We are often asked by clients whether they should own rental properties personally or own them through a corporation. Our advice is usually to own properties personally when rental income is nominal and when there are only a small number of properties. The advice usually changes as more properties are added to the rental pool and the income increases. The factors that need to be considered in making this decision include income tax, legal, and general business issues.
Income Tax Considerations
Canada’s tax system is designed to try to make the tax result the same under personal and corporate ownership scenarios. Of course, the tax department is not perfect and there is usually a small advantage of one scenario over the other. This advantage can also change over time as tax rates and rules change. Currently, the tax system favours personal ownership. The tax advantage for personal ownership is about a 4% savings in British Columbia using 2014 tax rates.
Consider a situation where you have other personal income of $50,000 and have property that produces rental income. You can choose to own the property personally or through a corporation in which you are the sole shareholder. The table below shows that owing the property personally produces better results because the effective tax rate is 4% less than owing the property in a corporation.
Even after considering the above example, there still may be income tax advantages to owing rental property in a corporation. For example, corporations generally provide more opportunity to split income, time the inclusion of income on personal tax returns, and plan for the transfer of wealth to younger family members.
Limited liability protection offered by corporations is often one of the advantages mentioned when deciding whether or not to incorporate a business. This means that, in general, shareholders are not liable for the corporation’s debts and creditors for the corporation cannot sue its shareholders.
Liability protection is usually not a big issue when you just own a few rental properties and do not have a large amount of mortgage debt outstanding on the properties. However, as your rental operation grows, you may require more debt financing, you may have employees, you will be dealing with more suppliers and service providers, and you will have more tenants. The increased number of interactions and transactions with all of the above likely increases liability risk, thus making a corporation more appealing.
General Business Considerations
Some of the general business considerations to keep in mind when deciding between personal and corporation ownership are:
- Access to capital – It is usually easier to raise money as a corporation. A corporation can apply for mortgages or issue shares, making it easier to acquire new rental properties.
- Financial reporting – A large rental operation will likely require some sort of financial reporting requirement from banks and tax authorities. A corporation is usually the best option to meet expanded reporting requirements.
- Administration – One of the disadvantages of a corporation is the need to pay for professional services and file an additional tax return. However, this burden decreases as your rental operation grows. For example, the accounting fees for an operation with 10 rental properties is likely not much different whether you own them personal or in a corporation.
The determination of the “right” ownership structure depends on a number of factors as noted above. The specific details of each situation need to be analyzed in order to determine the appropriate structure. Ask us for help next time you are faced with this decision. We can summarize the relevant aspects for you in a format that is understandable and objective.
Written by: Jeff Ross, CA/CPA