For high-net-worth families at the helm of family-owned enterprises, retirement planning is a multifaceted challenge…
A strategy for investing may include using pre-tax dollars to purchase an investment. Investing in real estate in your corporation is cost effective and allows you to purchase a larger property when considering the after-tax investable dollars. Generally, $100,000 earned in your corporation will net you between $52,000 to 58,000 in your personal pocket after taxes using the highest tax rates. However, leaving funds within the corporation and investing in the corporation will save the personal tax portion and therefore more funds will be available for the investment.
The access to the pre-tax funds for investment does make this an attractive proposition, however, recent tax rules necessitate planning. The 2018 federal budget placed constraints to accessing the small business rate. Currently, qualifying businesses may use the small business rate (110% in Alberta) on the first $500,000 of taxable income – all amounts over $500,000 would be taxed at the general corporate rate (25% in Alberta). The new rules state that if the small business’s passive income is more than $50,000 – CRA will claw back access to the small business rate by decreasing the $500,000 small business limit by $5 for each dollar above $50,000. Passive income of $150,000 or more would therefor eliminate access to the small business rate. The relevance here is that rental income would be considered passive income.
Planning around rental property owned by a small business should consider mitigating the impacts of rental income within a corporation. Once such mitigating factor would be to utilize expenses such as interest, property taxes, management fees and capital cost allowance to allow for a lesser taxable income from the passive income stream.
Another planning opportunity would be to maximize the eligible dividend received from the rental income stream. As the passive income is taxed at the general corporate rate, the dividend receivable from that stream would be taxed personally at a lower rate than a dividend received from the small business stream. This differential could be sizable.
It is also important to note that if a business owns its own property, essentially paying itself or a related party rent – that rent may not be considered passive income and would therefore not have an impact on the small business limit.
While investing in rental property within a corporation does have the advantage of maximizing purchase dollars – tax planning should be done to mitigate other concerns and a tax accountant should review your position each year.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2021 Shajani LLP.
Shajani LLP is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.