Moving real estate to corporate ownership: 7 tips you need to know

Posted on: July 27th, 2016 by Real Estate Accountants 52 Comments

Real estate investors discuss with real estate accountants whether properties should be moved to a corporation

The number one question for real estate accountants after “should I incorporate” is “can I move my properties to my company from my personal name?” Moving your personally owned rentals is not a “moving job” that should be undertaken without a great deal of thinking ahead and planning. You must ensure your real estate accountant, lawyer, and financing team are all on the same page. Here are 7 tips you need to know:

1) Before doing anything

Before transferring any property, consider whether the real estate should actually be in a corporation. A host of reasons exist for holding properties corporately including tax, legal, financing, business, estate, succession or legacy planning.

That said, you can also use some of those same reasons, such as tax and financing, to argue buying or keeping properties in your personal name. Generally speaking we find that from a pure tax perspective, owning one or two small properties personally is perfectly fine.

2) Before you close…if you have that advantage

If you’re in the fortunate situation of having yet to close on a property, despite having already made your offer, you do have some more flexibility with the ownership. In this case, it may be relatively easy to create a corporation, amend the purchase and sale agreement with respect to the purchaser, and cleanly close the property. Provided that your team has sufficient time, and you are confident that the vendor will accept the change in purchaser, we see many deals change in this way. (An exception can be if the vendor has another potential purchaser who has given a superior offer and uses this as an opportunity to take advantage of it.)

3) Trust agreements

If you find it challenging to change the purchase and sale agreements to a corporation and still get the deal to close, it may also be possible to use a trust agreement. The trust agreement means the property may be legally acquired personally by the purchaser but the individual may do so in trust for their corporation. (This is subject to legal and financing concerns in particular.) The trust agreement would spell out that the corporation is the beneficial owner of the property and thus the corporation is effectively treated from a tax perspective as the owner and is entitled to the rental income and on the hook for its expenses.

4) Costs upon transfer

What is this going to cost? The first three to consider are:

  • Transferring a property to a corporation results in a disposition. From a tax perspective, this means that if the property has appreciated in value since it was acquired, you will be taxed on the capital gains.
  • As well, “recapture” may result. If capital cost allowance (CCA), which is often thought of as depreciation, is claimed on an appreciating property, the CCA is included into income at the time of sale.
  • Further, depending on the province, the transfer triggers the land transfer tax.

In many cases, the above costs can be quite expensive and practically speaking prohibit a transfer.

Financing issues may arise if the financial institution has concerns. We generally find that certain institutions are typically neutral or positive, but some are negative or simply wish to keep things as they are until the next renewal. Trust agreements often alleviate concerns but working with your financial advisors are key.

Lastly, you need to budget for some accounting and legal fees to go through the process.

5) Deferring costs

Fortunately, in many cases, with the assistance of your legal advisor, we can complete a “rollover” which allows you to transfer qualified property to a company on a tax deferred basis. Essentially, when you follow the right steps, the Canada Revenue Agency will recognize that you simply indirectly own the real estate and thus your net worth has remained the same so there is no practical economic change. The rollover treats the company as if it effectively was the original purchaser of the property. Thus the incomes taxes which would otherwise be triggered are held off. This makes such planning much more manageable.

And, clearly if the property has failed to appreciate in value (we do see this at times when there is a downturn in the market) the rollover process may be unnecessary.

6) But maybe you should pay all the tax up front…

As odd as this may seem, at times you may want to transfer the property to the company and actually pay all the taxes related to this transfer! If the property will trigger a capital gain, essentially half the taxes are otherwise payable. What’s the advantage?

In selling the property to the company, the company must pay you for the property. Consider a property acquired initially for $100,000 that has accrued in value to $300,000. In transferring the property a capital gain of $200,000 would result and thus 50% would be taxable or $100,000. Assuming some rough numbers and a top tax bracket of roughly 50%, personal taxes of $50,000 would result. Now, the company would owe you $300,000. Thought of in another way, you would pay $50,000 on income of $300,000 which I suggest would be a very reasonable tax bracket for many investors. Perhaps you don’t have the ability to take this all at once, but it can wait! We can take it back over time. This strategy is even more effective where business owners draw their normal income from the company.

