A client is buying a building for office use, but plans on leasing out most of the units after acquisition. My only concern is the rental income will become passive income. The plan was to use a holdco to buy the property, but if they use the opco to buy it, the 5 employees rule likely kick in, so no passive income issue?
I wouldn’t be too sure.
125(7) specified investment business, carried on by a corporation in a taxation year, means a business (other than a business carried on by a credit union or a business of leasing property other than real or immovable property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but, except where the corporation was a prescribed labour-sponsored venture capital corporation at any time in the year, does not include a business carried on by the corporation in the year where
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided; (entreprise de placement déterminée)
I could see that CRA reads “where the corporation employs in the business throughout the year more than 5 full-time employees” as relating to the rental business.
So even though the operating company might have more than 5 employees, if they are not involved in the rental business, they wouldn’t count (if my interpretation is correct)
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Also, putting this property in the Opco may put the shares of Opco offside for the capital gains deduction.
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you know, sometimes, client think they are being creative when we tell them things like that. They didn’t know CRA knows all the creativity. I told him exactly those, and that’s when he suggested using the opco, and I was like, unless the rental income is high enough to sustain 5 full time employees, it’s likely going to be challenge. Capital gain exemption, most small businesses, are having a really difficult time selling shares, so most of them are not even concerned about that, worse case, do few purification before selling. But I agree, most likely it won’t be the solution if we do it properly
Putting a rental in a corp may only make things worse. I’ve had clients with multiple properties, some owned personally and some in a corp. unless the corp owns multiple properties requiring a staff, you’ll never get one with any employees, let alone five. So, it’s passive income taxed at the top rates. One client made a profit on the personally owned properties and lost on those in the corp. The losses in the corp will likely never be recovered. Had all properties been owned personally, the loss properties would have helped reduce his personal tax bill. Too bad, you lose. Now, if the holdco gets substantially all its rental income from an associated active CCPC, the holdco’s income is also considered active income, thus getting the better tax rates.
I don’t know about the rest of you, but I have no clients retiring and living off the rental income. Buildings are often refinanced to do major repairs, or just pay the bills, so no equity is ever built up. There are always those who buy smart, charge enough to cover expenses and make a profit, and have decent long-term tenants. I know they exist. I’ve seen one.
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couldn’t agree more. I have seen many different so call tax planning, but at the end, it’s a temporary differences, that will eventually even itself out.
if and when you pay out dividends, the effective corporate tax rate on the income (in Ontario) is 19.5%
I don’t think this should be a tax driven analysis…it only matters if you profit. I agree with upstream analysis that you must have 5+ employees in the rental business to avoid the SIB designation