Incorporate or not - Family-owned Investment property

Leveraging, renting vs owning, making an investment or buying a home?
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HoTiCE
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Incorporate or not - Family-owned Investment property

Post by HoTiCE » 04 Jan 2017 09:36

Hello,
Long time lurker, first time poster.

Along with my parents and my brother, we own an investment property that has gained substantial value throughout the years (purchased 400k, worth 1.1M today) and my parents went on retirement this year and I was wondering if we should be incorporating to gain from income splitting.

My train of thought is that since their revenue will be reduced substantially while my brother and I are currently gaining, should we incorporate, transfer the building ownership into it, and then distribute dividends only to my 2 parents?

We plan on refinancing it to acquire a 2nd building in 2017.

I am in the process of taking an appointment with a tax lawyer in the upcoming weeks to also discuss this but wanted to get a first impression from the pros here.

Thanks

Just a Guy
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Re: Incorporate or not - Family-owned Investment property

Post by Just a Guy » 04 Jan 2017 10:34

It all sounds so simple...but like anything, it won't be.

An accountant is probably better than a tax lawyer, and cheaper.

You can flip the property into a corporation without triggering the capital gains by filing the proper paperwork, section 47 I believe.

You can also create two different types of shares, so that you can pay out dividends to the class a shareholders but not to the class b shareholders. Technically, the other family memebers should put some money into the corporation as well.

I don't think you'll be allowed to refinance the property to acquire it and then deduct the interest on it though, since you aren't using it for new investments...though you may be able to pay back the original $400k and still write that off.

The messy part comes when your parents die as the shares become part of the estate and will trigger a capital gain. You may want to get insurance to cover this as well.

It can, of course, all be done, but it will involve a lot of paperwork, and not necessarily go exactly the way you wanted...but you should be able to get close.

HoTiCE
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Re: Incorporate or not - Family-owned Investment property

Post by HoTiCE » 04 Jan 2017 16:15

Just a Guy wrote:It all sounds so simple...but like anything, it won't be.

An accountant is probably better than a tax lawyer, and cheaper.

You can flip the property into a corporation without triggering the capital gains by filing the proper paperwork, section 47 I believe.

You can also create two different types of shares, so that you can pay out dividends to the class a shareholders but not to the class b shareholders. Technically, the other family memebers should put some money into the corporation as well.
Pardon the newbie question but why is this required? Can't we just pay out dividends to any shareholder we want with "standard shares"?

I don't think you'll be allowed to refinance the property to acquire it and then deduct the interest on it though, since you aren't using it for new investments...though you may be able to pay back the original $400k and still write that off.
We would be refinancing it to buy another investment property to leverage
The messy part comes when your parents die as the shares become part of the estate and will trigger a capital gain. You may want to get insurance to cover this as well.
Wouldn't this occur anyways without incorporating?

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Re: Incorporate or not - Family-owned Investment property

Post by Just a Guy » 04 Jan 2017 16:33

Dividends are issued to a class of shares. If you declare class a gets a dividend, every holder of class a shares receives the same amount of dividend per share. The company deals with its shares, not the owner of the shares.

If you wanted your parents to get a dividend, but not the kids, you could declare a dividend for holders of class a, but not class b. It's just a way to control payouts. You could also make shares voting or non-voting which can also be important when making decisions.

Estates are always messy, but can be worse with shares of a company with illiquid assets and multiple shareholders as the holdings are deemed sold at fair market value upon death and can trigger huge taxes. Since there are other shareholders who may not want to sell, this can cause cash problems. If they owned it personally, it's easier to sell.

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Re: Incorporate or not - Family-owned Investment property

Post by AltaRed » 04 Jan 2017 18:23

Beware of tax tails wagging the dog. Tax schemes are not for the faint of heart.
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Just a Guy
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Re: Incorporate or not - Family-owned Investment property

Post by Just a Guy » 04 Jan 2017 19:41

You know, thinking about it, it may be simpler to get added to the title of the existing property, through a buyin or gifting.

Then, all of you are on title and can refinance it, buying the new one with everyone on title.

Not sure of the capital gains in this case, you'd need to talk to an accountant.

Of course, there are those who believe that an incorporation can somewhat protect liability, but any good ambulance chaser can get around that.

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Re: Incorporate or not - Family-owned Investment property

Post by HoTiCE » 04 Jan 2017 20:00

Sorry, should have been clearer in the original post.

All 4 of us are already on the title of the investment property. We were just thinking of a way to effectively reduce our tax liability when income tax season comes.

Actual liability is not the factor here as we are very careful in our due diligence and also took higher-than-average liability insurance.

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Re: Incorporate or not - Family-owned Investment property

Post by AltaRed » 04 Jan 2017 20:06

Just a Guy wrote:Not sure of the capital gains in this case, you'd need to talk to an accountant.
I would think the key issue would be attribution per CRA. There is no way I know of that ownership of an existing asset can suddenly be re-distributed to new parties without trigering cap gains (arms length type buy/sell) or to re-distribute (split) income not in line with beneficial ownership. AFAIK, CRA takes a dim view of income splitting (other than pension income splitting between spouses).
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Re: Incorporate or not - Family-owned Investment property

Post by Just a Guy » 04 Jan 2017 23:54

Corporations don't get rid of taxes, they allow you to defer them at best. There is no way to avoid paying your fair share, it all comes out in the end.

Of course it all depends on what your personal incomes are and how much money the property is generating. If you keep plowing the money back into properties, you can defer income for years without a corporation, in fact losses can be claimed against personal incomes in some cases.

You can also purchase services (such as an accountant) and "stuff" (such as tools) and expense it instead of paying taxes. The government wants a certain portion of your income to be spent on society...you can either do that by buying deductible goods and services or by paying taxes, but one way or another you don't get to keep the money.

It's much more expensive to do this within a corporation than outside of one and, from talking to my accountant (I've got properties both inside and owned personally) there is no real benefit one way or another, especially since holding companies are taxed at higher rates anyway.

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Re: Incorporate or not - Family-owned Investment property

Post by Flaccidsteele » 05 Jan 2017 00:58

Just a Guy wrote:Corporations don't get rid of taxes, they allow you to defer them at best. There is no way to avoid paying your fair share, it all comes out in the end.
Just a Guy wrote:It's much more expensive to do this within a corporation than outside of one and, from talking to my accountant (I've got properties both inside and owned personally) there is no real benefit one way or another, especially since holding companies are taxed at higher rates anyway.
I agree with JaG.

I've had this conversation with my accountant as well and decided against creating a corporation to hold my properties.

Talk with your accountant.
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HoTiCE
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Re: Incorporate or not - Family-owned Investment property

Post by HoTiCE » 05 Jan 2017 11:04

Thanks will do. Looks like I'd be creating more of a headache than anything.

Thank you all for your valuable insight.

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