Paying the down payment with an incorporated company

[nepoez]

Hi all,

I currently have an incorporated company which I use to provide software consulting. That will be where all my income is coming from. It is a one man company, just me.

I plan to purchase properties under my own name. Can the company write a cheque for the down payment of my target properties? Or will I have to have the company pay myself via dividend or employment income, then write the cheque myself?

I am hoping that I can avoid getting paid myself, just to pay for a down payment.

If this can be done, what kind of complication will it add to the tax aspect of the company. The company does not own the property, I do.

Thanks for any advice!

Nepoez

 

[Nir]

Hi,

Since you plan to be on title I believe the down payment should be paid by you not the company.

However, doesn`t the company owe you money? didn`t you deposit amounts to the company account initially/in the past, whether as a registered loan or not?

If the answer is Yes (and your accountant should be able to tell you the amount you can take out, if any, with no implications whatsoever), then it is very simple: you can pay yourself back - take the amount from the business account to your personal account. Then use that money for whatever you want including down payment.

To be on the safe side you should consult an accountant.

Neil

 

[Thomas Beyer]

a payment to you from a corporation is either

a) a shareholder loan that must carry an interest rate and must be paid back with a certain time period, or

b) a dividend, thus taxed more favourable to you but is then not an expense to the business, or

c) income, i.e. taxed at the highest rate to you personally but then is an expense to the business

Chose an option from the three listed .. after consulting with your accountant and/or assessing your personal and corporate situation ..

What you then do with the cash is your personal business .. i.e. buy a boat, donate it or buy a property ..

 

[nepoez]

Hi Folks,

Thanks for replying me. I have never deposited any amount to the business account it doesn`t owe me anything.

So I guess the only legal way for me to buy a property is to pay myself dividend or salary. I cannot borrow from my company 60k just in case I cannot pay it back in time.

Now I`m wondering if paying myself via dividend or income would be overall more tax effective. It almost seems to me that even though dividends will get taxed less, but since Thomas says it will not count as an expense to the company, the company will be tax quite a lot and overall the dividend path is actually gonna cost more more on taxes! Can anyone verify this please!

Here is the estimated numbers for my scenario:
Expected gross income this year of Company: $90k
Expected gross income of myself: $0

Down payment and closing costs for a suited property $60k

A.) Taxes Paid via dividends:
$90k X [TAX RATE] + $60k X [TAX RATE]

B.) Taxes paid via income:
$30k X [TAX RATE] + $60k X [HIGH TAX RATE]

Now plug a 16% on the TAX RATE and a 25% on the HIGH TAX RATE, seems like scenario 2 is better. Could this be true? I hope I`m way off because I don`t really wanna setup pay roll!

Thanks for any help in advance!

Nepoez

 

[PeterKinchMortgageTeam]

QUOTE (nepoez @ May 2 2009, 12:51 PM) Hi all,

I currently have an incorporated company which I use to provide software consulting. That will be where all my income is coming from. It is a one man company, just me.

I plan to purchase properties under my own name. Can the company write a cheque for the down payment of my target properties? Or will I have to have the company pay myself via dividend or employment income, then write the cheque myself?

I am hoping that I can avoid getting paid myself, just to pay for a down payment.

If this can be done, what kind of complication will it add to the tax aspect of the company. The company does not own the property, I do.

Thanks for any advice!

Nepoez


From the lenders perspective, to confirm the downpayment condition as part of the mortgage you need only confirm that you own the company (ie it is your money to spend) and that the funds have been on deposit/accumulating for at least 3 months.

In regards to the accounting/taxation issues with that type of scenario, you may want to chat with your acccountant.

Hope that helps,

 

[nepoez]

Hi Peter,

Thanks for that tip. If I have not misunderstood you, then this means the lender will include the cash in the company to qualify me. How about the ownership of the property? Can the company pay for the down payment but yet I`m personally on title, and the company actually has no real ties to the property other than providing for the down payment?

Thanks!

Nepoez

QUOTE (CanadianMortgageTeam @ May 2 2009, 04:55 PM) From the lenders perspective, to confirm the downpayment condition as part of the mortgage you need only confirm that you own the company (ie it is your money to spend) and that the funds have been on deposit/accumulating for at least 3 months.

