Corporate Law
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Unlocking Tax Benefits of Incorporating Your Real Estate Investments in Ontario: A Comprehensive Guide

Written by
The Tabuchi Law Team
Published on
March 21, 2023

Imagine a world where your real estate investments work smarter, not harder, for financial prosperity. That's the power of incorporating your real estate investments in Ontario. This blog post will dive deep into the tax benefits this strategy can unlock, making your investment journey even more rewarding.

What are the tax benefits of incorporating your real estate investments in Ontario?

Incorporating your real estate investments in Ontario offers a number of significant tax benefits, including:

  • Income splitting: One of the most significant tax benefits of incorporation is income splitting. This allows you to distribute your corporation's income to family members with lower tax brackets, reducing your overall tax liability. For example, if you have a spouse or child who is in a lower tax bracket than you, you can pay them a salary or dividend from your corporation. This will shift some of your income to their lower tax bracket, saving you money on taxes.
  • Capital gains exemption: When you sell a property held in a corporation, you may be eligible for the capital gains exemption. This exemption allows you to defer paying capital gains tax on the sale of qualified small business corporation shares. To qualify for the exemption, the corporation must have been active in the business of owning and operating real estate for at least five years.
  • Strategic tax deferral: Incorporation also allows you to defer paying taxes on your profits until you withdraw them from the corporation. This can be advantageous if you expect to be in a lower tax bracket in the future. For example, if you retire early, you can withdraw your profits from the corporation at a lower tax rate than what you would have paid if you had withdrawn them while you were working.

Income splitting strategies

There are a number of different income splitting strategies that you can use, depending on your specific circumstances. Some common strategies include:

  • Paying a salary or dividend to your spouse or children: This is the most common income splitting strategy. You can pay your spouse or children a salary or dividend from your corporation, up to a certain amount each year. The amount that you can pay them will depend on a number of factors, such as their age and whether they are working full-time or part-time.
  • Creating a family trust and distributing the corporation's income to the beneficiaries: Another common income splitting strategy is to create a family trust and distribute the corporation's income to the beneficiaries. This can be a more complex strategy, but it can be effective for reducing your overall tax liability.
  • Selling shares of the corporation to your spouse or children at a discounted price: You can also sell shares of your corporation to your spouse or children at a discounted price. This will allow them to benefit from the corporation's growth and income, while reducing your overall tax liability.

Capital gains exemption planning

To maximize the benefits of the capital gains exemption, it is important to plan carefully. You should consider incorporating your real estate investments as early as possible and ensuring that the corporation meets all of the eligibility requirements for the exemption.

Here are some tips for capital gains exemption planning:

  • Incorporate your real estate investments as early as possible: The longer you hold the property in the corporation, the lower your capital gains tax will be when you eventually sell it.
  • Make sure the corporation meets all of the eligibility requirements for the exemption: To qualify for the capital gains exemption, the corporation must have been active in the business of owning and operating real estate for at least five years. The corporation must also have at least 50% of its assets invested in real estate.
  • Consider selling your shares in the corporation instead of the property itself: If you sell your shares in the corporation instead of the property itself, you may be able to defer paying capital gains tax until you withdraw the money from the corporation.

Strategic tax deferral techniques

There are a number of different strategic tax deferral techniques that you can use, depending on your specific circumstances. Some common techniques include:

  • Leaving profits in the corporation: If you expect to be in a lower tax bracket in the future, you can leave your profits in the corporation. This will allow you to defer paying taxes on the profits until you withdraw them.
  • Investing profits in tax-advantaged investments: You can also invest your profits in tax-advantaged investments, such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). This will allow you to grow your wealth tax-free.

How to incorporate your real estate investments in Ontario

To incorporate your real estate investments in Ontario, you must register your corporation with the Ontario Ministry of Government and Consumer Services. You will also need to obtain a business number from the Canada Revenue Agency (CRA). Once you have incorporated your business, you can transfer your real estate assets to the corporation.

Here are the steps involved in incorporating your real estate investments in Ontario:

  1. Choose a name for your corporation. The name of your corporation must be unique and cannot already be in use by another corporation. You can search for available corporation names on the Ontario Business Registry website.
  2. File articles of incorporation. The articles of incorporation are the legal documents that create your corporation. You can file your articles of incorporation online or by mail.
  3. Obtain a business number. A business number is a nine-digit number that is used to identify your corporation with the CRA. You can obtain a business number online or by phone.
  4. Transfer your real estate assets to the corporation. Once you have incorporated your business and obtained a business number, you can transfer your real estate assets to the corporation. You will need to complete a transfer of land form and have it signed by you and the corporation. You will also need to register the transfer of land with the Land Registry Office.

Why choose Tabuchi Law for your real estate investment incorporation needs?

Tabuchi Law is a leading law firm that specializes in real estate investment incorporation. We have a team of experienced lawyers who can help you navigate the process and ensure that you are taking advantage of all available tax benefits. We also offer ongoing support and guidance to help you manage your incorporated real estate investments effectively.

Contact Tabuchi Law today to learn more about the tax benefits of incorporating your real estate investments in Ontario

If you are considering incorporating your real estate investments in Ontario, contact Tabuchi Law today for a consultation. We can help you understand the tax benefits of incorporation and develop a customized strategy to meet your unique needs.

Additional Information for Real Estate Investors

Here are some additional tips for real estate investors who are considering incorporating their businesses:

  • Seek professional advice: It is important to seek professional advice from a lawyer or accountant before incorporating your real estate investments. They can help you understand the tax implications and ensure that you are taking advantage of all available benefits.
  • Have a plan in place: Before you incorporate your business, it is important to have a plan in place. This should include your goals for the business, your tax strategy, and your exit strategy.
  • Keep good records: It is important to keep good records of all income and expenses for your corporation. This will help you to file your taxes accurately and avoid any problems with the CRA.

Incorporating your real estate investments in Ontario can be a complex process, but it can be worth it in the long run. By taking advantage of the tax benefits available to corporations, you can reduce your tax liability, save more money, and grow your wealth faster.

Here are some additional tax benefits of incorporating your real estate investments in Ontario:

  • Access to the small business deduction: Canadian-controlled private corporations (CCPCs) with less than $500,000 in active business income can access the small business deduction, which reduces their federal corporate tax rate from 15% to 9%.
  • Eligibility for the capital gains exemption: When you sell a property held in a CCPC, you may be eligible for the capital gains exemption, which allows you to defer paying capital gains tax on the sale of qualified small business corporation shares. To qualify for the exemption, the corporation must have been active in the business of owning and operating real estate for at least five years.
  • Reduced tax rates on dividends: Dividends paid to Canadian residents from CCPCs are taxed at a lower rate than other types of income. The dividend tax rate in Ontario is 39.3% for eligible dividends and 47.7% for non-eligible dividends.

Conclusion

Incorporating your real estate investments in Ontario can offer a number of significant tax benefits, including income splitting, capital gains exemption, strategic tax deferral, access to the small business deduction, and reduced tax rates on dividends. If you are a real estate investor, it is important to consider incorporating your business to maximize your financial potential.

How to get started

If you are considering incorporating your real estate investments in Ontario, the first step is to contact a lawyer or accountant to discuss your specific needs. They can help you understand the tax implications of incorporation and develop a customized strategy to meet your unique goals.

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