How to structure ownership for tax benefits

jimcurran

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I recently sold all my properties and came across one I couldn't pass up to purchase in the process. Although the time to sell was good with the market, I will be paying the price at tax time taking the $ as income. I am in the highest tax bracket already so I will eat this one but, wondering what the best way to structure my next property and any future ones I purchase? Mine were personally owned by my wife and myself and the plan was to sell in retirement but as they were all multi-family and the market was up, we cashed out.

I'm purchasing the next one from my mom so I have time to figure out the best ownership structure moving forward. What is the best ownership structure moving forward to reduce any tax I have to take as income? Am i better to have a holding company for ownership, some sort of incorporated company? Is there a way to structure ownership with my kids (oldest is 13) so they can take the income at some point and I can transfer full ownership to them eventually without penalty? I think I might buy one more single family home and possibly a cottage to air b and b, or a multiple cottage type property. So all in all I would have 2 single family homes to rent and possibly one more cottage style. Is it worth owning them within a company for tax purposes?

I know this can create a lengthy discussion and probably depends on how long I plan on holding them (ideally until I die or need the $ from them in retirement). Hoping to retire in the next 3-5 years and not really interested in any more income at this time, I'm already paying my fair share of tax.

Any suggestions or advice greatly appreciated.
 

Thomas Beyer

Senior Forum Member
REIN Member
It makes a lot of sense to own real estate (or crypto or stock) assets in a corporation with multiple share classes. You can then dividend money to kids, spouse, yourself or your grandmother at liberty.

Before a profitable asset sale you can chose to buy corporations with a loss and co-mingle with gains in a real estate asset you plan to sell.

Since a corporation is a different legal person than you it pays different taxes, if any. Usually you pay no taxes while holding due to depreciation and expenses. You can also hire your kids (within reason) and pay them a small salary where they pay almost no taxes but that you deduct as expenses in the firm.

Of course on an eventual sale there’s taxes due but often a refi is better to invest into other assets as one of the primary benefits of a MF asset is that you can get very cheap CMHC loans. More insight here on “Buy or refi: the agony or the ecstasy” https://www.prestprop.com/2016/08/11/sell-refinance-agony-ecstasy/


More questions: just ask. I’ve been doing this for 20+ years .. with multiple corporations and assets in them .. many with investors .. with kids now in their 30s (and soon grandkids) .
 
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Tester

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My issue with the corporation is what happens when a person passes away while holding real estate in the corp.

Bear with me a minute while I set up this example. Suppose you have a property worth $1M that you buy in a new corporation. For simplicity at this point you have $1M in assets (property) and $1M in equity (common shares). Upon passing away suppose that property is now worth $3M. Disregarding any depreciation recapture, you have a capital gains of $2M that CRA will tax you on the shares you hold. However when your estate goes to sell the property inside the corporation, CRA will charge capital gains on the increase of $2M in the property value as well. Effectively double taxation as CRA doesn’t recognize the tax paid on the shares to increase the cost base of the property inside the Corp.

@Thomas Beyer, ive heard there are some complex ways of getting around this that the estate has to do. Wondering if you have run across this and what your plans are?
 

Thomas Beyer

Senior Forum Member
REIN Member
The shares aren’t worth $3M if the asset within corp are $3M as there are implied taxes. Say 25% taxes on gain thus $500,000 in taxes due thus shares are worth $2.5M.

No way around that except asset freeze ie you transfer shares to your heirs before death ie sell asset to them in essence. You then pay taxes and they own an asset worth $3M.

Or you sell shares to them prior to death for a nominal amount and they now own corp and deal with taxes within corp later.


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Tester

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Or you sell shares to them prior to death for a nominal amount and they now own corp and deal with taxes within corp later.

I wish I could predetermine my death
In any case, you are correct. Either sell the asset or the Corp. In either case the tax man takes his pound of flesh, and in the case of the asset sale you also pay the land transfer tax.

Have you considered owning the asset in a family trust?
 

Thomas Beyer

Senior Forum Member
REIN Member
Yes you can use trusts or bare trusts and change the beneficial owner. This will delay the taxes due. Get some proper legal & accounting advice here.


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