In regards to the accounting/taxation issues with that type of scenario, you may want to chat with your acccountant.

Hope that helps,

 

[Thomas Beyer]

QUOTE (nepoez @ May 2 2009, 05:16 PM) Hi Folks,

Thanks for replying me. I have never deposited any amount to the business account it doesn`t owe me anything.

So I guess the only legal way for me to buy a property is to pay myself dividend or salary. I cannot borrow from my company 60k just in case I cannot pay it back in time.

yes, you can lend yourself money as a shareholder loan. No taxes payable unless it is out longer than a year, then it is deemed income unless you repay it.

QUOTE (nepoez @ May 2 2009, 05:16 PM) Now I`m wondering if paying myself via dividend or income would be overall more tax effective. ...
There is no difference is paying yourself a dividend or an income .. the OVERALL TOTAL TAX is the same !

So what I would do it write the cheque to yourself ... then decide in early 2010 what to call it ..

then buy the property ..

Also: get used to paying taxes .. it is the right thing to do .. on a 60K income you pay less than 13K in taxes most likely .. where is the problem ?

 

[nepoez]

Hi It`s not that there`s a problem with paying taxes, since I`ve been paying taxes for every dollar I`ve earned. What I don`t mind is to legally pay less if I had the choice

QUOTE (thomasbeyer2000 @ May 2 2009, 06:04 PM) yes, you can lend yourself money as a shareholder loan. No taxes payable unless it is out longer than a year, then it is deemed income unless you repay it.


There is no difference is paying yourself a dividend or an income .. the OVERALL TOTAL TAX is the same !

So what I would do it write the cheque to yourself ... then decide in early 2010 what to call it ..

then buy the property ..

Also: get used to paying taxes .. it is the right thing to do .. on a 60K income you pay less than 13K in taxes most likely .. where is the problem ?

 

[Thomas Beyer]

QUOTE (nepoez @ May 2 2009, 07:20 PM) .. What I don`t mind is to legally pay less if I had the choice

do you have kids and a wife ?

pay them an income or have various classes of shares to dividend them money .. then the overall taxes are lower .. but it has to be reasonable .. so if you pay your child $10,000 and he/she is only 2 years old the CRA might not like that !

 

[Yev]

Have you considered another option...

How about incorporating another company (call it HoldCo.) and then you can transfer money between your two companies tax free. You own the shares of both companies (or you and your wife) and you buy the properties inside your new HoldCo. This lets you use `pretax dollars` to buy real estate and also protect your consulting company from liability of your real estate business.

Spend an hour talking with your accountant to figure out what makes sense in your situation - best money ever spent

Yevgeni

 

[Thomas Beyer]

QUOTE (Yev @ May 3 2009, 11:57 PM)
How about incorporating another company (call it HoldCo.) and then you can transfer money between your two companies tax free. You own the shares of both companies (or you and your wife) and you buy the properties inside your new HoldCo. This lets you use 'pretax dollars' to buy real estate and also protect your consulting company from liability of your real estate business.



...


indeed .. but there are complications getting a mortgage if the asset is held in a company !



Read this posts here re Pro`s and Con`s of creating a company for real estate holding:

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10292-54272-To_create_a_company_or_not.html#54272

 

[PeterKinchMortgageTeam]

QUOTE (nepoez @ May 2 2009, 05:27 PM) Hi Peter,

Thanks for that tip. If I have not misunderstood you, then this means the lender will include the cash in the company to qualify me. How about the ownership of the property? Can the company pay for the down payment but yet I`m personally on title, and the company actually has no real ties to the property other than providing for the down payment?

Thanks!

Nepoez

Yes to both - as long as you can confirm that you own the company. The property can still go in your personal name.

 

[Nir]

QUOTE (thomasbeyer2000 @ May 4 2009, 09:39 AM)
indeed .. but there are complications getting a mortgage if the asset is held in a company !



Read this posts here re Pro's and Con's of creating a company for real estate holding:

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10292-54272-To_create_a_company_or_not.html#54272




I haven't experienced that Thomas - the property is under the company name BUT the mortgage under your name hence the banks did not care company was on title. Am I missing something?



