Real estate investing is a popular way to build wealth and generate passive income in Canada. However, investors often face the question of whether to incorporate their real estate business or not. In this blog post, we will explore the pros and cons of incorporating for real estate investing in Canada.
Pros of Incorporating for Real Estate Investing
- Limited Liability: One of the biggest benefits of incorporating for real estate investing is limited liability. If you hold real estate in your own name and someone sues you, your personal assets are at risk. However, if you hold your real estate investments in a corporation, your personal assets are protected.
- Lower Tax Rates: Another benefit of incorporating is that you can take advantage of lower corporate tax rates. In Ontario, for example, the small business tax rate is 12.5%, which is lower than the top personal income tax rate.
- Income Splitting: When you incorporate, you can pay yourself a salary and dividends, which can be a tax-efficient way to split income with family members.
- Professional Image: Incorporating can give your real estate business a more professional image, which can be beneficial when dealing with lenders, investors, and tenants.
Cons of Incorporating for Real Estate Investing
- Higher Costs: Incorporating can be expensive, and you will need to pay ongoing fees to maintain your corporation. You may also need to hire an accountant or lawyer to help you set up and manage your corporation.
- Additional Paperwork: When you incorporate, you will need to file additional paperwork, such as annual corporate tax returns and corporate resolutions.
- Limited Deductions: If you incorporate, you may have limited access to certain tax deductions that are available to individual investors, such as the principal residence exemption.
- Losses Stay in the Corporation: If you incur losses in your real estate business, those losses will stay in the corporation and cannot be used to offset other income on your personal tax return.
Conclusion
Incorporating for real estate investing in Canada can offer many benefits, including limited liability, lower tax rates, income splitting, and a professional image. However, it also comes with additional costs, paperwork, and limited access to certain tax deductions. Ultimately, whether or not to incorporate will depend on your individual situation and goals.
It is important to consult with a qualified accountant or lawyer before making any decisions about incorporating your real estate business. They can help you navigate the complex tax laws and regulations, and determine if incorporating is the right choice for you.