Corporations

[lgrossi]

I have been a REIN member since May/2007. We haven`t bought any properties yet. We are thinking to incorporate first and after that start buying. I see some advantages in having a corporation: deductible expenses, limited liability, if the property has a negative cash flow the company can carry the loss for next years, etc... As an individual, I have to pay everything with my after-tax dollars and can deduct the interest that I pay for the line of credit and mortgage, and maybe some other expenses...

I thought that I could start as an individual and have the corporation later, but Revenue Canada will be looking very close to those non-arms lenght transactions.

So, I`d rather spent a little bit more time now and spent $ 350 to incorporate and save more money down the road than start as an individual and having some problems to transfer property to the corporation later on...

I would like to know if anybody has some experiences to share and the position for the mortgage and credit line. Because the corporation will be pretty new and won`t have credit history in the market.

I appreciate any comments or hints.

Thank you,

Luciana

 

[pvilay]

I was actually going to Incorporate as well because of some of the advantages. Turns out you can still deduct expenses and all with being a sole proprietor, but for a new company when it comes to liability, you will still have to co-sign for things under your own name in case your company goes under. The tax advantages are very small between incorporating and sole proprietorship until you start hitting the big bucks. Don`t take my word for it, I`d seek an accountant.

I recently spoke with my new accountant and he said its best if you go sole proprietor at the beginning and when your company grows, you can always incorporate. I really suggest talking to an accountant first.

 

[DonCampbell]

HI,

There is definitely no black-or-white answer to this questions. Each investor`s personal situation, their long-term plans and their exit strategies must be considered. We are working with a veteran lawyer in BC who has been advising investors for over 14 years on this subject. The goal is to have a clear presentation for all REIN Members, including the considerations that must be made before making the decision.

We plan on having this discussion at the REIN Workshops as follows:

BC - September 20th
ON - October 17th
AB - October 19th (Edm) and 23rd (Cal)

You will leave there with a very clear plan on what steps you should be taking when considering how to structure your purchases, corporately or personally.

One key note, in either case, corporately or personally, the banks will be looking for your personal guarantee on the mortgages.

 

[Anonymous]

Excellent question! just wanted to mention I am in the same situation and hope to get a more complete answer here in this forum.. I appreciate Don`s response about the upcoming events but I guess not everyone will join or would like to pay to get an answer so I hope someone else will answer your question here. If not, I will simply ask my accountant and strongly recommend that you do the same. Good luck!

 

[jadan]

Just figured I would give you my own experience.

I just recently became a REIN member, but have been incorporated as a real estate business for about a year. We (my son and I) incorporated our business on the direction of a real estate course we had taken. What we found was that the personal monies we had initially used for training, legal fees, etc. became a loan from us to the corporation, and once the corporation makes money, then the loan gets paid back. We never purchased property until just recently. When we did, in order to get our first purchase, we had to use 10% down. We could not use the corporation for the purchase because the money was coming from my heloc and was not a conventional mortgage. Basically, what I have found is that the incorporation created more issues than it solved.
If I had to do it all over again, I think I would wait until solid cash flow was established. Hope this helps!!

 

[FayWong]

QUOTE (misterthinker @ Sep 18 2007, 07:13 PM) Excellent question! just wanted to mention I am in the same situation and hope to get a more complete answer here in this forum.. I appreciate Don`s response about the upcoming events but I guess not everyone will join or would like to pay to get an answer so I hope someone else will answer your question here. If not, I will simply ask my accountant and strongly recommend that you do the same. Good luck! You Definately should talk to your accountant. When you do be sure he or she knows your whole circumstances. Personally I am incorporated. It was right for me at the time BUT the reasons that made it right for me apply to so few people that I suspect most people should not incorporate. When going over the pros and cons with your accountant, take your time, have the conversation more than once. You could forget to mention some detail that tips the balance (I did). This has a big impact on your business, take your time.

 

[timk519]

I established a consulting business in 1986 as a sole proprietor, then turned "Inc" when the business`s cash flow exceeded my salary requirements.

I`m not an accounting / legal professional - this is just my experience. Some observations I can make from that experience is:

• incorporating helps a lot with keeping $ out of the tax man`s hands, limiting liability, but it costs in terms of professional services to do the books and submit the returns to the gov`t,
• a lot of the deductions, etc. can still be had as a sole proprietor without the professional service overhead expenseAllowances for mileage were different. Under the sole-proprietorship, I could only deduct the actual cost for fuel, repairs, depreciation, etc. as a percentage of the total mileage on the vehicle over the year. When I incorporated, the standard per KM allowance came in, which in my case was a lot more advantageous than the sole-proprietorship formula was.

