Should You Own Rental Property in Your Holding Company?

Owning real estate is on the mind of many business owners. A question that comes up regularly is, “should I own my rental property inside my holding company instead of owning it personally?”.

The answer depends on factors that primarily involve tax. Let’s learn the dos and don’ts of owning rental property inside your holding company.

When Owning Rental Property Inside Your Holding Company is a Good Idea

Owning a rental property in your holding company means the company is the legal owner of the property instead of it being in your personal name. 

If these specific circumstances are met, having the holding company as the legal owner of the property can save you hundreds of thousands in tax.

1. When you’re using corporate dollars to buy the property

If you intend to purchase the rental property with money held inside the corporation, we advise you to own the property inside your holding company. 

Do not withdraw the cash out of the corporation to purchase the property personally. You will have to pay an additional layer of personal income tax that can easily be avoided by purchasing the property inside the holding company.

2. When your goal is to own the rental property long-term

If your goal is to hold the rental property for long-term investment purposes instead of short-term flips, it is much more beneficial for your property to be corporate-owned.

Real estate in your holding company generates Capital Dividend Account (CDA) credits when you sell in the future. This allows you to pull 50% of the sale proceeds out of the corporation tax-free. 

By holding your rental property as a long-term investment, the bigger return you can expect and the more CDA credits you will accumulate. It’s a strategic way to pull money out of the corporation tax-free in the form of capital dividends. 

(Here are three strategies to maximize the return on your rental properties)

What You Shouldn’t Do When Trying to Own Rental Property Inside Your Holding Company

The strategy of corporate-owned rental property is much more complex than it seems. It can also end up being very costly if not done correctly. 

One thing you definitely should not be doing is incorporating solely to own a rental property inside your corporation. You must consider the cost to incorporate, cost of annual corporate accounting fees, and additional liabilities.

Unless your goal is to create a business from owning a portfolio of rental properties with at least five full-time employees dedicated to managing your properties, it’s not a tax-efficient approach. 

Say if you did hire five full-time employees to manage your properties, your corporation would be an active business and no longer just a holding company. The income tax rate for the rental property would be cheaper because it’s taxed as active income at 11% instead of passive income at 50%. 

However, creating an active business of owning rental properties is likely not the goal for most business owners. It does not make sense to incorporate if you simply plan on owning one or two rental properties in your holding company.

(Thinking of owning life insurance inside your corporation? Here are five benefits)

More to consider…

A common misconception amongst business owners in Canada is that opening a holding company to purchase rental properties will automatically create tax savings. This is only true in specific circumstances such as the ones we mentioned above.

With no prior planning, owning a rental property in a holding company may end up costing more tax than if owned personally. 

The complexity of structuring a rental property inside your holding company requires the guidance of a professional financial planner. If you want to maximize your wealth using your corporate structure, book a call today, we’d love to help.

Did you learn a lot about owning a rental property inside your holding company? Here are three more posts to read next:

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