If you are thinking about purchasing some real estate, you are probably trying to figure out the best way to finance the deal. One option is to have a corporation purchase the property instead of buying it in your personal name. The question is simple enough but the answer can be quite complex.
Liability
Commercial rental property has a higher risk of liability, especially compared to residential rentals. In either event, the real estate purchased under a corporate name protects your personal assets. If there should be an issue, the corporation takes the financial burden, not your home, investments, or other assets. Just realize that there will be more expense and paperwork with a corporation including annual income taxes.
There is no direct tax advantage whether the property is corporately or individually owned.
The lifetime capital gains exemption applies only to the disposition of an active business corporation. Real estate corporations are passive income so the $800,000 exemption won't apply here.
If you want to minimize estate taxes but still pass your assets on to your family, the real estate held in a corporation is a good option. There are some income tax act elections that will allow for flexibility in estate distributions.
If this is sounding pretty good, here are some strategies that may apply.
• Your corporation makes a tax-free loan to you. This must be a legitimate loan with all the paperwork in place like an agreement and mortgage. You must also put up collateral like your personal residence.
• You must pay reasonable interest. You can easily find the current market rate and charge that.
• The agreement must have a reasonable repayment period, usually not to exceed 20 years. Again, look to your local banks to see the amortization period they establish for conventional mortgages.
• You must be an employee of the company. So you must receive regular payroll checks.
One thing to avoid is having the corporation pay you a bonus or a single salary payment. This is not financially advantageous because the CRA will take half of that lump sum in taxes and you will only be left with 50% of the amount for the purchase of the property.
There are a number of legal and technical details. This includes corporate tax returns, personal tax returns, documentation, and so forth. There are certainly tax benefits on both sides but the deal must be carefully structured to provide the best protection. This applies if the real estate purchased is going to be used for a personal residence or for income producing rental property.
This is not a DIY project. In order to consider all the consequences, discuss your ideas with a tax consultant. If there are any errors in the set up, the CRA can include the loan as personal taxable income, which will be exactly the opposite of what you are trying to achieve. Select an accounting firm that has experience with these types of loans and that regularly works with small businesses.
Contact your Accountants today click on this link —> https://capexcpa.com/contact