Taking an income from my Real Estate Business

[sunkat]

Good morning,

I have a question I would like to put out there.

I am currently spending the majority of my time these days doing and over seeing renovations on the new properties (single detached homes) we are adding to our portfolio.

My question is, can I pay myself for doing my own renovations and if so how do I determine what is reasonable without raising eyebrows with CCRA.
I have an answer from my accountant but I thought I heard something at a REIN meeting about this.

Thank you all

Mark Beech

REIN Member

 

[jarrettvaughan]

QUOTE (sunkat @ Jan 19 2009, 06:26 AM) Good morning,

I have a question I would like to put out there.

I am currently spending the majority of my time these days doing and over seeing renovations on the new properties (single detached homes) we are adding to our portfolio.

My question is, can I pay myself for doing my own renovations and if so how do I determine what is reasonable without raising eyebrows with CCRA.
I have an answer from my accountant but I thought I heard something at a REIN meeting about this.

Thank you all

Mark Beech

REIN Member


Hi Mark,

I have had the same question over the past couple weeks and am interested in the answers you receive from the other members. Would you also be able to post what your accountant recommended?

 

[housingrental]

I might be missing something but wouldn`t it not matter ???

 

[Thomas Beyer]

of course you have to pay yourself .. well if possible ..

Assuming the business is a company, you write yourself a cheque every month .. any figure you like. It is called "salary" or "management fee" .. it is an expense to the business but taxable as income to you, either you issue a T4 at year end with appropriate monthly deductions or corporation pays GST on services ..

WHERE IS THE SPECIFIC PROBLEM ???

The size of the cheque ? or the lack of cash after all other expenses ? or that there is no corporation ?

 

[Nir]

let`s just do the math. an example:Corp pays 20% tax. you take 30K income paying around 20% tax on it too. you didn`t do anything - reduced corp tax owing and increased yours by the same amount. However in different tax breaks there might either a benefit or disadvantage, i.e. 10K income no tax or 50K income more tax than corp pays. I think. hope i helped.

 

[sunkat]

QUOTE (thomasbeyer2000 @ Jan 19 2009, 09:28 PM) of course you have to pay yourself .. well if possible ..

Assuming the business is a company, you write yourself a cheque every month .. any figure you like. It is called "salary" or "management fee" .. it is an expense to the business but taxable as income to you, either you issue a T4 at year end with appropriate monthly deductions or corporation pays GST on services ..

WHERE IS THE SPECIFIC PROBLEM ???

The size of the cheque ? or the lack of cash after all other expenses ? or that there is no corporation ?

Thank you for your input.

The specific problem would be the amount of the cheque and this is not a corporation.

 

[Dan_Eisenhauer]

I am not an accountant, let alone a tax expert. But, here are my thoughts on the subject.
If the property is not owned by your corporation, then it is irrelevant whether you charge for your time today. It goes in one side and comes out the other, making it a wash.

However, if you capitalize your labour costs, then you lower capital gains tax when you sell by increased the Capital Cost Adjustment. But, you will have paid yourself a taxable income, and that is payable today, thus eliminating the tax benefit of capitalizing the expense. You can`t have it both ways... increasing the Capital Cost of the property and not paying tax on the income derived from increasing that cost. CRA is not that benevolent.

You really need advice from a tax expert on this one.

 

[Thomas Beyer]

QUOTE (sunkat @ Jan 20 2009, 05:19 AM)
The specific problem would be the amount of the cheque and this is not a corporation.


You will have to report business income as a sole proprietor ..



Example: you paint a house and charge $10,000 .. and paint costs $1000, and a helper $1500 .. rest is yours .. where is the specific problem ??

a) you don't charge enough ?

b) your cost is too high ?

c) you don't report your income ?

 

[dannielsen]

Hi Mark,



This is a great question. I had my own accounting business for 12 years doing corporate and business taxes. Now keep in mind that I sold the business almost 3 years ago but here is my 2 cents.

If you are operating your real estate business personally (not incorporated) you CANNOT pay yourself a salary. You can make withdraws from your business account personally, but in CRA’s eyes you pay the tax on your NET income from your Real Estate Business. You cannot deduct any amount for management fees or salary paid to yourself.



If you are a corporation, you may be best off paying yourself dividends rather than a wage in most instances. There are many factors that your accountant would have to look at, such as any other income (job), the company’s Balance Sheet etc. this becomes a very detailed and complicated topic which varies with each individual case.

In most cases I would recommend that real estate investors do not incorporate.



An excellent quick reference manual that every real estate investor should have is Form T4036 / T776. You can obtain this manual on line at www.cra.grc.ca or you can call them at 1-800-959-2221 and they will mail you a copy. This is an excellent booklet that explains what you can and cannot use as an expense and what is capital vs. expense. This form is for personal tax returns, not for limited companies.



I hope that this helps.


Dan Nielsen

 

[billf]

Hi,

One way you may lower your tax burden is pay a reasonable salary/fee to lower income generating members of your family who will have the income taxed at a lower rate. EG. pay your wife for doing the books, your retired dad for lawn maintenance, your kids for painting.

Bill F.

 

[AndyLuchies]

QUOTE (dannielsen @ Jan 20 2009, 01:57 PM) In most cases I would recommend that real estate investors do not incorporate.

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Dan Nielsen


Hey Dan, why would you recommend RE investors not to incorporate?

