Taxation and Holding Companies
Learn how to legally reduce the tax you pay
What tax deductions and expenses can you claim
The fastest way to grow your portfolio
What is a Holding Company and its benefits
When and How to Set Up a Holding Company
Short and Long-term tax planning
In this next series of Landlord Webinars, join your host Alex Wilson, #1 RE/MAX Agent by Volume in Canada in 2019, as we focus on Real Estate Taxation and Holding Companies. Learn how to Maximize Your Wealth and Minimize Your Tax!
Sanjeev Jain, CPA, CGA, Managing Partner and Avid Real Estate Investor will join us to Set the Record Straight about Tax Deductions, the Use of Holding Companies and Different Real Estate Tax Strategies. Learn what Expenses are Deductible on your taxes and how to Legally Reduce the Tax you pay. If you earn more than $100,000, setting up a Holding Company to Protect Your Real Estate Assets and Income may be a Prudent Step in Managing Your Real Estate Portfolio.
This is a must watch for any real estate landlord!
Webinar Recordings
MAY 29, 2020
MAY 22, 2020
MAY 8, 2020
MAY 15, 2020
Contacts
If you require expert help for any of the following areas, please contact these Wealth Builders approved contacts:
REAL ESTATE INVESTING
Alex Wilson
Owner/Broker of Record
RE/MAX Wealth Builders Real Estate
contact@alexjwilson.com
(416) 996-5181
Tax Preparation & Accounting Advice
Sanjeev Jain
CPA, CGA, Managing Partner
S&A Partners Professional Corporation
sanjeev@snapartners.ca
(289) 813 9742
LEASING & NEW DEV
Kyle Dovigi
Director/Sales Representative
RE/MAX Wealth Builders Real Estate
kyle@remaxwealth.com
(416) 356-6274
FREQUENTLY ASKED QUESTIONS
Real Estate Taxation and Holding Companies (Holdcos)
This FAQ consolidates all of the common questions we received about Real Estate Taxation and Holding Companies (Holdcos) during the webinars we hosted throughout May 2020.
Disclaimer: The guidance below is meant to be a guide only. Seek professional help from a tax accountant or tax lawyer before taking any actions because each case is unique.
It is critical to get the right tax advice when managing your real estate investments, regardless if you own 1 property or a portfolio of 20 units. You must work with someone that owns their own investment properties and knows how to structure a real estate portfolio correctly.
Q. What Type of Expenses Can I Claim Against My Rental Property?
A. Any expense that is related to generating income for the rental property is an expense, including:
Property tax
Mortgage interest
HELOC interest
Condo fees
Hydro/Utilities
Property Insurance
Fees to find tenants (e.g. realtor fees, advertising, etc.)
Mileage to service the property (a log book must be kept)
Repairs/Maintenance
Renovations
Q. Should I Claim Capital Cost Allowance (CCA)?
A. Capital Cost Allowance (CCA) is a yearly expense deduction that can be claimed on depreciable assets like buildings. This lowers the amount of income tax you pay in the current year but when you sell the property, any CCA claimed needs to be “recaptured” when calculating your gain. For condo investments, it is typically best not to claim any CCA because when you sell your property, you should have a large capital gain and recapturing the CCA in the final year will increase the tax you owe because you will be in a much higher tax bracket because of the capital gain from the sale of the property. Gaining a bit of income now will cost you a lot more later.
Q. What Is the Fastest Way To Grow My Portfolio?
A. Aside from winning the lottery, the fastest way to grow a real estate portfolio is to take equity out of your existing properties and invest it into additional properties (this is known as “refinancing”). Each financial institution approaches this differently which is why you want to work with a mortgage broker who specializes in working with real estate investors and will find the mortgage solution that best fits your needs.
