Understanding differences between Real Estate Development and Real Estate Investment is key, according to chartered professional accountants in Vancouver
Vancouver, BC -- (ReleaseWire) -- 08/16/2019 --There's a lot of confusion around the most tax-efficient way to hold real estate in 2019. According to the chartered professional accountants at Mew + Company in Vancouver, misunderstanding the difference between Real Estate Development and Real Estate Investment is often the problem. For more, go to: https://www.mewco.ca/blog/vancouver-real-estate-investments-personal-or-corporate-ownership/
If a taxpayer is planning to buy a piece of land and build a new house or substantially renovate an existing one, this is real estate development. Real estate development is considered active business income (ABI). As such, if development is done in a CCPC, like all ABIs, up to the first $500K of profit each year would be taxed at the 11% corporate tax rate.
Real estate investment is much more common. This is where a taxpayer purchases a condo or a house and collects rental income from a third-party tenant. Profits from renting are not considered ABI, so net rental income is taxed as investment income.
If real estate investment is held in a CCPC, the corporate tax rate is a whopping 50.67%. However, 30.67% is a refundable tax upon the distribution of dividends, which makes the effective rate on net rental income 20%. Dividends must be paid out to the shareholder in order to get back the refundable tax at the corporate level. Then, personal taxes have to be paid on dividend distribution at 35.71%—the highest tax bracket. So, the overall tax rate is the 20% paid by the corporation and 35.71% paid on personal income, totalling 55.71%.
If rental property is held personally, the highest marginal tax rate is only 49.8%. An additional tax rate of 5.91% on absolute term or 11.87 % on relative term would have to be paid by holding the investments in the corporation. Professional fees will also be involved in accounting and reporting for a corporation. This is why many believe investment property is best held personally.
However, if profits from a CCPC are the main source of a taxpayer's income, it's likely that all free cash will be held as retained earnings. Shareholders generally extract just enough income to pay for living expenses. Remaining funds are left in the CCPC and subject to much lower corporate tax rates.
If a shareholder contemplating real estate investment decides to personally hold property, taxes are first applied on the draws, which is not tax efficient. If the CCPC buys the investment directly, there is no tax consequence on the purchase.
There are two options to consider:
Using the large pool of corporate funds which are taxed only at 11% (or 27% on amounts above the SBD limit) and buying an investment property with no other immediate tax cost (there is an additional 5.91% absolute tax cost on the investment income every year).
Paying 39.73% (assuming highest personal tax bracket) upfront on dividend draws to hold the investment personally. Any future cash shortfalls would have to be extracted from the CCPC as dividends first.
Ultimately, the answer depends on an individual's situation. If the taxpayer earns most of their income through employment, it makes sense to hold the investment property personally. However, if the bulk of income is earned through a CCPC, then holding the investment property in the CCPC makes more sense.
As a team of chartered professional accountants in Vancouver, Mew + Company specializes in trust & estate planning services. Learn more about corporate tax planning and how to streamline taxation on property holdings by calling 604-688-9198.
About Mew + Company, Vancouver
Mew + Company, Vancouver, is an ideal solution to the taxation problem. With a simple philosophy of building long-lasting customer relationships, the company has been serving corporate clients in a variety of fields—including restaurants, real estate, retail, and the service industry. Investing in their specialist services will undoubtedly be fruitful for all kinds of clients.
To learn more about Mew + Company and discuss their services, log on to https://mewco.ca/
Lilly Woo, CPA, CA, CFE, CFP
Mew + Company Chartered Professional Accountants
604 688 9198
Company Website: https://www.mewco.ca