Landlords with multiple rental properties often wonder about the smartest ways to set up their business. Ontario real estate owners may consider incorporating their rental properties into a holding company. Before doing so, however, they should consider the advantages and disadvantages of this action under real estate law and the tax system.
The first thing a person incorporating rental properties should ensure is that the Canada Revenue Agency will not consider the rental real estate as inventory. Inventory, in this sense, refers to property held for resale, not rental. If the CRA declares rental property as inventory, it could trigger tax consequences. The best way to prove to the CRA that the property is for rent rather than resale is to show proof of past rental income.
There are some advantages of incorporating for Ontario landlords, including limited liability and creditor protection. Financial institutions and insurance companies may have policies regarding this. So, discussing any change such as an incorporation with these institutions is critical. Incorporation may also provide more flexibility when retiring. However, one should look at whether potential tax benefits and future protections are worth the initial investment, which may include a land transfer tax.
Recent changes in tax laws may have changed past benefits of incorporating for many businesses, including people who lease real estate. There may also be legal issues worth considering with regards to liability and other changes that occur when incorporating. Ontario landlords considering taking this step with their rental properties should speak with a lawyer about the process, as well as any related costs and consequences.
Source: moneysense.ca, “Will putting my rental properties into a corporation save taxes?“, Evelyn Jacks, Oct. 6, 2017
