The potential transfer of ownership presents an opportunity to recover tax-free cash from your corporation

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By Julie Cazzin with Andrew Dobson

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Q: Are there any tax consequences if I transfer my investment property — a duplex that I own 100% — into my incorporated company? If so, how can I minimize this tax? -Johnny L.

PF responses: If you transfer certain types of property to a corporation, you may be able to defer some or all of the income that might otherwise arise from it simply by electing under section 85 of the Income Tax Act Income.

A Section 85 transfer of your investment property to your corporation can be made on a tax-deferred basis. In some cases, a transferor may choose to trigger a partial capital gain, such as when you have relatively low income for the year or you have capital losses that you can use to offset the gain.

One of the requirements is that you must receive “stock consideration” – shares of the company – in return from the company. You can also receive “non-share consideration”, such as a note receivable, but this will trigger a capital gain if it exceeds the tax cost of ownership.

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Additionally, future rental income from the duplex will be taxed as passive income in your corporation, which will be at a rate similar to the top personal marginal tax rate. And if you withdraw that income from the corporation at a later date, taking into account the tax potentially refundable to your corporation upon payment of a dividend, the combined corporate and personal tax payable could be greater than that that you would have paid to earn all the income. personally first.

If the purpose of the transfer is to reduce your tax liability on the rental income, depending on your income and your province or territory of residence, this may not occur.

If you decide to sell the property in the future, the capital gain will be taxable to the company. It may pay tax at a higher rate than you would have paid had you continued to own it personally, since corporations pay tax rates on investment income similar to the most marginal personal tax rates. higher.

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One of the main advantages of this transfer strategy is that you may be able to withdraw money from the company tax-free.

For example, if you bought the property for $800,000 and it is now worth $1 million, you may be able to recover up to $800,000 in tax-free cash from the corporation in exchange for your transfer. .

This may present an opportunity if you have a lot of cash or investments in the company that you want to access personally, or if you will have a lot of cash in the future.

Keep in mind that holding investments like this rental property in your corporation may negate other tax benefits like the lifetime capital gains exemption.

If your business could one day be sold, you may not want to own rental real estate, stocks or mutual funds in it. Otherwise, you may not be able to claim the lifetime capital gains exemption on the sale of the business, which could exempt up to $913,630 of capital gains from tax.

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If this were a consideration, you could create a separate holding company to hold assets such as rental property and preserve access to the lifetime capital gains exemption.

It may also be advisable if your business could be subject to credit risk or other potential liability. If you hold the rental property in the same corporation as your active business and the latter is sued, this can expose your rental property or other assets that might otherwise be isolated by holding them in a separate corporation.

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Holding your real estate in your corporation may also prevent you from accessing small business tax rates due to the investment income generated by the property.

If your investment income exceeds $50,000, your corporation may begin to lose the benefit of the small business deduction that allows it to pay tax at lower rates on active business income.

Additionally, transferring real estate to a corporation may result in land transfer tax and legal fees. In a city like Toronto that collects municipal land transfer tax in addition to provincial land transfer tax, a $1 million property could incur land transfer tax of $32,950.

If the property is mortgaged, you will need to ensure that the lender will allow the company to take over the mortgage. You may need to refinance the mortgage and this could result in penalties or other charges. Business borrowers may have to pay higher interest rates and face other restrictions.

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The potential transfer of ownership presents an opportunity to recover tax-free cash from your corporation now or in the future. However, there may be no tax savings on rental income or any capital appreciation. There could be immediate land transfer taxes, legal fees and longer term costs due to higher mortgage interest rates. Seek legal and tax advice to assess the process, implications and costs/benefits of such a strategy.

Andrew Dobson is a Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) fee-only/advice-only at Objective Financial Partners Inc.

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