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Real Estate Developer

A couple own a few acres of land they want to develop and sell individually. They want to create a corporation and transfer the property to the corporation. Inventory of real property is not allowed under s85. They don’t want to be tax personally on the sale of the properties.

What do you suggest?

I think that right now it is personal use property. It will become land inventory after the transfer. However, I am not sure that personal use property can transferred with a S85.

John

Best way I can think of is to handle this as a sale to the corporation. It will have to be done at FMV and will likely attract capital gains as a result. It may be possible to utilize some of the personal exemption to offset the tax, though.

All costs incurred to subdivide the property would attach directly to the land inventory in the company. As would any utility services to the lots.

OOOOPS… forgot to mention the company would have to do a self-assessment for GST/HST on the purchase

Provided the “few acres of land” are not considered to be “real estate inventory” of the couple who seeks to transfer the property it seems the land would be considered capital property. Capital property is eligible to be transferred to a corporation under the provisions of section 85. Just because the property is going to become inventory to the corporation does not make it inventory of the current owner(s).

Facts surrounding their individual situation would determine whether the “few acres” is considered to be “real estate inventory” or a “capital property” of the couple. Factors such as whether they are already in the business of developing real estate, in the construction business, or if they have a history of buying and selling real estate would influence whether the real estate is inventory or capital property of the current owners. Once again, if it is capital property, then section 85 should be available.

Choosing to developing the property through a corporation might pose some advantages and mitigate some of the liability and risk associated with development. If income tax is an issue, as it seems to be, you should also determine ahead of time how the income will be classified in the hands of the corporation (ie Active Business Income, Specified Investment Income), which also depends on facts of the business.

Some links…

10 key lessons for real estate investors on capital vs income when arguing with the CRA: From intention to integrity.

Posted on: March 26th, 2016 by Real Estate Accountants

Should I Incorporate My Real Estate Business? 5 factors -

Posted on: April 12th, 2018 by Real Estate Accountants

Tax effects of buying real estate to sell for a profit

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/real-estate-sector/effects-buying-real-estate-sell-for-profit.html

Buying and Selling Real Estate? Consider These tax Implications First.

http://www.homebuildercanada.com/2805_comm-cent.htm

Thanks snowplowguy,

The couple are not Real Estate investors or in the business of selling property. They are getting ready to retire and thought they should roll the property into a corporation to deferred taxes.

It they were to split the acres, 24 lots will be available for sale. The city contacted them to purchased 2 of the lots for a water main project. However, nothing is finalized.

Eventually, sometime after retirement they will like to subdivide the lots and sell in the future.

I suppose, it all bowls down to the future intention of the couple.

Thank you all who have responded!

The couple may have three benefits and three costs in moving raw land to corporation.

Four possible benefits:

  • Liability protection,
  • Flexibility in period in which they pay themselves personally,
  • Flexibility in estate planning,
  • Possibly lower overall taxes due.

Three costs:

  • Incur capital gains as a date of transfer from deemed disposition at fair market value;
  • Cost of incorporation, corporate record book maintenance, and annual returns;
  • Bookkeeping, Financial Statement Preparation, and Tax Return preparation and filing fees.

Additional Considerations

  • Mortgage Renewal,
  • Bank Loans,
  • Financial and Estate Planning.

You may also want to give consideration to land transfer tax where the corporation is acquiring title to the land. Depending on where the land is, land transfer tax may apply. Where it does, you can look to see if there is an exemption and all the necessary steps to effect the exemption. Notwithstanding the s.85, that land transfer tax has the potential to add a hefty tax bill to the corporation.