7) Keeping it personal

In some cases, you may decide to simply acquire future properties in a corporation and leave the existing personally owned properties as they are. We see this more frequently where owners are unconcerned of legal issues related to personal ownership. Alternatively, given the cost of transferring properties, the transfers of a handful of properties may be effectively scheduled over a few years or timed with the next refinancing/renewal of the property.

Transferring properties to the company can be a bit of a task, and create some additional costs that ideally could have been avoided initially. That said, our clients have many completely valid reasons for acquiring the property personally and then later transferring the real estate to a corporation. But, as you can see, this is not a DIY decision or project. Discuss with your team to come up with a plan that makes sense for you – not only today but in the future.


George E. Dube, CPA, CA

George E. Dube, CPA, CA
Real estate accountant, real estate investor, speaker, author
gdube@bdo.ca

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52 Responses

  1. Grace DeLavoye says:

    I already have a property Corp and a management Corp. I want to sell my only property in the Corp and am considering buying another property in my own name.
    Will this have any negative impact on the taxation of the management Corp. I am currently using the management Corp to pay my home office and general business expenses (and some property expenses) plus I use it to run a small sales business and invest in 2nd mortgages.

    • Real Estate Accountants says:

      First and foremost, please speak specifically with your advisor as they will know more of your complete situation. Our answer is based on very limited information and thus should not be relied upon, but merely providing some thoughts for consideration that may be applicable.

      While I’m not at all confident a future property should be acquired personally as compared to the company designated for this, given your other activities conducted through the management company, there is not likely a large negative implication. If it makes sense, property management fees can be charged to yourself personally to better justify the expenses related to the properties claimed through the property management company. Assuming the expenses are reasonable and relate to the property, this may make sense.

      I believe you need to talk with your advisor regarding the overall plan between personal and corporate activity, the flow of funds, who does what, etc. to ensure it all makes sense from a business perspective and is tax efficient.

      George Dube

  2. Ed Hazell says:

    Great article, thanks

  3. Martin says:

    Very informative.
    How about moving principal residence to corporate? Then rent from the corporate. Get appreciation without payment personal tax.

    • Real Estate Accountants says:

      While theoretically possible to move a principal residence to a corporation, it is rarely done. I think I have been involved with two such transactions over the last 20+ years. For the most part, people won’t complete the transfer as they value the principal residence exemption, which is unavailable to the corporation, more than other potential tax benefits. Further, there’s the question of what value did the shareholder receive for having a corporate owned asset made available to them. This is relatively subjective hence opening up an opportunity for further discussions with Revenue Canada, which most people would rather forgoe. It sounds like a great idea to start, but once you get into technicalities unfortunately not a prudent plan absent special considerations.

      Warm regards…

  4. Henry Verdoux says:

    Hi George,

    I just wondering how a foreigner non-resident in Canada could create a company and buy real estate in Canada?

    • Real Estate Accountants says:

      We have a number of non-resident clients who invest in Canadian real estate and they hold the property in different ways depending on their situation. As well there are many factors to consider, such as legal and financing, and country of residence. We have certainly had non-resident clients invest through Canadian corporations though. I would recommend speaking to an advisor to help determine what would be best for your non-resident situation.

  5. Kira says:

    Hello Ed,
    Husband daughter and I own two rental houses. Is it possible to create a corporation instead having them in our names? Can we create a corporation for existing owned real estate please.
    Thank you.

    • Real Estate Accountants says:

      Generally speaking, yes, this is doable. There are several exceptions – you want to make sure the property qualifies and other conditions are met. Whether it should or shouldn’t be done is a separate matter. There are pros and cons, particularly given the proposed tax changes announced on July 18 by the Federal Government.
      Clearly there are many non-tax reasons to make the transfer as well.