 

[Thomas Beyer]

QUOTE (jessandy @ Jan 21 2009, 05:47 AM) Hey Dan, why would you recommend RE investors not to incorporate?
Because it costs money upfront (maybe $1000) and ongoing (maybe $2000 annually) and because it is tougher to get a mortgage.

It makes sense only for sizable holdings of residential real estate (say 8 to 10 or more) or for commercial properties ..

 

[dannielsen]

Bill, that is a great suggestion. The only thing to keep in mind when paying family members is to keep a detailed record of their work and how much you pay them for each job. CRA is ok with this as long as we pay our kids, spouse etc a reasonable amount and be sure to claim the income on their respective returns.



I would recommend that all real estate investors contact a good accountant who has experience with R.E. investors to discuss their options when it comes to incorporating. Always be sure to discuss your benefits as well as your costs. The accounting and legal rates can be very costly, and as always don’t forget to ask about your exit strategy and succession planning ahead of time. But in my experience, it is not beneficial to incorporate for the majority of investors as you will go from a very simple way of doing business as a sole proprietor to a very complicated and in most cases frustrating system associated with limited companies. There are so many details and differences between sole proprietorship and a limited company that I would be babbleing on for much to long.
I have had many clients who were running a very profitable business and then once they started to pay higher income taxes they run out and get incorporated. The next thing I knew they were so frustrated that they just wanted to give up. They lost focus on what was making them successful.

I personally have a company, but I do not have any of my real estate properties involved in the corporation. Keep in mind that all of my properties are single family.

Years ago everyone was incorporating because they wanted to protect their liability exposure. This is becoming less of an issue as there are some mighty smart lawyers out there who have been able to get at shareholders assets as well as the company’s. I would highly recommend that you call your insurance agent about increasing your liability limits, this is a very cheap way to help cover your assets.

 

[holymoly]

Dan, what if you already have an incorporated company, and the company invests its savings in rental real estate? Do you see a downside there, or have any cautions to pass along?

I bought my first and only rental property through my incorporated company, with my accountant`s `blessing`. (Between the company and myself, only the company had savings.) There were some practical irritations -- it was somewhat harder to get insurance and a mortgage, for example -- but the incorporation fees and the other messy bits like setting up government deductions and so on were put into place long before I started thinking about investing in RE.

 

[dannielsen]

Hi Holymoly,



This is a great question. I was in the same situation as you are in now and I bought my first property with the company’s money because I did not want to take it out and pay taxes on it personally and further more use pretax dollars to invest. The problem is that CRA does not treat rental property income and capital gains the same way in a company as they do personally. When you sell you rental property all of your capital gains will be taxed as income and then you will receive what they call a Dividend Tax Credit. Opposed to paying on only 50% of the capital gain when it is held personally.

Now the 2[sup]nd[/sup] HUGE issue is that you may put yourself off side when it comes to the small business capital gains exemption if your main business is not investing in RE. This can be a big problem if you were ever to sell your shares of the company.

I have since taken most of my money out of the company and I have purchased all of our properties in our personal names.

Please keep in mind that every accountant will give you different advise and that every situation is unique and must be carefully evaluated. Please be sure to discuss with your accountant your 5 year plan and openly discuss your exit strategy. A good accountant is a very important person in your team. After 11 years and over 4,000 tax returns I still consult another accountant.


Good luck, keep on moving forward.

 

[Thomas Beyer]

QUOTE (holymoly @ Jan 21 2009, 11:38 AM)
Dan, what if you already have an incorporated company, and the company invests its savings in rental real estate? Do you see a downside there, or have any cautions to pass along?



I bought my first and only rental property through my incorporated company, with my accountant's 'blessing'.


the "blessing" that is relevant is the banks !!



Don't forget the golden rule: He who has the gold makes the rules !



Since banks increasingly tighten their underwriting rules, a residential asset in a corporation may be more difficult to finance with a new mortgage (with a personal guarantee) than one held personally ..

 

[dannielsen]

please note in my last post I called the capital gains credit a Dividend Tax Credit, I meant to say it is called a Capital Dividend Account.
I should not type and drink Tim Hortons at the same time. ha ha

 

[TonyMandrique]

Consulting a tax expert and an experienced R.E. accountant is the best move. Good luck.

FHC

 

[holymoly]

QUOTE (dannielsen @ Jan 21 2009, 05:24 PM)
please note in my last post I called the capital gains credit a Dividend Tax Credit, I meant to say it is called a Capital Dividend Account.

I should not type and drink Tim Hortons at the same time. ha ha


Thanks very much for your response and the clarification, Dan!




QUOTE (thomasbeyer2000 @ Jan 21 2009, 05:18 PM)
Since banks increasingly tighten their underwriting rules, a residential asset in a corporation may be more difficult to finance with a new mortgage (with a personal guarantee) than one held personally ..


Interesting. I hadn't considered that at all, Thomas. Thanks for the insight.



Sorry for hijacking your thread, sunkat!

 

[AndyLuchies]

QUOTE (thomasbeyer2000 @ Jan 21 2009, 11:14 AM) Because it costs money upfront (maybe $1000) and ongoing (maybe $2000 annually) and because it is tougher to get a mortgage.

It makes sense only for sizable holdings of residential real estate (say 8 to 10 or more) or for commercial properties ..

I was told that becoming incorporated was best for all RE investors for: tax avoidance (not evasion), and for limiting legal action (e.g. tenant sues me)... what are your thoughts on this?

Also, if you have time, how would you recommend structuring a start-up real estate business (3 or less properties), just sole-proprietor?