations in place so it is always important to discuss your options with your accounting and tax professionals. So, always make sure to consult with the CRA, and to consult with your accounting professionals.
Nevertheless, if you are looking to use your corporation to buy your home, there are a couple of different options.
1. Corporate loans.
One option to purchase real-estate may be that you choose to have your corporation give you a loan for your home purchase, as an employee of the company. Being an employee of your own company means that you need to be on payroll. So, there may be some difficulties if you operate as a board member or contractor.
You could then get a tax-free loan from your corporation, which would need to be supported by a written agreement. As a homeowner, you would then need to pay a reasonable amount of money in interest payments as well provide a reasonable time frame for the loan to be repaid to the corporation.
If the company needed to take out a mortgage, the home would be used as collateral for the loan. But, this would allow you to purchase a home and repay it back – all while keeping it in the company.
2. Corporation purchase.
A variation on this would be if the corporation itself purchases the home. Doing this would allow you to utilize cash held by the corporation, and if needed, the corporation would take out any additional mortgage. You would then pay rent back to your corporation and they would be able to claim this as income, after deducting all of the expenses.
This may be a simpler way of purchasing real-estate, but still allows you to purchase personal housing through a corporation.
There is a significant distinction between holding companies and operating companies that we talk about in one of our other blogs. If you choose to have your corporation purchase your home, it would be smart to have it held by your holding company.
This way, your home would be a protected asset. If needed, the operating company could make a documented tax-free loan to the holding company that you are also a shareholder of, and the holding company would pay annual interest back to the operating company. As a homeowner, you would pay rent to the holding company for the home and your holding company would pay income tax, less any expenses on this rent, or income.
If you do not already have a company in place, you should consult your tax accountant to see if it even worthwhile to transfer your property to the corporation.
3. Trust agreement.
Another option that you could pursue regarding your personal property is to purchase the property under your name and then set up a trust agreement that states that the corporation is the beneficial owner of the property.
The corporation would then be treated as the owner from a tax perspective and would claim the rental income as well as the expenses related to the residence. Again, consult a professional so that you know if there will be tax implications or capital gains.
When looking at secondary homes or rental property, it is typically better to not own these as an individual due to annual taxes and capital gains. If you are in a higher tax bracket, it would definitely be more beneficial to have the property held by the corporation, which would pay lower tax rates.
Purchasing real-estate, pros and cons
If you are looking specifically at purchasing a secondary home, there may be a disadvantage. You would need to compare the rent that you would need to pay to the corporation and its resulting taxes it would need to pay on the income earned compared to what the tax implications would be if you personally held the property.
Here again is where you need to speak with your tax specialist to determine if the costs and implications of moving the property or properties to a corporation when you already own them may outweigh the benefits.
If you are purchasing properties for the purpose of flipping them, the tax implications regarding the profits will be better in the corporation rather than personally. In this instance, your company could be taxed as low as 9-15%.
Another disadvantage is that it may be harder for the corporation to get financing. Depending on the financial institution, they may charge a higher interest rate for the corporation or require the directors to personally guarantee the loan.
In B.C. and real-estate hubs like Vancouver specifically, the mortgage lender may require that the company be registered in BC and may still ask for a personal guarantee from the principal of the corporation.
Again, each case is different especially and it can become more complex if you are looking at purchasing a second property out of Canada. Different countries have different tax laws and you will need to ensure you understand them before purchasing a property. Always check with your accounting professional to ensure you know the implications before you purchase.
A corporation may choose to purchase real estate, not for the benefit of personal use but for the benefit of the corporation. This could include purchasing the real estate that your company is operating out of, or any other properties that it wants for investment purposes.
If a company is a Canadian Controlled Private Corporation (CCPC), there can be benefits. For example, there is a capital gains deduction when corporate shares are sold or there can be increased number of deductions at tax time.
As well, some additional benefits of corporate owned real estate include profit, as the property appreciates, tax benefits due to expenses and cash flow if you decide to rent out your property.
Some disadvantages for a corporation to buy real estate include potential losses if you rent out your property, either from tenants not paying rent or damages incurred. As well, the corporation needs to consider the cost and time that are involved in not only finding the right real estate, but in the maintenance of the property.
One last thing to take into consideration. If you are planning on leaving the property to your children when you pass away, there may be inheritance tax savings if the property is held within a corporation.
If they are shareholders of the limited company, if and when the property is sold and they receive the proceeds, they may be taxed at a lesser level than inheritance tax. Even though there are no inheritance taxes in Canada at this time, there are rules that apply to properties outside of our borders.
Always remember to plan ahead and speak with a professional as this can save you at tax time or hurt your bottom line. Especially in cities and locations with plenty of international real-estate and corporate ownership of real-estate, it is important to consult with taxation and accounting professionals to figure out what the best option is.
Need help from an expert?
If you need clarification on the pros and cons of buying real estate with your corporation, let one of our experts at Valley Business Centre help. For over 30 years, our team has been providing comprehensive bookkeeping, payroll and tax services to our clients in Whistler, Squamish, the Sea to Sky Corridor and metro Vancouver BC areas. We’ll give you the peace of mind you need to make confident financial decisions.
This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.