      Warm regards…

  6. Joon Pack says:

    Hi George,

    Great article! Wondering are there any regulations against selling personal property to your own corp? Say, I hold a personal property that has appreciated from $100,000 to $300,000 and by selling to my own corp no capital gain would incur (exempted) but my corp would have to pay land transfer tax. And since I won’t need to pay tax on that gain on the personal level, the corp can owe me that money for some time.. is that correct?

    • Real Estate Accountants says:

      Good afternoon Joon,
      Good question. This will be a longer answer, so I’m putting together a blog post for this question. I’ll link it back here when complete.

      Warm regards…

  7. Matt says:

    Hi George,
    My wife and I own three properties (none creating income) and we are about to venture into buying rental properties. We would like to sell a piece of land to help fund our rental property investment but do not want to trigger capital gains. Is it possible to incorporate, transfer the land to the corp, sell it and then buy a rental property immediately and not trigger gains? The company still has the same net value but has changed assets.
    Cheers.

    • Matt says:

      A follow up question. At what net income level do the tax benefits outweigh the management costs of a corporation? Tough one to answer precisely but an estimate?

      • Real Estate Accountants says:

        Good afternoon Matt,

        A general answer is easy. It’s the precise answer that is the challenge. There’s far more to consider in incorporating that just the net income. Beyond legal, financing, etc issues, consideration of the vendor’s income, current income, future expected income, family situation, family incomes and involvement, future investment and business plans, estate considerations, succession planning, etc. all play a role. The tax changes proposed on July 18 by the Federal Government will also have impact on the decision.

        I know many people like rules of thumb for incorporating, but those rules are generally misleading and dangerous.

        Warm regards…

    • Real Estate Accountants says:

      Good afternoon Matt,

      For the most part, you’re not allowed to exchange assets without incurring a tax bill for the same. As I understand your description of the proposed transaction, taxes would be incurred.

      Warm regards…

  8. Luke says:

    Hi George

    I own 8 rental properties plus my matrimonial home. The rental properties are all owned personally and are in my name only. The matrimonial home is owned jointly by my wife and I.

    The question I have is, should I be putting the rental properties into a corp? Would the transfers be subject to any land transfer taxes?

    My accountant is somewhat unsure as to what I should do. He says any future property acquisitions should be done in a corp name.

    Please advise,
    Thank you
    Luke

    • Real Estate Accountants says:

      There is quite a bit of information I would need to know before conclusively advising. That said, I would be surprised if you shouldn’t be in a corporation and probably should have been using a corporation/family trust for some time now. Again without knowing more details I wouldn’t be able to say definitively.

      If you are interested in talking further, happy to discuss.

      Warm regards…
      George Dube

  9. kristina says:

    Hello George,

    Great article!! Very helpful!

    I have a question which has been sort of difficult to answer, hopefully you can help me out:)
    We own 4 rental properties under my husbands and my name, we are thinking about incorporating and transferring these properties to the corporation that we both will own.
    My question is, if 2 of the property mortgages are due for renewal, 1 we would refinance as the penalty is only$300, and the 4th is a new variable rate mortgage, would we be responsible for the land transfer tax if we transfer these properties at the time of mortgage renewal?

    Thank you!

    • Real Estate Accountants says:

      Thank you!

      Frequently we understand that land transfer tax is typically applicable, particularly where there is an existing mortgage on the property. It is certainly a common question we see but must be reviewed by a lawyer familiar with land transfer taxes applicable to the particular province.

  10. Mark says:

    I already have capital in an existing incorporated company and I currently rent my principle residence. Can I purchase a property with the corporate funds and then rent it back to myself at fair market value ? The property asset would remain within the corporation and the “rent” would show as income to the corporation.

    • Real Estate Accountants says:

      The quick answer is yes it’s possible. But there are a variety of negative ramifications you are probably not going to be thrilled with.

      Warm regards…
      George Dube

  11. Ramesh Aroea says:

    Can I ‘transfer’ a personally owned real estate property to my corporation using Trusr Agreement to avoid paying land transfer taxes?

    Also how do we ‘price’ the property so that it is not questioned by CRA since it’s non-arm length transaction?

