Real estate owners often contemplate whether they should own investment real estate personally or through a corporation, considering the tax implications and various factors that come into play when transferring real estate to a corporation. Are you aware of what those factors and tax consequences are?

Should You Hold Real Estate Personally or in a corporation?

Deciding whether to hold real estate property personally or in a corporation involves consideration of several factors. One significant factor is the limited liability protection offered by a corporation, which may influence the decision to transfer real estate ownership to a corporation. This is particularly relevant in situations where a taxpayer owns a multi-unit residential complex, and potential litigation poses a risk of excessive debt or even bankruptcy.

Moreover, owning real estate within a corporation can offer tax advantages. Typically, income from real estate is classified as passive income, subject to higher tax rates for corporations. However, in some cases, it may be possible to have the income classified as active business income, providing opportunities for tax deferral and savings.

Additionally, a corporation can be a useful tool for estate planning, particularly when transferring property to next of kin. In such cases, the corporation’s assets may be frozen, and fixed value voting preferred shares may be issued to the shareholder, while introducing the children to the future growth of the assets through a trust or other means, while the taxpayer retains control of the corporation.

If you currently own the property personally and are considering transferring your real estate investment to a corporation, it’s crucial to consider several components before making the transfer.

Taxation when Transferring Property

In Canada, transferring property between an individual and a corporation is generally considered a sale at fair market value and may trigger immediate capital gains tax. However, tax deferral may be possible if certain conditions are met. To qualify for a tax-deferred transfer, both the individual and the corporation must jointly elect to use a prescribed form and meet the imposed deadline. This process is often referred to as a “rollover”.

Acquiring Approval from Creditors for Mortgage Transfer to Corporation

Before transferring real estate property to a corporation, it’s important to seek permission from creditors. This can involve paying prepayment penalties depending on the agreement with the creditors.

Land Transfer Tax, Also Known as Mutations Tax

Land transfer tax, also known as mutations tax, is generally applicable when there is a change in the legal ownership of a property between unrelated parties. However, in certain provinces, an exemption may apply if the transfer is made to a related party.

For example, in Quebec, if a property held by an individual is transferred to a corporation and the individual owns 90% or more of the voting rights, there is an exemption from mutations tax.

However, it is crucial to seek proper advice before making such a determination, as the transfer may not be worth it due to the significant transfer tax.

Sales Tax (GST/HST/PST)

Sales tax, which includes GST/HST/PST, generally does not apply to the sale of a residential property if it is used as a place of residence. However, transfers of commercial properties are usually taxable. For instance, if a rental property is used for commercial business operations, it would be considered a commercial property. In cases where a property is transferred to a corporation, the purchasing corporation is required to pay GST/HST/PST on the fair market value (FMV) of the property.

Fortunately, the Excise Tax Act provides special provisions that exempt the seller and purchaser from charging and remitting sales tax, provided that certain conditions are met. The purchaser must be registered for GST/QST and must acquire the real estate primarily for commercial activities. If the conditions are met, the purchaser is required to self-assess the amount of tax owing and report it on their GST/QST return during the reporting period of the transfer. The purchaser can also claim an input tax credit (ITC), which eliminates the need to remit the tax.

Acquiring Fair Market Value Appraisals for Real Estate Property Transfers

It’s important to transfer real estate property at fair market value (FMV) between taxpayers. This is especially crucial when transferring property to a corporation with unrelated shareholders, to avoid any unfavorable assessments by the Canada Revenue Agency (CRA). Obtaining a third-party appraisal can help determine the FMV of the property being transferred, which is necessary to ensure that the consideration received in exchange for the property equals its FMV. Typically, the consideration is made up of cash, promissory notes, and shares of the corporation if there is insufficient cash. In cases where there is no appraisal available, a transfer agreement should include a price adjustment clause to protect both the transferor and transferee in case of a disagreement with the CRA regarding the FMV of the property.

Also read: Essential Information on Payment Dates and Benefits

How to Report Foreign Income Using Form T2209

If you earn income from a foreign country as a Canadian resident, you are required to report it to the CRA and pay taxes on it. This may seem unfair, especially if you have already paid taxes on that income in the country where it was earned. However, reporting your foreign income to the CRA does not mean you will be taxed twice. The purpose is to inform the Canadian government of your income sources to avoid any confusion or suspicion, and also to claim federal foreign tax credits that can help reduce your other tax obligations. So, it’s a beneficial step that can help you save some money on your taxes.

What is the Federal Foreign Income Tax Credit and How Does it Work?

The Federal Foreign Tax Credit is a credit you can claim if you pay business or non-business taxes on an income made in a foreign country. Reporting your foreign income is necessary to claim this credit. If you paid taxes to multiple countries, each totalling more than $200, you will need to calculate the tax for each source of income separately before reporting them together on the T2209 form. This credit can help reduce your tax obligations, making it an important consideration for Canadians with foreign income.

Can contributions to foreign public pension plans qualify for the Federal Foreign Tax Credit?

Yes, they can. According to the CRA, contributions to foreign public pension plans are considered non-business income tax, as you may never benefit from that money earned while working temporarily under foreign legislation. This applies to the Federal Insurance Contributions Act (FICA) under U.S. law, which requires all employees to pay payroll tax regardless of residency status. If you contribute to FICA, you are eligible for the Federal Foreign Tax Credit.

Is the Federal Foreign Tax Credit the same for all countries?

No, it varies depending on whether a tax treaty has been signed between Canada and the foreign country. If you are unsure about the specifics of the credit for a particular country, it is recommended to seek further details and clarification.

Can you claim a provincial foreign tax credit in Canada?

Yes, you can claim a provincial foreign tax credit in Canada as long as your federal foreign tax credit on non-business income is less than the tax you paid to a foreign country, and you do not reside in Quebec. You can claim the credit by filling out the T2036 form. It’s also important to note that when calculating the credit, you should use the conversion rate at the time of the transaction, not at the time of filing your taxes in Canadian dollars.