Selecting Tax Efficient Real Estate Structure in Canada

So, you have decided to invest in real estate… Make sure to choose the right structure because it is very tough to change and there can be significant financial consequences.

There is no “cookie cutter” structure that fits every single real estate deal due to many different factors including the size of the deal, the number of purchasers, whether the purchasers are Canadians citizens, the purchasers marginal tax rate and plans for the property in the future to name a few.

This post is designed to provide an overview of each entity type and general use for each. It does not consider complex structures using multiple entities. Prior to moving forward with any deal make sure to consult your tax and legal advisors.

Personal Ownership

Generally, purchasing real estate in your personal name for collecting passive rental income normally makes the most sense in Manitoba. This is primarily a result of the lower graduated personal tax rates versus the higher corporate tax rates on passive rental income as shown in the table below:

Another benefit of owning real estate in your personal name is that losses can be used to reduce other forms income such as employment income potentially reducing your overall tax bill.

Personal real estate ownership is the most cost-effective and simplest way to acquire real estate because there are no additional legal or accounting fees other than closing costs and completing your personal tax return.

General and Limited Partnerships

General and limited partnerships are a commonly used vehicle to own real estate to earn passive rental income when there are multiple parties. This is because taxation of partnerships is very similar to personal income tax because income is allocated and taxed in the hands of the partners. Therefore, you can invest with more than one investor and still take advantage of the lower graduated personal tax rates in Manitoba.

Like owning real estate personally, losses can be used to reduce other forms of income. However, these losses may be restricted when utilizing a limited partnership.

General and Limited Partnerships are separate legal entities. Therefore, there are tax and legal fees associated with establishing the partnership and annual filing fees.

Corporation

Corporations can form part of an effective tax strategy to purchase real estate to earn income from development or flipping properties. Purchasing real estate, making improvements and then selling it for a profit is much the same as purchasing raw materials and producing a widget to sell for a profit. Therefore, real estate development can be active business income and eligible for the small business corporate tax rate of 10% for 2018 in Manitoba. This allows for the opportunity for the deferral of a significant amount of tax to reinvest in subsequent projects and build your business.

That being said, to benefit from incorporating your real estate development or flipping business you need to be able to retain the funds in the corporation. If funds are removed from the corporation the rules are established so that the combined personal and corporate tax is equal to the personal tax rates. While this integration is not perfect, withdrawing funds from the corporation eliminates the significant tax deferral advantage.

Conclusion

Purchasing real estate is an exciting time! Consider real estate ownership personally or through a partnership for properties earning passive rental income and a corporation for developing or flipping property.

Tax planning opportunities do not end with the above. Consult with your tax and legal professional for a personalized assessment of how to structure your real estate holdings.

Book your consultation

S2 Chartered Professional Accountant Ltd. provides tax planning and preparation to individuals, businesses and non-profits located in and around Winnipeg, Manitoba. Book a free 30 minute consultation to review your situation using our online booking tool here, email info@s2cpa.ca or call the office at (204) 292-1051.