Buying Real Estate through a Corporation

When buying real estate, a person may consider purchasing property through a corporation. Corporate purchase transactions can be complex, so this article will highlight a few key considerations. Keep in mind that all corporations may not be able to purchase property, so consider the limitations of a corporation’s articles of incorporation, bylaws, applicable legislation, and shareholder agreements. Before committing to buying real estate through a corporation, it’s also important to consult tax and legal professionals to help navigate the complexities of doing so.

Corporations as separate legal entities

Corporations are considered “legal persons” and under the Business Corporations Act, a corporation “has the capacity and the rights, powers and privileges of an individual of full capacity.”[1] A corporation acts as a natural person, much like an individual does. Accordingly, a corporation can own real estate, just like an individual does.

Why purchase property through a corporation?

(1) Limiting personal liability

Purchasing real estate through a corporation means the corporation will be registered with the Land Titles Office as the legal owner of the property and all of the benefits and risks of the property will fall on the corporation. Doing this separates corporate assets from personal assets, which limits the potential for liabilities at the property from being realizable against an individual’s personal assets, and similarly insulates the property from an individual’s personal liabilities.

(2) Structuring ownership by multiple owners

If multiple people are buying a property together as an investment, it can be easier to structure ownership through a corporation than through a single agreement. Owning through a corporation can mean flexibility on if and when the owners recognize income personally. If owning directly in personal names, there is no flexibility as to if and when the owners receive income from the property.

(3) Tax benefits

If a corporation has several real estate properties that earn profit or rental income, it may be advantageous to purchase property through a corporation. When the profit or rental income is taxed, the corporate tax rate may be lower than an individual’s personal tax rate. However, this is not always the case which is why obtaining tax advice is so important.

Corporations can offset income and profit by deducting expenses related to maintaining the properties, resulting in lower taxes payable than if those expenses were not deducted. Additionally, corporations carry forward losses at the property and claim them for up to three years in the future in order to reduce taxes payable in the year those losses are applied.

A corporation often can deduct part of the property’s value by claiming a depreciation expense. A depreciation expense is when a fixed asset loses value over its useful life. A depreciating expense allows the corporation to deduct the expense from the rental income and pay lower taxes.

Keep in mind that corporations do not qualify for the principal residence exemption to payment of capital gains tax, even if someone is living in the property for the majority of the time. However, if a corporation pays capital gains taxes, it often leaves an opportunity for the shareholders to withdraw some of the net funds in the corporation without paying any tax.  

These are all examples of potential benefits of holding real estate in a corporation, but they do not always apply. It is important to consult an accountant to see if the tax advantages outweigh the cost when deciding to purchase property through a corporation.

(4) Succession planning

Buying property through a corporation can allow the corporation’s owner to, prior to or upon death, transfer shares in the corporation to an heir or spouse without having the ownership of the property itself change hands. This can have the effect of bypassing the court process when the individual dies, which avoids probate fees. Normally, when an individual dies, their estate must pay a ‘probate fee’ to the government based on the fair market value of the assets held. However, there are some strategies surrounding ownership of a corporation that can reduce or avoid the application of those probate fees. Probate fees of an estate valued between $25,000 and $50,000 are charged 0.6% and estates valued over $50,000 pay a fee of 1.4%.

(5) Flexibility in Future Transfers of the Property

At the time of writing this article, property transfer tax is assessed on a purchase of real estate at the time title to the property is transferred. The administrative framework of these laws is designed to simplify administration of the tax by focusing on clear and registrable events. However, property transfer tax laws were also written such that if a corporation held real estate, and a purchaser acquired the shares in the corporation instead of buying the real estate itself, no property transfer tax would apply. This can save a purchaser tens of thousands of dollars. Therefore, ownership through a corporation can provide the option of a tax-saving transaction structure. However, this usually only makes sense as part of a larger plan for development because the legal and accounting cost of those structures can be more costly, and also results in the owner not being able to use the principal residence exemption to capital gains tax when the property is sold. Therefore, the option of acquiring the corporation is rarely appropriate for an individual buying a condo or single-family home where the buyer intends to occupy it as their principal residence.

(6) Limited Privacy

Owning real estate through a corporation can provide a layer of anonymity because the owner on title to the property will show as the corporation, and not the individual(s) behind the corporation. That said, the Land Ownership Transparency Registry discloses publicly the names of any individual who controls 10% or more of the shares or voting shares in a corporation, and the corporate registry names publicly who the directors of a corporation are, so the privacy of corporate ownership can easily be circumvented by a person searching diligently for the ultimate beneficiaries or controlling minds.

Conclusion

Buying property through corporations can be complex because there are numerous factors to account for on a case-by-case basis. Consider if this strategy is right for you by consulting legal and accounting professionals.

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[1] https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/02057_02