Entrepreneurship & Small Business

Real estate company questions from a noob

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  • Aug 23rd, 2014 12:20 am
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[OP]
Newbie
Oct 2, 2013
38 posts
5 upvotes
Montr

Real estate company questions from a noob

I was planning to purchase the condo with my newly created real estate company (1 person owner, incorporated). The idea is to buy and sell the condo/house for a capital gain.

Other details...
- The company (CCPC) will only exist to buy/resell properties
- Company has a GST/QST number
- No one will live in it as a primary residence
- The condo will not be rented long term
- No employees, so no payroll
- Personally, I work full-time, average Canadian salary let's say $50,000
- In the housing market here in QC, I don't see selling a property for more than $30,000 to $50,000 profit (maybe it would happen at most once per year)

Q1- Can the company furnish the condo (furniture, appliances etc.) and expense it? I want to stage the condo/house for maximum resale value.
Q2- With no employees, can the company claim my home office expenses? Travel expenses (specifically driving out to meet clients at condo/house)?
Q3- Finally, should I actually incorporate? Or just buy it personally?
8 replies
Deal Addict
Aug 28, 2007
1857 posts
253 upvotes
Calgary
Talking to your accountant is always good, but be mindful of traditional thinkers who are indoctrinated with conventional wisdom and can't think outside the box.

As long as someone (presumably you) are paying market rents to the corporation, then it is a viable business, so the expenses in your questions 1 and 2 are valid deductible business expenses.

Question 3 is the challenge. You seem to think it is a foregone conclusion it will go up in price quickly for a nice capital gain. If you are so certain that is true, then you will be losing out on the free capital gains deduction on a principal residence. So on the other hand, the corporation will be liable for taxes on the quick flip while you (personally) would not. I am not such a believer in the primary assumption that things always go up in price on a clean schedule. Meaning I lean towards the corporation route, due to Murphy's Law.

Of course, none of us can predict the future, so that is where the true value of doing it under a corporation comes in. It can handle the downdrafts in the market while the operating expenses remain deductible even though the capital value of the asset has dropped. I think the corporation is a better long term choice because the repeatability of this business model is absent. It assumes you can come to bat and make a hit every time. Sooner or later you will strike out - guaranteed.

The last fly in the ointment is you may need two corporations. The one that just owns the asset with only passive income pays higher tax. I believe it loses the Small Business Tax deduction but I'm not sure... your accountant will have the answer. Of course, the easy way out of that is two corporations. One to passively own the asset and second one to be a property manager with active operating business income. It will invoice the first one for services & maintenance. You draw income from the second one and the first one makes very little profit (i.e. it's tax is negligible). A good accountant can tell you exactly how to structure it.
Deal Addict
Aug 28, 2007
1857 posts
253 upvotes
Calgary
Talking to your accountant is always good, but be mindful of traditional thinkers who are indoctrinated with conventional wisdom and can't think outside the box.

As long as someone (presumably you) are paying market rents to the corporation, then it is a viable business, so the expenses in your questions 1 and 2 are valid deductible business expenses.

Question 3 is the challenge. You seem to think it is a foregone conclusion it will go up in price quickly for a nice capital gain. If you are so certain that is true, then you will be losing out on the free capital gains deduction on a principal residence. So on the other hand, the corporation will be liable for taxes on the quick flip while you (personally) would not. I am not such a believer in the primary assumption that things always go up in price on a clean schedule. Meaning I lean towards the corporation route, due to Murphy's Law.

Of course, none of us can predict the future, so that is where the true value of doing it under a corporation comes in. It can handle the downdrafts in the market while the operating expenses remain deductible even though the capital value of the asset has dropped. I think the corporation is a better long term choice because the repeatability of this business model is absent. It assumes you can come to bat and make a hit every time. Sooner or later you will strike out - guaranteed.

The last fly in the ointment is you may need two corporations. The one that just owns the asset with only passive income pays higher tax. I believe it loses the Small Business Tax deduction but I'm not sure... your accountant will have the answer. Of course, the easy way out of that is two corporations. One to passively own the asset and second one to be a property manager with active operating business income. It will invoice the first one for services & maintenance. You draw income from the second one and the first one makes very little profit (i.e. it's tax is negligible). A good accountant can tell you exactly how to structure it.
Deal Addict
Jul 4, 2004
4818 posts
922 upvotes
Ottawa
Talk to an accountant. It probably depends on the province but I asked ours a few years ago and he said that in Ontario, as far as taxes, you were better off owning personally than owning through a corporation (I think he said it was something about how having more passive income (in the real estate) rather than active income (in the rent) affects your status as an Ontario Small Business and if you lose the Ontario Small Business status, you end up paying more taxes).
[OP]
Newbie
Oct 2, 2013
38 posts
5 upvotes
Montr
Thanks for the tips guys, an accountant will definitely help...but just hearing your different perspectives is also very useful...Perspectives that maybe an accountant wouldn't necessarily mention.

It seems like a corporation is the way to go, if you were to flip quickly (ie: say flip in a few/several months), but if holding on to it for at least a year or more, then maybe holding it personally is better.
Deal Fanatic
Aug 21, 2007
5157 posts
302 upvotes
Markham
bargainhunter514 wrote:
Jul 30th, 2014 10:20 pm
Thanks for the tips guys, an accountant will definitely help...but just hearing your different perspectives is also very useful...Perspectives that maybe an accountant wouldn't necessarily mention.

It seems like a corporation is the way to go, if you were to flip quickly (ie: say flip in a few/several months), but if holding on to it for at least a year or more, then maybe holding it personally is better.
i dont like it from a tax perspective:

- any rental icnome will be taxed at high rate of 46.67% as the corp will be a specified investment business

- if the corp exists only to buy and sell property, then it will be considered to be in the business of doing that, so any gains will be taxed in full

if personal, you are taxed at your marginal rate, and the capital gains will only be half taxable
Deal Addict
Aug 28, 2007
1857 posts
253 upvotes
Calgary
adeel wrote:
Jul 30th, 2014 10:40 pm
i dont like it from a tax perspective:

- any rental icnome will be taxed at high rate of 46.67% as the corp will be a specified investment business

- if the corp exists only to buy and sell property, then it will be considered to be in the business of doing that, so any gains will be taxed in full

if personal, you are taxed at your marginal rate, and the capital gains will only be half taxable
Adeel is absolutely correct. The first two points emphasize the need to operate this business under two corporations to eliminate those tax risk scenarios. Where I would disagree is the third point. As Adeel says, it is only when you get a capital gain that taxes will be paid. The overlooked part of the plan is the risk mitigation. Real estate investing is like baseball, even an exceptionally good player will strike out more often than getting a home run. Capital losses only have value in offsetting capital gains. Your batting average says capital losses will happen more often than capital gains. So it is higher priority to have a business process to handle risks on the capital loss outcome than the additional tax risk of the capital gain outcome. I believe the corporate solution with all of its tax flexibility including the lower marginal rate is more appropriate for that process than the personal exposure. While it may be significantly less fruitful in the case of a large gain transaction, it will be more fruitful (less risk) in a loss transaction.
Newbie
Dec 10, 2009
64 posts
5 upvotes
I invest in RE, currently own 6 property in Ontario. Definitely own it in person, no benefit in corporation. I know some builder who would buy property, demo it, rebuild, flip for profit and declare it as principle residence and pay no tax.

Also, you forgot to account for the most important factor. You think you have better protection owning through a corp. first, bank wants at least 50% downpayment and prime+3% if you buy from a corp? Do you think bank or loan company are stupid that you reap all profit and they take all the risk. The big 5 bank also require personal guarantee on the corporate mortgage.

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