    • Real Estate Accountants says:

      Land transfer tax questions I will defer to the lawyers as this is their area of expertise. However, the majority of legal opinions I have seen provide that, unless the property was originally acquired in trust for the company, land transfer tax is applicable.

      Transfer values must be done at fair market value, beat evidenced by an arm’s length appraisal of the property. At a minimum, we typically recommend a realtor’s statement of opinion on the values based on comparables. This doesn’t mean that the CRA won’t question the numbers but that they provide support for your numbers. The “elected” value may be different than the fair market value but fair market value is still going to be required to complete the transaction.

      Warm regards…
      George

  12. Joseph says:

    My family owns several rental properties. Some in our personal names, and some in corporations. We have about 6 family members who work in the business on a full time basis and draw their sole income from the business (through dividends, salaries, contracts, etc). Currently, the CRA classifies our business as a passive real estate investment and we get taxed at the maximum rate (~46%).

    We are thinking of consolidating our real estate portfolio into 1 corporation and getting our real estate business classified as an active business (since we have 6 full time employees, which is an exception the CRA has for real estate), which would reduce our tax rate to ~14.5% with the small business deduction. The savings in tax (within just 1 year) would more than cover the land transfer tax required to transfer all properties to 1 active business corporation.

    My question is: will that work? Are there any other hurdles the CRA may raise when we’re trying to get classified as an active business?

    I know it’s generally not adviseable to hold all real estate in one corporation for legal liability purposes, but we’re going to be saving so much in tax that we can compensate for this with more and better insurance to cover us (and still come out ahead).

    • Real Estate Accountants says:

      Clearly there is a lot involved in the decision. It sounds like you have a fair grasp of the major concepts. I would direct your attention to the following for further consideration:

      First – you may find that land transfer tax is not applicable in moving properties/amalgamating/winding up companies depending on your province. This could further help you.
      Second – with the new and existing tax rules, you may quickly find your 14% may be more accurately around 27% depending on your province. This then needs to be contrasted with net taxes after refundable taxes of approximately 20%.
      Third – careful attention to the definition of “business” must be given as the interpretation could be far different than what you are probably thinking it is in Revenue Canada’s eyes.

      This is definitely a situation where you need professional tax advice.

      Warm regards…
      George

  13. Kumar says:

    Hi,

    I came across your blog and thought of getting your feedback.

    I am planning to buy a property that was initially bought by the two sellers (in partnership) in 2007 for 100k, and had it partially transferred to one of the sellers incorporation in 2017 for 50K.

    As a buyer, I would like to find out what should I look out for to ensure I would not end up in trouble at later times by either of the seller or the incorporation.

    Any suggestions are greatly appreciated.

    Thanks in advance!!!

    • Real Estate Accountants says:

      If you are looking to buy the real estate itself, regardless if personally or corporately owned, your issues are the traditional ones you would have with any property purchase. If however you are buying the shares of the company, and all or a portion of the real estate, there are a variety of due diligence steps that would typically take place with the assistance of accountants and lawyers.

      Warm regards…

      George

  14. Mike says:

    Hi interesting article. If one considers incorporating a non functional business for the purpose of buying a real estate property. When it’s time to sell, transfers the company shares to the buyer instead. Does this effectively avoid capital gains vs purchasing the property under personal?

    • Real Estate Accountants says:

      While we regularly see the shares of a corporation being sold, there would still be tax consequences for the sale of the shares themselves. This may or may not be beneficial to the vendor and/or purchaser. Various pros and cons exist but in many cases it is certainly worth looking at as an option.

      Warm regards…
      George

  15. Frank says:

    Over all do you think someone just starting out and wanting to get involved in the relistate market, are the pros and cons greater as pluses or are the pros and cons greater if not better doing it on A personal and or individual leavel ?

