Dan from Toronto wrote to ask:
I noticed you’ve purchased an investment property that you rent out. I’ve recently purchased a new home, re-financing my existing condominium to help pay the downpayment on the new home, and also renting out the condo. The rental income from the condominium covers quite evenly the operating cost of the condo (essentially – it carries itself, which was my goal from outset).Now in speaking to an accountant, he’s telling me I should NOT have the condo in my name, that I should either incorporate, and transfer the unit to the corp (thereby resulting in Land Transfer tax), or transfer it to my spouse. Others are telling me the accountant is nuts, and that I’m fine leaving it my name and simply claiming the rental income as just that, rental income, on my tax return, and write off the interest expense as well.
Wanted to quickly ping you to determine whether you have incorporated or have all your investment property in your name? ie: rent cheques go to your name? or 123456 Ontario Ltd. etc. The accountant says that since I re-financed my principal residence and put that money into my new residence, that this is a bad thing. Others say hogwash to that! 🙂 Not sure who to believe at this point, but wanted to hear your take.
I have a condo I rent out (which is in my name, NOT in a corporation) and I’m a silent partner in owning a building (which IS a corporation, which I own 50% of).
Whether it would be worth putting the condo in a corporation or not would depend on your networth, your marginal tax rate, your risk threshold and how much income the condo is making. To get the taxes done for a corporation costs about $1K / year, so that’s going to come out of your pocket if it’s breaking even right now. Corporations are taxed more favorably, so the income would be taxed at the corp rate (25%) if you incorporated, or at your marginal tax rate if you didn’t.
Assuming you have a marginal tax rate of 40%, it would make sense to incorporate if the condo made more then $6,667 PROFIT / year (since you’d have a tax savings of 15% from incorporating, but would have a fixed cost of $1000 for having the taxes done). Since your current profit is $0, I’d be tempted to leave it in your own name. The other advantage of incorporating is to shield yourself from liability. Say your tenant tripped, broke his back and sued you for 1.5 million. If you actually have 1.5 million, you could lose everything (and it might be worth $1K / year to avoid this). Incorporating would make the rental unit a separate legal entity, and in a worst case scenario your loses SHOULD be restricted to the condo itself. I say should because its possible to “pierce the corporate veil” and make the owner liable (I have no idea how this works, just that its possible). Its also possible to get insurance as a private owner to protect against things like this.
The fact that your accountant is suggesting you transfer it to a corporation OR your spouse sounds like he’s thinking that it’s better to declare the income under someone who is earning at a lower marginal rate then you are, but it’s weird since the condo is breaking even (there isn’t much to declare).
I’d tend to side with your friends and say your accountant seems to be giving strange advice. I’d try to get a clarification from him, and if he can’t explain his thinking to you, perhaps consider finding a new accountant (I’ve used 2 accountants and was dissatisfied with both of them). Telly makes a pretty good argument that you’re best figuring out your own taxes, and just going to accountants to get specific questions answered.
Remember that the PRINCIPAL portion of the mortgage ISN’T deductible (you’ll pay tax on this at your marginal rate, as if its income), so if a reasonably large portion of the mortgage payments are going to the principle (i.e. if this is approaching $7k / year) then it would make sense to get it in someone else’s name (as your accountant suggests). It would also mean that you’re doing far better than “breaking even” (which would be a good thing 😉 ). When you pay down the principal, you put equity into the property, which is almost as good as money in the bank (and is taxed accordingly).
The re-financing to buy your new home MAY have caused problems with the rental (when you re-financed it to take money out, the interest on the money you withdrew is no longer tax deductible since you’re using it for personal reasons – buying a house for you to live in – and not for investment purposes). Who’s name the condo is in wouldn’t affect this though (unless the view was that you could make it deductible again by selling it to your spouse or your corporation).
Your accountant MIGHT be suggesting this because he wants to earn the $$$ for setting up the corporation and for doing its taxes each year (which would motivate me to find a new accountant, you don’t need people to make bad recommendations for you to generate fees for themselves).
Dan responded and said:
My lawyer gave me very similar advice to yours, his words to me were “I don’t see the benefit of incorporation for you, since you would reduce your income on the condo to zero in any event by prepaying your mortgage, thereby eliminating tax liability whether the condo is owned by you or a corporation.”
I think based on the advice I’ve received from yourself and numerous others, I’m better off doing my own taxes next year.
We covered a lot of ground on this topic, and I’m certainly not up on all the relevant laws (tax and corporate). If anyone has more information (or knows that something I wrote is incorrect), please post a comment!