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How to Reduce Tax Payments on Your Rental Properties Through a Holding Company

Key takeaways:

  • Tax payments can create a large dent in cash flow from your rental properties and affect your available capital for reinvestment
  • Rental property owners in Canada can consider setting up a holding company for their rental income to save on tax
  • Holding companies offer asset protection, tax savings, and lifetime capital gains exemption opportunities which reduce the amount of tax paid
  • Speak to your tax accountant about specific tax savings opportunities on rental properties in your province

Rental properties for real estate investments have become increasingly popular and can be very rewarding. But income aside, investing in real estate can impose hidden tax implications that, without the right knowledge or a team of advisors, can add up and significantly impact your returns.

Let’s face it – no one wants to pay taxes. While we can’t avoid taxes altogether, we can make business decisions that can largely reduce our overall tax payments. One method of reducing tax payments is by setting up the business structure for your rental properties as a holding company.

In this article, we’ll go over how a holding company can be used to reduce tax payments for investors with multiple rental properties.

What is a holding company?

A holding company is an incorporated company that is primarily used for holding your real estate investments. As a real estate investor, you can choose to hold your investments personally or through a holding company.

When rental properties are held personally, the rent is reported right away on the investors personal tax return and can be subject to income taxes, which can take away from returns and reinvestment opportunities. In contrast, when rental properties are held in a corporation, they may offer significant tax savings through tax deferral and income splitting opportunities, as well as providing asset protection.

Tax Savings and Deferral

One major advantage of having your rental properties held by a corporation can be around the tax savings and tax deferrals. You can transfer the returns on your rental property to a holding company through tax-free dividends. This also provides greater opportunity for tax deferral because when you transfer the returns from your rental property into a holding company, you may be able to defer your taxes until they are taken out of the holding company, which could be at a later point in time when your overall income is lower, thereby putting you in a lower tax bracket.

The specifics on how much tax you can save and defer will depend on a number of criteria including the type of property, income generated, and overall deductible expenses. To find out the exact savings you’re eligible for, it’s best to speak to your accountant or financial advisor.

Lifetime Capital Gains Exemption

Holding companies can also be a wise way to structure the returns from your rental properties. Since real estate returns are classified as capital gains, rather than business or personal income, they are subject to a capital gains tax, which can be upwards of 50%.

Imagine losing 50% of your returns, or… let’s not. Let’s instead turn our attention to the Lifetime Capital Gains Exemption (LCGE).

The LCGE allows some real estate investors (and other small business owners) to avoid paying taxes on capital gains income up to a certain amount when they sell shares in their business. Normally, half of that return would be taxed (at a capital gains tax rate of 50%), but with the LCGE, business owners are allowed to subtract that amount from overall profits.

Since there are specific criteria that need to be met to claim the LCGE, a holding company can help business owners meet these criteria. With an exemption limit of over $800,000 in gross capital gains, the LCGE allows over $400,000 of taxable capital gains (at a 50% capital gains tax rate) to be subtracted from overall profits of your holding company.

Eligibility for the LCGE can be a little tricky, so it’s best to speak to a qualified accountant to find out how you best qualify.

Remember… being strategic about your business decisions can save you a lot of money. Consult the experts and get ahead.

As with all business decisions, it’s important to do your research and consult with the experts. Getting an accountant or tax advisor to help you figure out the best approach for your financial plan can be a key step in achieving your real estate investment goals.

FShad CPA Professional Corporation can help you identify ways to achieve tax savings and deferrals. We’ll help you navigate through the many factors that affect your tax payments, including the province you live in, your personal income, and whether or not it’s beneficial for you to incorporate your rental properties.

Book a consultation today and get started with our team of expert accountants!

FShad CPA Professional Corporation

Call us at +1 (844) 655-6487 or send us an email to info@shadcpa.ca

Woodbridge, ON