Tax Benefit - is this true or did I miss the point?

[Nir]

Hi,

A friend recently told me (assuming you do business under a corporation) that if you register a PM company instead of doing everything under one company, you create active income from passive income, and on active income you pay less tax. is this true?

Example:

123 Ontario LTD generates 10,000/month net income for tax purposes.

What my friend is saying is that if you register a PM company abc Ontario Ltd. now you can reduce 123 Ontario Ltd`s income from 10,000/month to 7000/month by paying 3000 PM fees to abc Ontario Ltd.

My question is will abc Ontario ltd really pay less tax on that $3000 than 123 Ontario ltd would on the same $3000 had it not reduced its income by paying PM fees?

He mentioned something like "on active income you pay half the tax you pay on passive income."

THANKS.

 

[AndyLuchies]

QUOTE (investmart @ Oct 22 2009, 03:56 PM) Hi,

A friend recently told me (assuming you do business under a corporation) that if you register a PM company instead of doing everything under one company, you create active income from passive income, and on active income you pay less tax. is this true?

Example:

123 Ontario LTD generates 10,000/month net income for tax purposes.

What my friend is saying is that if you register a PM company abc Ontario Ltd. now you can reduce 123 Ontario Ltd`s income from 10,000/month to 7000/month by paying 3000 PM fees to abc Ontario Ltd.

My question is will abc Ontario ltd really pay less tax on that $3000 than 123 Ontario ltd would on the same $3000 had it not reduced its income by paying PM fees?

He mentioned something like "on active income you pay half the tax you pay on passive income."

THANKS.

I thought it was generally the other way around...that active income was taxed more than passive...

Whatever the case, after listening to the tax discussions on incorporation at the REIN meeting, the answer is always "it depends..."

probably, it depends largely on how much you`re making, what tax brackets you fall into. You could also take that $10,000 profit and give dividends out to the shareholders (yourself) which would then be taxed lower I believe.... I just had this chat with my brother-in-law who`s a hot shot tax accountant in mississauga, but don`t remember exactly what he said. (Imagine getting free advice and saving $400/hr because he`s my wife`s brother, HECK YEAH!!!!)

You should join REIN and listen to the last few months of meetings, its been all about incorporation... whatever the case, I`m pretty sure its not as simple as your friend would suggest, each person`s needs change everything.

 

[realinvesting]

QUOTE (jessandy @ Oct 22 2009, 06:09 PM) I thought it was generally the other way around...that active income was taxed more than passive...

Whatever the case, after listening to the tax discussions on incorporation at the REIN meeting, the answer is always "it depends..."

probably, it depends largely on how much you`re making, what tax brackets you fall into. You could also take that $10,000 profit and give dividends out to the shareholders (yourself) which would then be taxed lower I believe.... I just had this chat with my brother-in-law who`s a hot shot tax accountant in mississauga, but don`t remember exactly what he said. (Imagine getting free advice and saving $400/hr because he`s my wife`s brother, HECK YEAH!!!!)

You should join REIN and listen to the last few months of meetings, its been all about incorporation... whatever the case, I`m pretty sure its not as simple as your friend would suggest, each person`s needs change everything.

 

[realinvesting]

I totally agree with the idea of the one below you, I believe taxes is a much complicated issue and it is not that easy as your friend suggested.

[email protected]

 

[Nir]

Thanks jessandy. Actually the question is pretty specific, not that general . if you read carefully it is related to a more sophisticated model where you have a separate PM corp. VS. just a RE Corp. I think most REIN members do not use this 3 tier cash flow model/structure. (3 tier because you also have a holding company).
By the way, I have an accountant I can go to anytime I want - part of the "package". However, it is always better to get more opinions. No one knows everything. cheers.

 

[AndyLuchies]

QUOTE (investmart @ Oct 22 2009, 11:41 PM) Thanks jessandy. Actually the question is pretty specific, not that general . if you read carefully it is related to a more sophisticated model where you have a separate PM corp. VS. just a RE Corp. I think most REIN members do not use this 3 tier cash flow model/structure. (3 tier because you also have a holding company).
By the way, I have an accountant I can go to anytime I want - part of the "package". However, it is always better to get more opinions. No one knows everything. cheers.