    • Real Estate Accountants says:

      The famous response is “It Depends!” the answer to this question is based on a variety of factors that we assess with our clients, including their future goals, their current situation, and so on. If interested, I suggest reading this article for some more insights: http://bdoreinvestor.ca/2018/04/12/incorporate-real-estate-business/

      For what it’s worth, the majority of times we do recommend using a corporation where somebody is going to be acquiring more than a couple of properties (of course dependent on their value and size). That said certainly some contrary examples exist even within this guidelines. It’s best to tailor something to your situation vs what’s appropriate for others. Normally after an hour meeting we can determine this with you to help you get the right answer for your situation.

      Warm regards…
      George

  16. Ariel says:

    Hi George, great article. The question I have is slightly different: a group of 5 friends and I are looking into buying a ski cabin for short term rental as well as our own use. Wondering if it makes more sense for us to incorporate and then buy the property as a corporation, or buy it with our 5 names on the Title.
    I guess the general question is, what are the benefits of buying a property as a corporation vs personally?
    If you’d rather point me to some resources online that’s fine, too!

    Thanks

  17. Peter says:

    Wondering if you could help in this project. This project is a land deal of about $1 mil to $1.1 mil and will take about $300,000 in infrastructure and work to see the value of the land double in a short time frame. I was thinking of getting one or two people to partner with me in this project, but its hard to find people with that amount of money.

    So I thought maybe best to set up a corporation and each person that invests $100,000 gets a vote. Investors with less than $100,000 would not have a vote. Maximum investment is $400,000 and 4 votes such that no one person would have control of the corporation.

    Is it best to set up a corporation versus an agreement between 10 people? What would be the share structure?
    Look forward to your reply!

    • Real Estate Accountants says:

      Thanks for the question Peter. There are a lot more opportunities and pitfalls in structuring these types of deals. Working with experienced advisors can help you sort through the choices that are available and implications of each. If you’d like to contact us, we’d be happy to help.
      Warm regards…
      George Dube

  18. Ricky says:

    I have a consulting corporation that owns a live-work condo that I operate the business from. I want to transfer the property to me and my wife to hold personally in the most tax efficient manner. I know there will be HST and possibly land transfer tax implications, but are there efficient ways for this to occur or can it only be done essentially as a real estate transaction between a corporation and an unrelated person?

    • Real Estate Accountants says:

      While not as tax efficient as moving from personal to corporate, there is planning available to make this perhaps more efficient that what would otherwise be. That said the planning won’t be for everybody.

      Warm regards…
      George

  19. Angela says:

    Great article. My husband purchased a property personally in his name (land value only). He also has a corporation (building/renovating). The corporation paid for the new build of the house and we are thinking of selling the land to the company, so that the company will own the property out right. We think it’s best this ways so that the company has the benefit of retaining the HST as well as a corporate asset to write off, which we need this year.
    My question is, if the corporation then decides to sell it to another corporation (holdco company), does that HST benefit get retained by his corporation that he was able to deduct?

    • Real Estate Accountants says:

      Hello Angela,
      I have read your request and am unsure what you mean by the HST benefit. As there can be many moving parts when dealing with real estate I would suggest we have a call to discuss your question. I can be reached at 519-622-7676 ex 1957.

      Scott Merry
      Partner, Indirect Tax

  20. Sasha says:

    Hello, I enjoyed reading your article.
    My husband and I have incorporated our business and had a cottage built by the business. We used the cottage for holidays for 1 year, but then moved overseas several years ago and can no longer keep it. We were able to rent the cottage once for a couple of weeks until we found out we could not rent it out as per the strata rules. We want to sell it and wonder if we have to charge or pay GST or HST???

    • Real Estate Accountants says:

      In order to answer this question I need to better understand what you mean by ” We used the cottage for holidays for 1 year” as this can have different interpretations.

      Generally speaking the sale of a cottage owned by a corporation and rented solely to a shareholder for his/her personal use would be exempt of GST/HST subject to the following condition being met:

      1. The corporation has not claimed input tax credits (ITCs) on any capital costs related to the cottage.

      If the renter of the cottage does not have exclusive rights to the use of the cottage or ITCs were claimed it is likely the cottage is subject to GS/HST.

