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Real Estate Considerations: Incorporation Part 2

Why Ownership Selection is Important

Any form of investment bears a level of risk.  Risk, I learned back from working for an auditing firm, is any uncertainty that will have impact (positive or negative) to your business.  Sometimes, risk manifests itself in a way that causes personal liability.  When real estate transactions involving such a high volume of cash changing hands, you as an investor and party to that transaction want to tread very carefully.  It just so happens that in the real world, the higher the dollar value of an investment, the greater the chance you can have claims made against you.

To start, written agreements can help you circumvent most of the foreseeable claims, and of course, having a capable real estate agent can help you with this when writing a Contract of Purchase and Sale.  More importantly, your choice of ownership structure is also important.  There is a handful of strategies I will introduce here to help reduce your personal exposure to claims that could easily eat into your profit margin, Return on Investment, and Rate of Return.

Corporations, undoubtedly, can help protect you from these claims in an increasingly litigious environment.  A corporation, as a separate legal entity controlled by but independent of it’s individual shareholders, acts on its own legal behalf and bears responsibility for its actions.

Strategies

Seek a lawyer for this part:

Taking advantage of the protection that personal liability corporations offer is easy.  For example, always sign business documents as an authorized signatory of the corporation of which you’re a part.  A clear statement that are you acting as a representative of the corporation rather than in your own personal capacity will help ensure the corporation, and not you, bears the brunt of any claims.

Similarly, if you make loans to your corporation, become a secured creditor.  The corporation’s director may bear some liability.  Be cognizant that if you’re a director of your corporation, you are liable for:

  • Corporate tax
  • Sales taxes
  • Provincial employment standards legislation
  • Builder’s liens

To protect yourself as a director of a corporation, consider not owning personal assets such as cars or real estate.  You can transfer these assets to your spouse to limit what claimants can seek from you.

To minimize your risk, one strategy is to lessen your involvement in your business as a director.  Another strategy is to reduce the number of possessions you hold in your personal name, such as property.

All these strategies you will require advance customized legal and tax advice.  As always, seek the right professionals first and build a strong relationship with them at the onset so you will have your interests protected.  My job as your realtor is protect your real estate related interests so you can reach your financial objectives with comfort, confidence, and clarity.

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Real Estate Considerations: Incorporation (limited company)

A corporation is a business that operates as a legal entity but is separate from its owner or owners.  Corporations must file annual reports, submit tax returns, and pay taxes.

A corporate structure, as opposed to partnership and sole proprietorship, has many tax benefits.  With a sole proprietorship, you must declare and pay taxes on all your income in the taxation year you’ve earned income.  Corporations pay a corporate tax in the year money is earned which benefits from a reduced tax rate up to potentially $500,000 if the corporation has three employees or less and other criteria are met.  You don’t pay any personal tax until you take money out of your company, and knowing this, you can optimize your real estate planning options.  Your accountant can delve more into how you can capture benefits based on your unique situation.

WARNING: Although you do benefit from reduced taxes for your taxable income from a real estate corporation, passive recurring income from real estate assets may be subject to a different tax rate.  Again, consult with your accountant to plan the most tax-advantageous arrangement if you incorporate.

A corporate entity will be required to abide by strict reporting rules set forth by provincial law where the company incorporates, but the advantage to you, as a shareholder, is that the company accepts full responsibility for all claims made against it.  Unless you sign a personal guarantee accepting all claims against the corporation, claims are limited to the corporation’s assets.

Taxes are a significant consideration as you choose an ownership structure for your real estate investments.  Ownership of properties through a legal corporate entity may open up various tax advantages.  Since the company operating your properties files its own taxes, you can claim only the income flowing to you as a shareholder in the business.  Business related expenses of the corporation are not available for shareholders to claim.

As a shareholder, you want to always ensure that a shareholder’s agreement and buy-sell clause are signed before entering into any deal that requires putting money to a corporation.  These documents pertain to dealing with management and dissolution of the company if anything goes south.  It also contains possible issues and scenarios related to your participation in the corporation.  A lawyer can help you examine whether the agreements are a fit to your overall objectives.

As always, seek independent legal, accounting, and other professional advice related to your real estate transaction.  Experts will help you navigate this journey and help you avoid unforeseen problems.  Of course, have a realtor on your side to ensure you find the right home all the while connecting you to the right people every step of the way.

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Real Estate Considerations: Taxes

In this world, nothing can be said to be certain, except death and taxes.  ~Benjamin Franklin

Taxes are inevitable.  Instead of brooding over dollars lost, we can better spend our energy on how to better optimize our investment portfolio that are less susceptible to taxes.  Real estate offers certain tax benefits for you as a shrewd investor, especially when you develop an investment strategy with taxes in mind.

Taxes erode the return on investments that yield a fixed return, such as bank accounts (interest payments), bonds (coupons), and Guaranteed Investment Certificates (GIC return).  Of course, your Tax-Free savings account is free from all that.  Stocks and other equities put your principal at risk, and it’s also exposed to capital gains tax.

Real estate investments are subject to a reduced tax rate.  Tax advantages range from tax-free capital gains on principal residence properties to savings as high as 50% on taxes levied on capital gains from investment properties.  You’ll also be able to deduct investment expenses and write off any depreciation in the assessed property value.

Take a moment to read our extensive list of Tax Rebates and Grants for first-time home-buyers in our FAQ section.