One question I get is “should I incorporate”. Well if it’s about incorporating a rental property business, the answer is almost always no.
Although the small business corporation tax rate for active business income is 13.5%, for rental property it’s 50%. That’s usually higher than your personal tax rate. The fundamentals point to you paying more money in tax. Overall, there are a number of factors you need to examine and bring your accountant into the discussion. One aspect is if your rental is attached, or part of, your primary residence. If it is, the answer is still ‘no’ because by incorporating you lose your principal residence exemption on your property taxes. Additionally, with this you lose the ability to sell your home without paying capital gains. Sounds expensive? Because it is.
Another factor that leads clients to want to incorporate a rental is for the limited liability protection. Ok, there is a case here for something positive. Then again, often you can replace this protection with liability insurance which will overall cost you much less.
Last factor to consider, tax benefits of owning a rental within a corporation. Truth is, there aren’t many and as stated above, can result in being taxed more than if you kept the rental on your personal tax filing. There a few rare scenarios where this may not be the case, for instance if you owned multiple rentals, had multiple full time employees, and paid yourself a dividend. This is absolutely a conversation to have with your accountant before making a move.
Last question, “what if I’m a Sole Proprietor?”. You can deduct rental losses against other income, including employment income. Though to look at these scenarios in detail, including your business plans and tax options, let’s connect.