Regards,

Neil

 

[PeterKinchMortgageTeam]

QUOTE (investmart @ May 4 2009, 12:20 PM) I haven`t experienced that Thomas - the property is under the company name BUT the mortgage under your name hence the banks did not care company was on title. Am I missing something?

Regards,
Neil

Some lenders do finance in company names - others do not at all. For the ones that do finance in company names, the guidelines aren`t any different so if you want it in the company name, they`ll probably do it with a personal guarantee without too many issues. You`ll be limited in products however - no LOC`s, no interest only payments,no readvanceable mortgages etc....

Some lenders simply do not lend in company names, and if that is how you require your mortgages to be - you are eliminating alot of good lenders. If your intention is to build a large portfolio, at some point, you will probalby need those lenders.....

Hope that helps,

 

[Thomas Beyer]

QUOTE (investmart @ May 4 2009, 01:20 PM) I haven`t experienced that Thomas - the property is under the company name BUT the mortgage under your name hence the banks did not care company was on title. Am I missing something?
yes .. the fact that some (but not all) lenders do not lend to corporations or lower the loan amount if asset is held in a corporation.

Hence: you have fewer available lenders .. hence a good mortgage broker is key !

 

[Nir]

Correct me if I`m wrong Peter, MOST banks finance in company names with a personal guarantee without too many issues.

That`s the impression I got. However, you are in touch with many more banks so perhaps it was just a coincidence ALL those I had contacted
have no issue financing in company names as long as it`s done with a personal guarantee as you mentioned.

Examples: RBC, Laurentian Bank. No problem!

 

[nepoez]

Hi folks,

Thanks for all the input.

So it seems that my original problem is solved! I have no reason to pay myself either via dividend or income, because the company can just write a large cheque when it comes time to hand over the down payment. So

1.) I can keep all my money in the company and enjoy the benefits of lower tax rates for my consulting income, and
2.) the company qualifies, and writes the cheque for down payment, and
3.) still have the property under my own name, not the company.

Can this be true? It seems too good to be true.

 

[Thomas Beyer]

QUOTE (nepoez @ May 4 2009, 07:01 PM) ..

Can this be true? It seems too good to be true.
it is indeed NOT true. Who told you you can ?


If you write a cheque to yourself, then at some point it has to be declared income. You can call it an interest free shareholder loan for about a year .. then it must be repaid or it is deemed personal income.

The only way to avoid taxes on the cash is if the company buys the asset and thus, any gain or loss accrues to the company (even if the mortgage is held personally).

 

[nepoez]

I didn`t mean that the company will write a cheque to myself, but I meant the company will write a cheque to the lender. Not doable? I was getting the impression from Peter`s replies that it is doable. Now I`m confused!



QUOTE (thomasbeyer2000 @ May 4 2009, 06:08 PM) it is indeed NOT true. Who told you you can ?


If you write a cheque to yourself, then at some point it has to be declared income. You can call it an interest free shareholder loan for about a year .. then it must be repaid or it is deemed personal income.

The only way to avoid taxes on the cash is if the company buys the asset and thus, any gain or loss accrues to the company (even if the mortgage is held personally).

 

[Thomas Beyer]

QUOTE (nepoez @ May 4 2009, 07:14 PM) I didn`t mean that the company will write a cheque to myself, but I meant the company will write a cheque to the lender. Not doable? I was getting the impression from Peter`s replies that it is doable. Now I`m confused!

same thing .. the cheque is to the bank ON BEHALF OF YOURSELF the beneficial owner of the asset .. i.e. a loan or a dividend or income to YOU PERSONALLY !!!!

If you write a cheque to someone OUTSIDE the firm it is either:
a) a loan, or
b) a purchase of an asset, or
c) a dividend, or
d) income, or
e) a payment for an invoice i.e. an expense payment, or
f) taxes

please get a basic accounting 101 !!

Equity in firm = assets - liabilities

In accounting, if cash (which is an asset) is debited, something else on the asset side has to be decreased or on the liability side increased !

so cash goes down. What goes up: another asset or equity goes down or a (tax) liability goes down or payable goes down.