Should I buy a rental property in my name or under my corporation?
This is the first question that comes to everyone’s mind who plans to make real estate investments and use them for rental purposes.
The answer is “it depends” and varies with every client’s situation.
Situation 1: If you are an individual at a higher personal tax bracket and want to buy a property under a corporation, realistically, it won’t make much difference from a tax perspective, either buying under the corporation or the personal name. The corporation earning rental income only is subject to the corporate rate of 50% of their net rental income and not eligible for a small business deduction. The only benefit, the corporation is a separate legal entity separate from its shareholder and can own real estate in its name. It protects your assets from future legal consequences.
Situation 2: You already have a corporation earning income from an active business, and you are contemplating buying real estate under the corporation for rental purposes.
There is a clear distinction between the “active income” and “passive “business income in the Income-tax Act. Rent on the “real property” is categorized as a passive income source and will not benefit from the small business deduction.
Your active business income in the corporation is taxed at 12.2% up to $500,000 but varies by province or territory.
Beginning in 2019, as your passive income increases, there is a corresponding decrease in the amount of your active business income that can be taxed at the small business tax rate. For every $1 over $50,000 in passive income earned in a given year, the small business tax rate threshold will be lowered by $5 in the following year.
Earnings above the threshold will be taxed at the general corporate tax rate, which is around 27% varies on province or territory.
If your corporation has more than $500,000 in active business income, then your allowed passive income drops to $50,000 to get the benefit of lower small business tax rates. So, suppose you have other passive income inside the corporation along with the rental. In that case, you might go above the threshold and may lose the benefit of lower small business tax rates on the corporation’s income.
Knowing your number is key to determining whether you will be impacted and what mitigating strategies may help you to decide.
There are many other factors too that need to be considered, so there is no correct answer.
The corporation may be a suitable structure for holding real estate in some situations, but the cost and complexity may not be worthwhile. Expert advice should be considered before making the decision.