Should rental properties be held personally or in a corporation?
With the real estate in such high demand in Vancouver, Canada, many Vancouverites are buying investment properties either to generate rental income and/or participate in capital appreciation. The dilemma commonly faced is whether or not the rental unit(s) should be held personally or in a corporation?
Personal ownership makes more sense
Although there are many pros, cons and legal considerations that come with each option, from a tax standpoint, personal ownership makes more sense and eliminates all of the compliance issues that are attached to corporate ownership.
Rental income is not considered active business income so it does not qualify for the special 13% corporate tax rate. In fact, rental income is taxed at a 47% corporate tax rate initially and creates refundable tax pools that are refunded back to the corporation only with the payment of dividends to the shareholder(s). The 47% corporate tax rate is equivalent to the highest personal tax bracket of 47.7% for BC residents. This is why it is an unfavorable tax strategy to hold a rental property in a corporation.
On one hand, when the asset is owned personally, the net rental income is reported as part of the personal tax return. On the other hand, if the asset is held in a corporation, year-end financial statements, tax returns, and legal compliance matters need to be filed annually by the corporation. These compliance costs can be a burden, given that rental properties do not always generate positive cash flows.
When to consider corporate ownership of rental properties
The only time corporate ownership of a rental property should be considered is when the number of properties owned necessitates employing more than five full time employees to operate the rental business. If the five full time employees test is met, then the rental business becomes an active business and will qualify for the 13% corporate tax rate on its first $500,000 corporate net profit and would be eligible for all the other tax planning strategies that come with generating active income.
It’s important to also note that short-term and Airbnb rentals would not change otherwise passive rental income into active income for tax purposes. In fact, this would only add more complexity to the situation once GST is factored into the equation.
Mew & Company, Vancouver Tax Planning
For help planning your taxes, or for any questions and further details on Canadian taxes and rental properties, contact Mew and Company chartered accountants — we are here to help!
Give us a call at 604-688-9198 and enjoy peace of mind, knowing you can depend on the experience and expertise of a professional chartered accountant.
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