Written by: Suzanne Cody, CPA, CGA, Senior Partner
If you are planning to delve into real estate as a source of income, there’s a lot of decisions you will need to make. One very common one is how to structure the ownership of the property. Two of the most common structures are personal and corporate. There are others, but they will not be discussed in this article.
The most simple ownership structure is to own the property personally. Any income earned from the property is reported directly on the owner’s personal income tax return. This minimizes government reporting costs as compared to those of a corporation.
A corporation is a separate legal entity and can be thought of as a separate person responsible for its own debts, obligations and, actions. Any income earned from a property owned by a corporation will be taxed within the corporation and can be paid out to shareholders as dividends. It is necessary for the corporation to file its own income tax return annually.
So that there is no advantage to earning income within either structure, the Federal Government has an integrated approach to its taxation. This means that regardless of whether the income is earned personally or corporately, the taxes paid should be the same. The result is that depending on personal circumstances, there may still be a small tax savings to owning the property personally.
Generally, it is more economic to structure the ownership personally when there is a single owner and the properties are small rental properties because of the additional reporting costs associated with a corporation. When there are multiple owners and large properties involved, it may make more sense to form a corporate ownership structure to create flexibility for income splitting and estate planning.
You should seek professional advice from your accountant surrounding your own specific circumstances.