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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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