      Regards,

      Scott Merry
      Indirect Tax Partner
      smerry@bdo.ca

  21. Mike John says:

    Hi I currently live and reside in Ontario . I am looking to purchase a property in Montreal. I am considering buying it through a registered corporation. If I register an Ontario corp can I purchase a property in Montreal ?

    • Real Estate Accountants says:

      While not a problem from a tax perspective in that we can “fix” the provincial situation, there can be legal issues requiring alternative or additional registrations. In confirming with Kyle Hampson, a partner with MillerThomson, he indicated that an Ontario Corp would require an extra provincial registration in Quebec to hold real property within that province. That registration needs to be renewed annually.

      Warm regards…
      George Dube

  22. Harry says:

    Enjoying this thread .

    My wife and I have invested in 2 pre-construction condos in Toronto. These are for investments and will be closing in couple of years. We plan to invest into 3 more investment properties in next 2-3 years. Our question is how should we structure it i.e buy under personal name or incorporate a company or create a trust structure to buy it?

  23. Lawrence says:

    I’m looking to rollover 4 properties into a corporation. I went to the city and got copies of the original purchase price and I have the depreciated value. I went to an appraiser to get the FMV but they asked me who to address the report to. They asked is it an accountant? Lawyer? Do I need to have it addressed to some profession in particular or would having it addressed to myself be good enough to do the rollover?

    • Real Estate Accountants says:

      My first caution is that rolling properties to a corporation is not what I’d call a do-it-yourself project. This can create a tax, mortgage and/or legal disaster in multiple ways.

      That said, going to the city for cost information indicates records have been lost, and you may be losing the benefit of closing costs, additions over the years etc. Perhaps not the end of the world, but unfortunate. Normally we would obtain the details from legal documentation and the prior tax returns, plus ideally we can reference our internal tracking if we have been working with someone on their tax returns prior to this.

      If going to an appraiser, the report can be addressed to yourself. Ultimately it is there to support the information that ideally the accountant and lawyer are using in putting together the election, tax and accounting adjustments and related documentation.

      Warm regards…
      George Dube

  24. MaryCatherine Lamond says:

    Hi
    We currently own our principle residence with no mortgage. We also own a rental house in a corporate name that we purchased as a student house for our son to live in while at university/mortgage on this rental is with a big bank. Will the traditional banks lend to a corporation for a second rental ? We are struggling to find a bank that understands our investment ideas with real estate.

    • Real Estate Accountants says:

      I won’t pretend to be a mortgage advisor (and I certainly recommend you speak with one who is experienced in these matters) but can comment from what I see with my portfolio and those of clients. While unquestionably more challenging now to get corporate funding for properties, it is very possible, although not always the way or at the same terms as we were accustomed to for smaller properties that don’t qualify as “commercial” for banking purposes. This applies to all of the big five banks when done correctly and in the right circumstances.

      In your case, I expect your challenge is magnified as you have a student property which creates alarm bells for most financial institutions from what I can see. In my own case, I was quite frustrated at having resistance to one of my properties which, based on I believe it’s postal code, was in an area with student properties and was effectively deemed to be a student property. The underwriter wouldn’t do the deal, at least yet, so alternative planning is needed or a different institution.

      Overall, I expect your biggest problem is talking to the right people – a quick inquiry with your experienced adviser can likely get you an appropriate introduction.

      Warm regards…
      George Dube

  25. Ian says:

    I have a rental that I purchased in 2012 and now I want to sell it to my incorporation. Can I sell it at the original purchased price?
    Do you know any legal advisors you would recommended in Ontario that can help with Rollover?

    • Real Estate Accountants says:

      Generally speaking you are able to transfer a property to your company for the original purchase price under section 85 of the Income Tax Act, less any capital cost allowance claimed. A sale of the property would typically be at fair market value which would typically trigger income taxes assuming that the property has increased in value (or capital cost allowance was claimed). There are a number of exceptions though to the section 85 election that you must ensure are not applicable, or to what degree they may be, just in case.

      Upon learning more about your situation, I would be very happy to make recommendations for you on the legal front.

      Warm regards…
      George Dube