Based on my experience, I think the time to look at incorporating is when

1) the return on your investments exceeds your salary requirements (which would be a business expense) plus all the professional service fees needed to found and operate the corporation,

2) you want to limit the amount of potential liability to the assets in the company,

3) your investments have accumulated a large amount of free cash, in which case it may be helpful to look at establishing a holding company to make it creditor-proof,

4) you like paying tax at the corporate rate, rather than the personal tax rate


Others have said talk to your accountant, which I heartily agree. I`d add "and a lawyer" as you`ll need their help to set the company up and do the annual minutes, etc.

 

[bgjvan]

Can anyone recommend an accountant in Toronto or Mississauga that has expereince working with real estate investors? I want to get advice on how to set up my RE business.

 

[HowardWiens]

There's a similar topic in a separate discussion thread. Go to





http://myreinspace.com/rein_members_only/Legal/85-840-Confusion_about_incorporating.html

 

[MikeMcCrae]

From a mortgage perspective, some lenders won`t do rentals in a company name, and some won`t do in a personal name. Sorry this just confuses things more. I do some deals in a company and some in personal. One major disadvantage to company purchases is personal guarantees are required.

 

[George]

Good morning Luciana,

I am an accountant who does invest plus my largest client segement is real estate investors and thus believe that I have some knowledge of this topic. That being said, my opinions are just that, opinions. While I have very detailed reasons for believing investments should be completed through one entity or another, others can have equally strong and valid opinions but with an opposite conclusion. My opinions are formed only after discussions with clients based on their particular situation. I appreciate that this is very frustrating and confusing as compared to having a relatively straight forward formula. I also appreciate that my advice is often the reverse of the majority of accountants. The reasons for this are relatively straight forward in my mind. First, my priorities are different (tax is actually my third priority) and secondly, it is my opinion that many accountants have a general practice (that is not meant to be negative and recognizes that they can be extremely capable advisors, stronger than myself in various areas - but perhaps not as strong as desirable in a focused area such as real estate) as compared to sufficient knowledge on real estate. The question then becomes - what are your priorities? Your current situation and future plans will play a critical role in this decision making process. Further, despite what may seem like many similarities, your situation is unique. As a result, do not blindly accept "a" solution. While I admittedly prefer using corporations in many cases once a certain investment level has been/strongly expected to be met, I have seen far too many instances where someone was told to set up a corporation(s) to buy real estate within, they set up the corporation, and learn after the fact that this was a complete waste of time/money and in some cases even cause significant tax/business problems. Unfortunately, I have also seen the same but opposite scenarios where another structure would have provided benefits but ...

I would highly recommend talking to your accounting and legal advisors and while doing so, ensure that you understand WHY they believe that in YOUR situation one particular structure over another is appropriate. They should be capable of explaining the pros and cons of the different alternatives and getting from you an idea of your priorities in order to make a recommendation. Additionally, having a rough idea of how your situation will evolve and what will trigger this evolution is important. Where you have heard/read contrary positions stated, ask the advisor to reconcile these positions to that which they are advocating. This will provide you with much more confidence in your ultimate decision plus help ensure all of the relevant issues are on the table for consideration. After your meetings, you will then have an opportunity to let some of the information percolate in your mind over some time and can then ask follow-up questions and make a decision.

In my mind it is important to go beyond considering just the tax and legal considerations in choosing your entity. Ensure that your advisor is addressing alternative considerations.

As you can probably tell, I could go on and on but will leave it at this for now.

Warm regards...

George

 

[DonCampbell]

Great Post George. Hits all of the key points.

The most important point being that an investor must have an accountant who`s focus is real estate. There are many generalists out there who don`t understand the many strategies (both tax and structure) that can be utilized for their business.

Thanks for the detail

QUOTE (George @ Sep 29 2007, 09:32 AM) Good morning Luciana,

I am an accountant who does invest plus my largest client segement is real estate investors and thus believe that I have some knowledge of this topic. That being said, my opinions are just that, opinions. While I have very detailed reasons for believing investments should be completed through one entity or another, others can have equally strong and valid opinions but with an opposite conclusion. My opinions are formed only after discussions with clients based on their particular situation. I appreciate that this is very frustrating and confusing as compared to having a relatively straight forward formula. I also appreciate that my advice is often the reverse of the majority of accountants. The reasons for this are relatively straight forward in my mind. First, my priorities are different (tax is actually my third priority) and secondly, it is my opinion that many accountants have a general practice (that is not meant to be negative and recognizes that they can be extremely capable advisors, stronger than myself in various areas - but perhaps not as strong as desirable in a focused area such as real estate) as compared to sufficient knowledge on real estate. The question then becomes - what are your priorities? Your current situation and future plans will play a critical role in this decision making process. Further, despite what may seem like many similarities, your situation is unique. As a result, do not blindly accept "a" solution. While I admittedly prefer using corporations in many cases once a certain investment level has been/strongly expected to be met, I have seen far too many instances where someone was told to set up a corporation(s) to buy real estate within, they set up the corporation, and learn after the fact that this was a complete waste of time/money and in some cases even cause significant tax/business problems. Unfortunately, I have also seen the same but opposite scenarios where another structure would have provided benefits but ...

