12 Feb

Beneficial Ownership – a route to financing investment properties

Income Tax

Posted by: Garth Chapman

I have purchased well over 100 residential properties since 2002, and I learned early on that it is much easier to finance a property when it is held in your personal name rather than in the name of your Corporation, and this is especially so when dealing with new Corporations.  In fact these days there are fewer lenders willing to lend on rentals held by a Corporation, and those that do either require the Corporation to be a Holding Company, and others who require it to be an Operating Company.  And this list of lenders continues to shrink.

So I have used the concept of beneficial ownership to allow me to buy and hold properties in my name or my wife’s name In Trust for our Corporation.  To allow me to properly record this for each property, especially in case CRA came calling (and we were audited, and passed with zero changes to our tax filings) I had my real estate lawyer drew up a Trust Deed to clearly define that the subject property will be held by me ‘In Trust’ for our Corporation.  This means that the Beneficial Owner of the property is the Corporation.  The Beneficial Owner (the Corporation) must act accordingly, including the receiving of all revenue and payments of all expenses.  And of course it then follows that the tax reporting is handled by the Beneficial Owner (the Corporation) via its tax return as filed with CRA.  When the property is sold, the Corporation receives the proceeds of the sale, and is responsible for any tax on Capital Gains.

When you take out a mortgage in a Corporation you invariably will have to sign personal guarantees for the mortgage, unlike when done in your personal name. This means that if the mortgage goes into default and the bank forecloses, that the bank has the right to come looking to your other assets to cover for any shortfall they may have in proceeds they receive from the sale of the property.

If you do not already hold rentals in a Corporation I strongly advise you to get your tax advisers to weigh in on the implications of holding properties in a Corporation.  One thing to consider it that the net income derived from rental properties held by a Corporation is considered Passive Business Income and is therefore taxed at the highest rate.  Another consideration is the added complexity and costs associated with the Corporation, especially around keeping the books and filing tax returns.

IMPORTANT NOTE- Be sure to discuss this in detail with your professional Tax and legal advisers.  Each of us presents a unique set of circumstances, and as such, there is no one-size-fits-all recipe.

I have several template Trust Deeds for this, each specific to how many Title owners and Corporations are involved in the property.  Call or email me if you want to discuss this concept in more detail.

I hope this helps as you decide how to move forward in building your portfolio of investment properties.