One of the questions I get asked a lot, especially with personal real estate corporation (PREC), is whether you can own rental properties inside an active business company.
- Do you want to mix the business risk with the risk of operating your rental portfolio?
Whether you are operating a PREC as a real estate agent, or simply carrying out a consulting business, there’s no law/guideline that prohibit you from buying an investment property inside the same company.
Your real estate commission are taxed at the 12.5% active business rate, while the rental income is taxed as specified investment business income.
One important thing you need to consider is the risk of being sued. If you operate in a business environment that you have a high likelihood of being sued, you may not want to put all your eggs in one basket, mixing the rental portfolio or investment portfolio with your business. This means that they can go after your rental properties as well.
Probably not a good idea if your business is at a higher risk of being sued.
- Do you have someone to split income with?
Income splitting via dividend is somewhat limited within PREC or an active business these days (thanks to Justin Trudeau who introduced the new tax law in 2017).
You can structure your investment holdings in a separate corporation and split income with your low income family members legitimately.
If your plan is to split income (or at least have the option to split income) with your lower income family members, it’s often advisable to setup a different corporation to achieve this purpose.
Make sure you consult with a professional accountant before you implement this strategy.
- Are you planning to sell your business?
As a Canadian tax residents, we’re all entitled to a lifetime Capital Gain Exemption in the amount of $880K in 2020. One of the criteria to qualify is that the company must have at least 50% of assets used in active business.
If you are building a team of realtors working for you, and one day you are planning to sell the business owning rental properties would jeopardize your ability to qualify for the CGE.
- Do you need a mortgage with your property investments?
Certain banks are only willing to lend money to you to purchase a rental property if the corporation owner DOES NOT have any other active income. It has to be 100% holding company that earns investment income, but nothing else.
When you decide whether you want to hold a rental property in a PREC, it’s a good idea to check with the bank to make sure they are okay to lend money to a corporation that also earns active income.
Until next time, happy Halloween.