structuring property purchases
Purchases may be structured in several ways. Each method has a different effect on taxation of the purchaser, so accounting advice is helpful in determining which method is best for the purchaser.
PURCHASE THROUGH A CORPORATION
Corporate versus personal purchase is usually a tax driven
question, so accounting advice is very important. The purchaser must consider the drawbacks to corporate
purchase, including the following:
- Depending on the marginal tax rate of an individual, the tax rate on income derived from property may be higher for a corporation.
The capital gains tax rate of a corporation may be higher than that of an individual.
- Incorporating a company for the purposes of purchases property will cost approximately $1,000 plus additional costs, including corporate records maintenance and accounting costs.
- Incorporating a British Columbia company requires that there be a majority of directors resident in Canada and at least one director resident in British Columbia.
- If the corporation is not a British Columbia Corporation, a mortgage lender may require that the company be registered in British Columbia, which will incur legal expenses as set out above.
- If a corporation is not required to register provincially in British Columbia before completing a transaction, a Certificate of Good Standing will be required from the incorporating jurisdiction, along with an opinion letter from a solicitor in the incorporating jurisdiction, in order to get mortgage financing in British Columbia.
- A corporation which purchases property must be maintained as long as the property is owned by the corporation.
- Even though the property will be owned by a company, the mortgage lender will generally require personal guarantees from the principals of the corporation.
- If there are losses from the property, those losses cannot offset personal income tax.
Some of the advantages of purchase through a corporation include:
- If the principals of the company die, there is no change of ownership of the property, which means that no probate fees will be incurred on the property, only on the change in ownership of the shares.
- If the shares of the company are held outside of British Columbia they will be exempt from the probate fees imposed in conjunction with a change of ownership of the shares.
- If the company’s only asset is the property, sale of the property may be effected through sale of the shares of the company, avoiding payment of the Property Transfer Tax and Goods and Services Tax.
LIMITED LIABILITY CORPORATIONS
In order to register a property in the name of a limited liability corporation (LLC) without extra provincial registration of the LLC, the Land Title office will need a copy of the constating documents of the company showing that the LLC is empowered to hold real estate. If the LLC is not empowered to hold real estate it may be possible to change the LLC constating documents to allow it to do so.
BUYING IN THE NAME OF A TRUST
- Buying in the name of a trust (frequently a family trust) avoids payment of probate or succession fees upon the death of the owner of the property.
- If the purchase is going to be made in the name of the trust, the Land Title Office will require that the original trust document be filed with the Land Title Office. This makes the trust document available to the public, giving out considerable information about the beneficiaries and assets of the trust.
- Instead of buying through a trust to avoid probate and succession fees, the purchaser may want to consider holding the property in joint tenancy. This means that more than one person’s name is on the title, and when one title-holder dies, the title passes automatically to the other joint tenant.
- If mortgage financing is necessary, purchasing in the name of a trust may become more complex.
- The mortgage institution may not be willing to lend to a trust, and a solicitor’s opinion letter as to the trust’s ability to enter into mortgage agreements may be necessary.