I would highly recommend talking to your accounting and legal advisors and while doing so, ensure that you understand WHY they believe that in YOUR situation one particular structure over another is appropriate. They should be capable of explaining the pros and cons of the different alternatives and getting from you an idea of your priorities in order to make a recommendation. Additionally, having a rough idea of how your situation will evolve and what will trigger this evolution is important. Where you have heard/read contrary positions stated, ask the advisor to reconcile these positions to that which they are advocating. This will provide you with much more confidence in your ultimate decision plus help ensure all of the relevant issues are on the table for consideration. After your meetings, you will then have an opportunity to let some of the information percolate in your mind over some time and can then ask follow-up questions and make a decision.

In my mind it is important to go beyond considering just the tax and legal considerations in choosing your entity. Ensure that your advisor is addressing alternative considerations.

As you can probably tell, I could go on and on but will leave it at this for now.

Warm regards...

George

 

[bluerockgroup]

Thanks to George, Don and everybody else in this thread!

It sounds like I have good reasons to be confused about this topic and with the October REIN meeting coming up soon; I can`t wait to scratch my head even more. The good news is that I plan on having this issue wrapped up by November 15th and will share not only my results but my assessment, the strategic design and an implementation strategy with everyone.

Cheers,

Grant

 

[Al Verwey]

QUOTE (DonCampbell @ Sep 29 2007, 08:43 PM) Great Post George. Hits all of the key points.

The most important point being that an investor must have an accountant who`s focus is real estate. There are many generalists out there who don`t understand the many strategies (both tax and structure) that can be utilized for their business.

Don,

Can you ask the special guest at the October meeting to also comment on the usefulness of setting up a corporation based in the U.S. in one of the states that offers preferential tax treatment and additional protection (such as Nevada or Delaware)? Some real estate seminars (including Canadian-based ones) advocate this for Canadian investors. The simple premise is that the U.S. corporation can hold a second mortgage on your Canadian property by loaning you the downpayment money and you can get either a local conventional mortgage for the balance, or even a U.S. mortgage. It also facilitates buying U.S. properties.

One Canadian-based seminar group advocates setting up a 3-corporation tree to hold and manage your properties with funds flowing between them. It is supposed to offer tax advantages and the ability to pay yourself a salary form the holding company to the property management company, for example.

It would be great to get the lowdown on all these things. What do you and your fellow high-level investors use?

Al Verwey

 

[George]

Good evening Al and everyone,
Note that this is a very confusing message I`ve written for reasons I expect given my position you can appreciate. If nothing else, skip over all but the bold sentence.

Please, please, please use extreme caution when employing the Nevada company and similar strategies.

Athough I`m not a US tax expert, the Delaware company strategy is, generally speaking, OK and used for tax purposes. But it doesn`t deliver the same legal protection as the Nevada, for example. That being said, please consult US tax and legal experts.

I`ve heard directly the explanation of the Nevada strategy, and heard different renditions of the same strategy from others attending the same courses. I continue to believe that certain critical points, from a Canadian tax perspective, were omitted in the discussion. While in my opinion the use of related party loans as described in the prior post can be a legitimate strategy in some cases (I do use this but with Canadian companies and appreciate that it can also be completed very legitimately with foreign entities), it is my understanding that this is not the real purpose of the Nevada and similar companies in all cases. I`m quite familiar with the 3 corporate strategy and similar strategies, but currently REFUSE to act for clients who employ the Nevada strategy. The strategy, as I understand it, can be very legitimate. One of the uses of the strategy as I`ve heard it described - and I have spoken with instructors at some of the other Canadian-based seminar groups - is closer than most people want to get to Canadian tax fraud.

While I`m not saying don`t do it - please ensure that your advisors describe in detail the tax/legal issues of not just the governing jurisdiction but also those of Canada. I`m sure it can be legitimately done, but I have not yet been able to reconcile the legitimate way with the effectiveness of the strategy as described by some seminar groups. I`d be more than happy though to learn otherwise.

If there is a legitimate way of fully using such a strategy, I would also greatly value hearing a presentation on the same.

The 3 corporate structure in my mind can be used very effectively and legitimately in some cases, but is certainly not meant for the majority of investors. Adding the Nevada company to the mix is the source of my alarm.

Warm regards...

George

 

[MikeJohansen]

Thanks for the input by all thus far on this subject.

I was hoping that getting to the end of the thread would provide some post-October-seminar-discussions on the subject of Incorporating enlightenment..
Did anyone attend that meeting and learn anything valuable to add to this thread?

Thank you in advance!

 

[Briannah]

Hi George/Don,

I am a brand new REIN member and am facing the same issues as discussed in this thread. I`m wondering if there`s any way to get a copy of the October meeting that covered incorporation so I can get up to speed on this issue... Or, if not the meeting itself, a handout of the crux?

Thanks,
Briannah