Real Estate Talk:
Income Property /12
The tax implications and other advantages of purchasing income property within a corporation
By Joseph Marovitch
For several years I have worked with investors purchasing income property of six units (apartments) or more. Seasoned investors are aware of the risks and advantages of owning residential income property and are almost always incorporated.
Many new investors are motivated by the idea of owning income property to create a steady flow of income. However, there are other issues to consider when purchasing income property. Landlords are responsible for the tenants in the building and anything the landlord included in the lease such as heating, appliances, common area maintenance, common area liability insurance and more.
Seasoned investors are aware of the risks and advantages of owning residential income property and are almost always incorporated.
- What happens if a plumber on their way to perform a repair in a unit falls down the stairs in the building and breaks a leg?
- What happens if a section of the roof collapses or a fire breaks out?
- What happens if the heat suddenly turns off in the building, in minus 40-degree weather, in mid-winter and the tenants freeze?
For these reasons and more, it is paramount to incorporate before purchasing income property. There are four types of incorporation:
- Sole proprietorship
- The corporation
- The corporative
To purchase and manage residential income property, the type required is the corporation. Corporations are responsible for their actions, debts and taxes, much like people.
- Purchasing property within a corporation allows limited liability on the part of the owner. Should a mishap occur within the property and there is a legal implication, the corporation is responsible, not the owner unless the owner committed fraud.
- All purchases for the corporation are tax-deductible, such as services, supplies and materials for the property.
- When a corporation purchases an income property from an individual, the corporation must pay taxes on the purchase, though they can be recovered as a deduction later. When a corporation purchases an income property from another corporation, the taxes can be cancelled out with an FP2044-V tax form completed by the notary or lawyer.
- Income from the corporation can be paid out to the owner as a salary or a dividend at a lower tax rate.
The disadvantages of incorporating are ongoing paperwork and filing of an annual business tax return, which should be performed by an accountant. Another disadvantage is corporation set up fees can be high, though there are options.
‘To purchase and manage residential income property, the type required is the corporation. Corporations are responsible for their actions, debts and taxes, much like people.’
Set up fees for incorporation
Set up fees for incorporation vary depending on the route to incorporate chosen. In many cases, investors will incorporate using the services of a real estate lawyer and the fees will vary from $900 to $2500.
Incorporation in Quebec can also be performed on-line. One site offers legal incorporation in Quebec at a fee of $396 plus tax including the set-up fee and provision of a GST and QST number, which is required to collect and pay taxes.
For further questions on incorporation, the process to sell income property or to purchase, feel free to contact me.
Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.
Next article: The purchase process in the new normal
State of the market
The market is tight with few properties for sale and buyers searching high and low through a tense atmosphere of apprehension. Many buyers searching for a three-bedroom home have limited options. The following numbers indicate areas and how many three bedrooms are available: CSL-11, DDO-15, Hampstead-3, Mont-Royal-6, NDG-13, CDN-4, Westmount-13. Buyers for these properties are serious, negotiation is quick and short.
‘The market is tight with few properties for sale and buyers searching high and low through a tense atmosphere of apprehension.’
The pandemic appears to be getting worse before getting better. According to a Gazette article of December 1, hospitals are reaching capacity with COVID cases rising in Quebec. We all must continue social distancing, which is especially difficult during the holidays in a time when families have not been together in months.
The bright side is that demand to buy and sell is steadily growing the longer the pandemic goes on. A vaccine is on the way. In a few months, most are expected to be vaccinated following which, within the year or more, herd immunity will take effect.
Once the situation is under control, we should see a booming real estate market.
Have a great week and stay safe!
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Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible for, Joseph applies this to his present real estate broker career. Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or firstname.lastname@example.org