Hi everyone, I have a question about mobile home park owned by holdco., my understanding is that the rental income earned by a corporation should be passive income and be taxed at 50%, the only exception is that when the property is rented to the OpCo that carries an Active Business and deducts the rent (at market value) paid to the HoldCo. In this case, the rental income will be deemed as ABI in holdco.
However, this is the third client where I found their previous T2 filed rental income as ABI & claimed small business deduction…
Am I missing something here? Or the previous year’s filing was actually incorrect? I also have another client got a letter from CRA asking to prove her income is indeed ABI, so I think CRA also looks into it as well…
I’m just as confused as @Nezzer reading this… but to clarify
Holdco owns a mobile home and rents out to an Opco.
Holdco collects rental income from Opco.
Firstly, we can disregard your comment mentioning a 50% tax rate on passive income. Passive income is taxed in a corporation at the general corporate rate of approx. 38 1/3 %
Can you specify if they own the entire park? As in there’s an entire landscape in this holdco… or are we talking about a trailer home here or something along those lines … ?
It would appear (most likely), that prior years T2 was filed incorrectly. You’d be surprised how many preparers don’t know the first thing with regards to passive income rules… This should all really be going on your Schedule 7R, depending on if your answer is yes to the 5 or more employees question above.
The HoldCo owns an OpCo which main activity is rental, the rental income goes straight to HoldCo, they don’t have any employees, just some sub-contracting expenses.
Sorry for the confusion (as I am also confused by the previous T2 haha).
HoldCo owns OpCo which owns a mobile home park, the rent from individuals and expenses go to HoldCo directly.
No, OpCo didn’t pay any rent to HoldCo.
We are in BC, so federal rate of 38 1/3% + 12% provincial rate is where passive income gets taxed at 50%. They don’t meet the 5 full time employee tests as they don’t have anyone on payroll, just some sub-contracting expenses for repair and maintenance.
You are correct. However, you need to also factor the ART component (10 2/3), and accruals for recoverable RDTOH balances. Remember that the whole concept behind taxation at the general rate is to discourage passive tax sheltering through the corporate structure, not to eliminate tax integration. Always assume it will be recovered.
Hence this situation is actually a good example of the effectiveness of the general rate… whereby the OPCO would report, for tax purposes, the rental income in accordance to the passive income provisions on it’s T2, and thereby kick that rental income up into the HOLDCO, thereby recovering it’s RDTOH and inevitably pooling it in the Holdco. So the OPCO is in fact subjected to an approx. 38% general rate in this example, not 50%.
I should add that you are correct, the upper limit threshold in BC actually exceeds 50% (about 52% give or take), until it is inevitably recovered.
As noted by @Deepinthemoneycall , if OpCo owns the park, then it “owns” the rental income. If OpCo passes that money on to HoldCo, it must either be an inter-corporate dividend or an inter-corporate loan (i.e. Due to/from…)
Since OpCo’s entire revenue is passive income (i.e. rent), I wouldn’t really call it an “OpCo”. In my mind, it’s more like HoldCo1 owns shares of HoldCo2 which owns real property.