Deciding whether to buy a property personally or through incorporation is a crucial decision and involves various pros and cons. It’s important to consider both the legal and financial implications before making a decision.
Advantages
1. Liability Protection
Limited Personal Liability: By transferring ownership to a corporation, the liability for debts or legal actions tied to the property may be limited to the corporation itself, helping protect your personal assets.
2. Tax Planning
Income Splitting: If the corporation rents out the property, it might benefit from income splitting, reducing the tax burden across multiple shareholders.
Tax Deferral: Depending on the tax strategy, income earned by the corporation might be taxed at a lower corporate tax rate, allowing the taxpayer to defer personal taxes. Profits can be parked within the corporation and defer personal taxes.
Capital Gains Exemption: A corporation may be eligible for the lifetime capital gains exemption if it qualifies as a small business corporation and the sale is structured as a share sale. This is not applicable to sole proprietorships or partnerships.
3. Operational Expense Deductions
The corporation can deduct operating expenses related to the property, such as mortgage interest, maintenance, and repairs, potentially reducing the taxable income of the corporation.
4. Potential for Future Gains
If the value of the property appreciates, having it within the corporation might offer more flexibility in terms of reinvestment or selling within a business context.
Disadvantages
1. Loss of Principal Residence Exemption
By transferring the property to a corporation, you lose the ability to claim the principal residence exemption on any capital gains. This could result in significant tax costs when the property is sold, as any appreciation in the property's value will be taxed as a capital gain within the corporation.
2. Mortgage Approval and Complications
Mortgage Approval: Most lenders have strict policies on approving and transferring a personal mortgage to a corporation. This may lead to higher interest rates or less favorable terms compared to a personally held mortgage.
Personal Guarantees: Even if the mortgage is transferred, many lenders will still require a personal guarantee, meaning you're not entirely protected from liability.
3. Double Taxation on Sale
If the corporation sells the property, the corporation will pay tax on any capital gains. If you then withdraw those profits for personal use, you could face additional personal taxes, leading to double taxation.
4. Legal and Administrative Costs
Transferring the property will involve legal fees, appraisal costs, and potentially land transfer taxes. Setting up and maintaining a corporation also adds administrative burdens, including bookkeeping, filing corporate taxes, and preparing legal documents.
5. Limited Flexibility in Use
Once purchased or transferred to the corporation, the property may be restricted in terms of its personal use, especially if the primary intent is to use it for corporate purposes. If you wish to continue living there, you'd likely need to pay rent to the corporation, which can complicate personal tax situations.
Conclusion
While purchasing or transferring a property to a corporation may offer liability protection and some tax benefits, it comes with significant downsides, especially the loss of the principal residence exemption and potential double taxation. Consider consulting with a financial advisor or tax professional to evaluate your situation before making a decision.
For more info, visit CRA’s Rental Income Guide.
