New World Order - Time to Incorporate?

[fumbrunner]

Caveat: This assumes that all the rumours about new TDSR calculations come to fruition in April and lending institutions follow suit.

It appears that the time will come where investors will once again be limited to 3-4 properties due to the new way CMHC will calculate TDSR. With this in mind, incorporation seems to be a viable option in increase one`s ability to purchase additional properties. There have been a number of posts regarding the pros and cons of incorporating (pros: not many cons: cost, lack of tax incentive, etc). But given the new world order, this may be the only route for some investors (me included, I suspect). I will be talking to my accountant on this, but I thought I`d get some preliminary thoughts from you folks on the following:

1. If one is to incorporate, how does one rollover existing properties into the corp? What are the tax implications? It would also seem that you lose the flexibility of using HELOCs, or rather any use of them within the corp would be taxed if you withdraw them from the corp structure.

2. Going forward, does it make sense to purchase as an individual (favourable terms, interest rates, etc) and then transfer properties to the corp, or to purchase as a corp (more difficult to obtain financing, shorter amortization, higher rates)? Can this be done easily? Are there tax implications each time this is done?

3. Investors will have to determine the best way to obtain funds from the corp, either pre-tax (salary, management fees, etc) or after tax (dividends). This will likely vary from investor to investor. What are the pros and cons of each mechanism?

Thoughts?

 

[OlegP]

Can you please clarify re: new TDSR calculation? Is it not max of 40% any longer? Also, seeing that for the most part banks require personal guarantee even if you buy as a corporation, what is the added benefit of corporation in the new world order?

I am also not sure what role CMHC has to play if banks offer 80% LTV, and the only reason to go with CMHC was to lower your downpayment. What deals should now go to CMHC?

Thanks.

Oleg

 

[Thomas Beyer]

QUOTE (OlegP @ Feb 23 2010, 09:24 PM) .. What deals should now go to CMHC?

..
lower rates for apartment buildings by 1.25 to 2.0% .. but yes: no real reason anymore to go to CMHC for residential single units to 4 plexes !

 

[Thomas Beyer]

QUOTE (fumbrunner @ Feb 23 2010, 11:32 AM)
...



1. If one is to incorporate, how does one rollover existing properties into the corp? What are the tax implications? It would also seem that you lose the flexibility of using HELOCs, or rather any use of them within the corp would be taxed if you withdraw them from the corp structure.


you can rollover with no tax consequence into the corp. Legally that is a SALE and banks can call the mortgage. Some will, many don't.



Many banks will "see through" the corporation. So most do NOT care if the asset is personally held or in a corporation.



You can of course chose to not disclose what you own or just show "I won 100,000 shares in XYZ corp. without telling the bank what is in XYZ corp. Or lie. This is called mortgage fraud and not recommended !!



Pro's and con's are talked abut in related posts here:


...





2. Going forward, does it make sense to purchase as an individual (favourable terms, interest rates, etc) and then transfer properties to the corp, or to purchase as a corp (more difficult to obtain financing, shorter amortization, higher rates)? Can this be done easily? Are there tax implications each time this is done?


tax implications on sale.



pro's and con's see above.




QUOTE (fumbrunner @ Feb 23 2010, 11:32 AM)
...





3. Investors will have to determine the best way to obtain funds from the corp, either pre-tax (salary, management fees, etc) or after tax (dividends). This will likely vary from investor to investor. What are the pros and cons of each mechanism?



Thoughts?




Management fees: you have to pay GST.



Salaries: there are deductions.



Biggest benefit: dividends to kids/spouse or income splitting to spouse/kids within reason.



dividends: lower taxes outside the corp. personally, but no deducability inside the corp. a NET WASH overall.



Better to SWITCH ASSET CLASSES when scaling up: multi-family, commercial, industrial or storage .. single family is just one type of real estate. THERE ARE MANY OTHERS !!



Happy scaling !

 

[fumbrunner]

QUOTE (ThomasBeyer @ Feb 23 2010, 10:19 PM) you can rollover with no tax consequence into the corp. Legally that is a SALE and banks can call the mortgage. Some will, many don`t.

Many banks will "see through" the corporation. So most do NOT care if the asset is personally held or in a corporation.

You can of course chose to not disclose what you own or just show "I won 100,000 shares in XYZ corp. without telling the bank what is in XYZ corp. Or lie. This is called mortgage fraud and not recommended !!

Thanks Thomas.  As a follow up, do banks look at your RE holdings in a corporation when purchasing personally.  Or rather, will those properties be counted towards your TDS and GDS regardless if they are held in a corp or not?

 

[RobMacdonald]

If you`ve been buying residential properties, in a corporation or not, the banks want full disclosure. Where many of the banks will not require the information is if you own commercial properties as well.

I think what everyone needs to keep in mind, is that the government can change the rules for CMHC and how CMHC will underwrite mortgages. But if you are putting 20% down, I don`t necessarily think all the banks will automatically follow suit to the new rules for conventional lending.

Many of the lenders already have different policies for high ratio and conventional rental properties. TD and Scotiabank have always maintained a 50% addback calculation on a high ratio application.

There will be a few areas that the new calculation will have quite an impact:
1. New potential homeowners that own 1 or 2 rental properties already and want to take advantage of a high ratio purchase.
2. It will be more difficlut to `buy up` and maintain your existing residence as a rental. This was getting more common under the old rules. Buy the first property at 5% down, then after a year or two save up another 5% and buy a bigger home
3. The person that planned on a buying a new `residence` every 3 months with minimal down payments (but I suppose this is the one that CMHC is after)

 

[PeterKinchMortgageTeam]

I don`t see where incorporating makes any difference. You still have to declare it as a personal asset and you are personally responsible for any mortgage in a corporation with CMHC - so that will make zero difference.
Please don`t take these rule changes out of context. The only thing that has changed is CMHC - you can still get numerous mortgages with any of the chartered banks. If you put 20% down - which you should for cash flow reasons - then the only thing that has changed is the need to pay strict attention to your `Cap Space` at each lender.

Peter Kinch

 

[fumbrunner]

QUOTE (PeterKinchMortgageTeam @ Feb 24 2010, 12:09 AM) I don`t see where incorporating makes any difference. You still have to declare it as a personal asset and you are personally responsible for any mortgage in a corporation with CMHC - so that will make zero difference. Please don`t take these rule changes out of context. The only thing that has changed is CMHC - you can still get numerous mortgages with any of the chartered banks. If you put 20% down - which you should for cash flow reasons - then the only thing that has changed is the need to pay strict attention to your `Cap Space` at each lender. Peter KinchThanks. That answers my question re: holding properties in a corp and being able to buy personally. My hope is that lenders do not follow suit. My lender has told me that they have not made that decision yet.