Incorporate or Sole Proprietary

Hello,

I am a fairly new real estate investor with 4 properties for a total of 6 rental units.

I have been trying to decide whether or not to incorporate. What are the pros and cons to incorporate? Tax implications? Obtaining financing from lenders? And so on.

Any information you can provide me with would be greatly appreciated. There are so many different approaches it is difficult to cut through the fluff and get right down to the main components.

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Feb 24, 2016
by: Tom

Thanks for the question!

First off, remember we are not accountants and to consult a professional for proper advice!

You will get many different answers around this. We've even seen accountants literally argue with each around the tax efficiencies possible with real estate and corporations.

As long as the cash flow from your properties are large enough to pay for the overhead of incorporating we've always felt its worth it for the liability protection and more importantly, for the long-term wealth management possibilities. For example, you can introduce a holding company into the equation which can hold some of your wealth and gives you all sorts of wonderful options. Many banks don't like lending to corps for small properties but a good mortgage broker can usually find one that will. There are tax implications to be very aware of. Real estate income is taxed at a high rate in a business (again, consult an accountant) so you'll want to speak to a professional who can help you assess if it's all worth it. But the bottom line is, a good accountant, can really make a multi-corporate structure work well and overall you'll pay less tax. Remember, if you transfer properties into a corporation now you'll be faced with things like land transfer taxes and even mortgage updates with your banks as the ownership is changing. Even with all that, from our experience, with four properties you are approaching the point that it may make both tax sense and liability sense. We're not trying to be vague with our answer but everyone's situation is so unique you really need a good real estate tax accountant. If you're in Ontario, email our office and we can send you a few referrals if you'd like.

It took us about three full years of using corporations to really get some of the big tax benefits going and now we would never go back.

Tom

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