I don`t believe your question is specific enough. To say that ANYONE who creates the 3 tier corporation business (a common strategy for "Rich Dad Graduates") will save on taxes by paying a PM company from their holding company IS too general. Like George Dube said at REIN the exact same action done by two different businesses can yeild opposite results. To say that if YOU create a 3-tier corporation to save on taxes is only knowable depending on much more information about you and your business specifically.

To say that "on active income you pay half the tax you pay on passive income." is much too general because it depends not only on how you set up your corporations (not just how many you have, and how you transfer your profit/loss/assets between them), but on how much profit you have, how much you want to transfer, etc.

So essentially, this method could work for me for one reason (assuming the theory is sound), and be the wrong option for you. It depends on what your goals are.

(All this is simply from listening to two REIN meetings on Incorporation)

Your method doesn`t seem to be that sophisticated, in fact, you`re only using 3 different corporations and transferring between them. Apparently lots of REIN members who incorporate have at least 1 corporation per property and/or 1 per joint venture so juggling 3 isn`t that complicated (at least, that`s what Don Campbell recommends).

Anyways, if you can locate George Dube on this forum, and ask him, he`ll give you a straight answer, but I`d bet a sizeable portion of my income that his response will be "it depends...." irregardless, maybe our discussion back and forth will push a more experienced REIN member to comment....

 

[ChrisDavies]

You also need to be saving enough to pay for the costs of running each entity. If you`re still running fewer than a dozen doors, you`ll be way ahead by running it personally.

 

[Nir]

Thanks jessandy for the clarification and valuable information.

Chris, regardless of costs and tax benefits, isn`t having 10 doors under a corporation an advantage from a liability stand point?
You only mentioned the cost to run it so I guess you don`t think it`s a significant advantage liability-wise(?) thanks.

 

[JimWhitelaw]

QUOTE (investmart @ Oct 22 2009, 01:56 PM) A friend recently told me (assuming you do business under a corporation) that if you register a PM company instead of doing everything under one company, you create active income from passive income, and on active income you pay less tax. is this true?
I don`t think you pay less tax on the active income, but I believe that a business that generates active income is eligible for a wider range of deductible expenses. I don`t know the specifics. So far, every real expense I`ve generated in pursuit of rental income was OK`d as deductible by my accountant so I haven`t needed to pursue the separate PM company strategy.

 

[Nir]

Thank Jim. I`m assuming if you JV`d with someone you would not use the same corporation. in, other words if not under your name, then under a different corporation whether you call it PM company or not(?) I know it`s a new/different question.. but related.

 

[AndyLuchies]

QUOTE (investmart @ Oct 23 2009, 11:04 AM) Chris, regardless of costs and tax benefits, isn`t having 10 doors under a corporation an advantage from a liability stand point?
You only mentioned the cost to run it so I guess you don`t think it`s a significant advantage liability-wise(?) thanks.


Not if you mean "can they touch my personal assets if they sue the corporation?" If you were to get sued, they can get around the corporation by suing you personally (I just asked Thomas Beyer that question a few months ago) plus, at the REIN meeting, they were saying something like..."even in a corporation you have to put down a personal guarantee for a portion of the property to get lending, so if they sue for everything, you`ll still pay some out of pocket," if I remember things correctly. So perhaps you can reduce your liability through a corporation, but someone can always by-pass and sue you personally somehow...

for what its worth, I believe Thomas Beyer was saying it takes around $2000/year per corporation in fees to run them in Canada PLUS increased accounting costs, so that adds up quickly with a small portfolio of properties. I heard a similar strategy to the one you`re mentioning at a Rich Dad weekend before I joined REIN, only to have it shot down by REIN members...I was kinda pissed off because it seemed airtight before I talked to others.