If investors hold real estate corporately, this ownership structure can open up tax savings, and other opportunities, in many cases. Real estate investors often have questions about passive income, such as that generated through buy and hold real estate, and whether is it truly possible to save taxes by using a corporation. The answer can often be yes.
And, how do “refundable taxes” make a big different to the taxes you pay if you hold real estate corporately? This is a key concept for investors to know about when considering corporate ownership.
Watch or read the video transcript below to learn more.
Video Transcript – Hold real estate corporately to save taxes
George Dube:
– More common, of course, is the long-term real estate investor receiving rental income, interest income, things of that nature that are considered from a tax perspective, passive. How can I save taxes if my corporation is earning passive income?
I’m George Dube, saving the world from tax one bow tie at a time.
Passive income and real estate
Passive income, again, from a tax perspective as compared to what we might consider passive income from a real estate investor’s perspective. So passive income from a tax side, I’d like to really describe as in revenue Canada’s eyes, it’s rent or interest, for example. But the concept is, I can be earning that income while sitting on my couch throughout the day. I’m not actively involved into it.
So here, depending on the province or territory, my initial tax rate is approximately 50%. 50. That’s very similar to what my maximum personal tax rate would be. Again, depending on the province or territory. So initially, there might be a little bit of savings or a little bit of cost, depending on my exact level of income, province, or return.
More interesting is that on the personal side, if I’ve paid my 50ish percent tax, that money is gone. See you, never getting that back.
Refundable tax
On the corporate side, I’ve locked in roughly a 30% refundable tax amount. And that refund can be triggered to my corporation. Yes, revenue Canada will write me a check, deposit my money if I’ve paid out a dividend to a qualified individual.
I have to be considering what the personal taxes are. But if I can drain my 50% tax bracket down to 20% after the 30% refund, that’s something I wanna be thinking about. Then on the personal side, depending on my tax bracket, that tax may be a little bit worse than if I just earned it personally, or it may be significantly better.
So, as an example, perhaps I have no other source of personal income. Maybe a bunch of my income is at a corporate level, and I don’t need to pay myself out of a particular company. Such as in my case, where I’ll have a variety of my professional income at the corporate level, and I can leave it there or I can take investment income triggering refundable taxes. If I have no other source of income, I can pay myself roughly speaking $40,000 a year, and I would pay less than $2,000 in taxes on the personal side. Those are taxes that I can afford.
And just because I increase that above the 40,000 doesn’t mean I’m in an astronomical tax bracket right away. It means there’s planning to be done. Talking with your advisor to see what that total picture is between corporate and personal. But please don’t default to the concept that paying that 50% tax on the corporate side is good or bad. It could be either.
Planning for the future
And give a lot of thought. And here’s where I think a lot of people go sideways to what happens down the road. In other words, if we’re just measuring on day one, maybe the corporation is worse. But now let’s consider well down the road, I might be in a retirement mode or retirement in a semi fashion, or my spouse, they may do the same. Maybe both of us will always be in a high tax bracket, and instead, we’re looking to the next generation or the generation thereafter. Maybe my entire family will always be in a top bracket. And as I am trying to at some point in time, change my structure or do some succession estate planning, I sell some of my real estate portfolio. But instead of selling the buildings directly, perhaps I approach other investors and say, “Why don’t you buy my shares of the company?” By the way, there’s several million dollars in refundable taxes there, but split the difference. Now I’ve gotten something out of nothing.
If I was always paying that high tax bracket or thereabouts on the personal side, the money was gone. The corporate side, I might lose some time value of money, but I’ve still got something at the end of the rainbow.
Thanks for watching. And again, it’s summary in nature. There’s a lot more to it that will also be dependent on your particular situation.
Have more questions, please subscribe, follow, and even share. I want all of us to have the tax information we need to do wonderful things.
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Resources for holding real estate corporately
For additional resources related to holding real estate corporately:
- Flipping properties & saving taxes: Incorporating may be the answer
- Moving real estate to a corporation: 7 tips you need to know
- Back to: Buying real estate in a corporation: Ultimate guide for Canadian real estate investors
More questions?
Still have questions? I want to help you Do Wonderful Things™ with your real estate investments, so please contact me today.
Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
