Real estate investment is a great way to build wealth and generate passive income. However, choosing the correct holding structure for your properties is essential. In Ontario, Canada, many savvy investors opt for a corporation. This is because corporations offer a variety of advantages, including lower tax rates, income splitting, limited liability, and continuity of ownership.
Lower Tax Rates
One of the biggest benefits of holding real estate in a corporation is the potential for lower tax rates. Corporations in Ontario are subject to a lower tax rate on rental income than individuals. This can result in significant savings over time, especially if you own multiple properties.
For example, in 2023, the Ontario corporate tax rate on small business income (under $500,000) is 13.5%. However, the Ontario personal tax rate on the highest income bracket (over $222,000) is 53.53%. This means a corporation can save a significant amount of tax on rental income compared to an individual.
Another benefit of holding real estate in a corporation is the ability to income split. This means you can distribute the corporation's income to family members in lower tax brackets. This can help to reduce your overall tax liability.
For example, if you own a rental property held in a corporation and your spouse is unemployed, you could distribute the corporation's income to your spouse. Since your spouse is in a lower tax bracket, they would pay less tax on the income. This would effectively reduce the overall tax liability for you and your family.
Limited liability is one of the most significant benefits of holding real estate in a corporation. This means that your personal assets are protected from claims or lawsuits against the property.
For example, if a tenant sues the corporation for damages, your personal assets are not at risk. Only the corporation's assets are at risk. This can provide significant peace of mind for real estate investors.
Continuity of Ownership
Another benefit of holding real estate in a corporation is continuity of ownership. This means the corporation doesn't cease to exist when the owner dies. This can make estate planning and succession planning much more straightforward.
For example, if you own a rental property held in a corporation and you die, the corporation will continue to own the property. This means your family members will not have to go through the probate process to transfer property ownership.
In addition to the benefits mentioned above, holding real estate in a corporation can also offer the following advantages:
- Easier financing: Corporations are often seen as more stable and reliable borrowers than individuals. This can make it easier to secure financing for your real estate investments.
- Professional image: A corporation is more than just a legal entity; it's a statement. It signals to others that you're serious about your investments, which can enhance your professional image and open up more opportunities.
Disadvantages of Holding Real Estate in a Corporation
While there are many advantages to holding real estate in a corporation, there are also a few disadvantages to consider:
- Additional costs: Additional costs are associated with maintaining a corporation, such as annual fees and accounting costs.
- Complexity: Corporations can be more complex to set up and manage than other types of business structures.
- Tax implications: While corporations may have lower tax rates on rental income, there can be tax implications for distributing income to shareholders.
Is Holding Real Estate in a Corporation Right for You?
Whether or not holding real estate in a corporation is right for you depends on your individual circumstances. If you are considering this approach, seeking professional advice from an accountant or lawyer, like our team at Tabuchi Law, is necessary.
They can help you understand the benefits and drawbacks of this approach and determine if it's right for you.
Holding real estate in a corporation can offer a variety of advantages, including lower tax rates, income splitting, limited liability, and continuity of ownership. However, it's important to remember that each investor's situation is unique. Seeking professional advice is crucial to ensure this approach aligns with your investment strategy.
If you are considering holding real estate in a corporation in Ontario, please contact Tabuchi Law for a consultation. Our experienced lawyers can help you understand the benefits and drawbacks of this approach and determine if it's right for you.