Q. If I Take Equity Out of My Properties, Won’t My Cash Flow Go Down?
A. While cash flow is great, most of that income is taxed away at your highest marginal tax rate. Taking equity of your properties allows you to increase your mortgage expense which can be written off against the income. This grows your portfolio without any additional money from your pocket in a tax-free manner (you are just moving around debt). The gain from the appreciation on your real estate is only taxed at 50% of your marginal tax rate whereas the income from the cash flow is taxed at 100% of your marginal tax rate.
Q. Can I Use A HELOC To Purchase An Investment Property?
A. Most banks do not allow Home-Equity-Lines-Of-Credit (HELOC) to be used for the down-payment of a resale property. However, a HELOC can be used to put down deposits for pre-construction condo investments.
Q. What Are the Tax Implications Of Changing My Principal Residence to A Rental?
A. This is called a “Change of Use”. The portion of the gain that is tax-free is determined by the ratio of time you used the property as your principal residence versus how long you owned the property. Or even better, have an appraisal done at the time you switch the use to protect the entire gain from taxes while it was your principal residence and establish a value for future tax calculations.
Q. Can You Sell An Investment Property To Buy Another One And Not Pay Tax?
A. This is called a “Tax Rollover” which is a deferral of taxes that otherwise would have been payable upon the disposition of the asset. Unfortunately, this does not apply to most real estate in Canada. If the real estate is associated with your active business income and you invest the entire amounts of the proceeds, then you may be able to defer the taxes – contact an expert.
Q. What Is A Holding Company (or “Holdco”)
A. A Holding Company is an incorporated business that is used mainly for tax-purposes. A Holdco typically “holds” passive investments like real estate, stocks, bonds, etc. versus active business activities like revenue from sales, payroll, etc.
Q. What Are the Benefits Of A Holding Company?
A. There are several benefits of putting your real estate into a Holdco:
Tax Deferral & Reinvestment
The biggest advantage of using a Holdco is that you can defer paying income tax on revenue earned until the earnings are withdrawn at a later date (hopefully when your marginal tax bracket is much lower). This allows a bigger “pot of money” to grow than otherwise possible. This benefit is amplified if you are running a business because you can move excess cash flow tax-free from your operating company to your holding company instead of earning it personally.
Efficient Taxation
Money can be taken out of the Holdco using a dividend which is much more tax efficient. Dividend payments can also be timed to maximize tax benefits and income splitting options with a spouse/children.
Risk Mitigation
If you are self-employed, you are exposed to risk associated with operating a public business. Having a holding company allows you to protect your real estate assets from claims and litigation.
Q. When Should You Setup A Holding Company?
A. The primary benefit of a holding company starts to be realized when you earn over $100,000 of personal net income and are maximized when you earn over $225,000. The number of properties does not really factor in because you could own 5 condos or one multi-unit building, the determining factor is mainly income. It all depends on your personal tax situation so get professional advice. If you own 1 or 2 properties and do not plan to grow, then a Holdco probably isn’t needed.
Q. How Much Does It Cost To Set Up A Holdco?
A. A lawyer is required to properly incorporate a Holding Company and it costs around $1,100. Do not try setup a Holding Company by yourself! You also need an accountant to advise on how to setup the ownership structure in the most tax efficient way. Again, using the right professionals to set this up properly is CRITICAL! Annual corporate tax returns will be required for each holding corporation but the costs are minimal compared to the overall benefit (around $1,500-$2,500 a year).
Q. Can I Transfer Personally Owned Properties Into A Holding Company After?
A. Yes. There is an income tax provision that allows you to roll the properties into the holding company tax free. Seek professional help.
Q. Can I Get A Mortgage On A Property In A Holding Company?
A. Yes, this is not a problem if the Holding Company is structured properly; you will just need to personally guarantee the mortgage (mortgage qualification is based on your personal income).
Q. Should I Buy Real Estate In My Operating Company?
A. No. NEVER. Please don’t! Your operating business is open to liability and litigation and you want to protect your assets including your real estate. In fact, any excess cash in your operating company should be transferred to your holding company and invested to protect it. Getting a mortgage on a property in an operating company can also be difficult because of the higher risk associated with the business structure.