Rental Property in a Corporation in Canada: Worth It?

Should I hold my rental property in a corporation in Canada?

A corporation changes who pays tax on the rent and when, not which expenses count. Rent earned inside a Canadian corporation is generally investment income (often called passive income). It is taxed in the corporation without the small business rate, part of that tax is refunded when the corporation pays taxable dividends, and you pay personal tax on those dividends. Held in your own name, the rent is added to your income (CRA: Rental income).

This page assumes a Canadian-controlled private corporation (CCPC), meaning a private Canadian corporation not controlled by non-residents or public companies, and property in Canada.

A case is not simple when you already own an operating company, when the properties are already in your name, when you need the rent to live on, when a lender sets the terms, or when a sale is planned. Gather the property list with purchase dates and costs, mortgage statements and lender terms, rent and expense history, the T2 returns of any company you already own, and how much you need to take out each year. In any of these cases, have the personal and corporate numbers compared before you buy, move properties in or sign a lender's terms.

A corporation can be worth comparing when most of the income will stay invested, when your operating company will pay the rent, or when a lender will lend only to a corporation. Compare it with reporting the rent personally first.

Does a corporation give me more deductions for a rental?

Not for the rental itself. A person and a corporation follow the same rule: no deduction for an expense unless it was made to earn the income, and none for a capital outlay except as the Act allows, which for a building means CCA (Income Tax Act, section 18). The CRA draws the same line between current and capital costs for rentals (CRA: Rental income).

If the reason offered for a corporation is "to claim expenses", ask which expense and under which rule. The real differences are the tax rate on rent, the refund, the CCA loss rule below, financing and cost.

A corporation also cannot deduct your personal costs. When it pays them, the amount can be added to your income as a shareholder benefit (section 15). See personal expenses paid by a corporation.

How is rent taxed inside a corporation?

Rent is generally income from property (often called passive or investment income), not active business income, so a corporation does not get the small business rate on it. The Act excludes a "specified investment business", one whose principal purpose is income from property including rents, from "active business", and the small business deduction applies only to active business income (section 125).

The general tax reduction that brings the federal rate on other income down to 15% does not apply to a CCPC's investment income (section 123.4), and the federal small business rate of 9% is out of reach for rent unless an exception below applies. Add the federal and provincial parts to see the corporation's tax; the refundable share is covered under taking money out.

What if the corporation has more than five full-time employees?

Then the rental income is not income from a specified investment business (a business whose principal purpose is earning rent and other income from property), and it can be active business income that qualifies for the small business deduction. The exception applies when the corporation employs in the business, throughout the year, more than 5 full-time employees. It also applies when an associated corporation provides managerial, administrative, financial, maintenance or similar services in its own active business and the rental corporation could reasonably be expected to need that many full-time employees without them (section 125; CRA T2 guide, Chapter 4).

The test is about staffing in the rental business, not the number of properties. Whether a given arrangement meets it is a question of fact, so confirm it against payroll records before relying on it. If it applies, the rental income joins the corporation's active business income and shares the business limit with its associated corporations. Staff mean payroll: directors are jointly liable for amounts the corporation fails to withhold or remit, and an action against a director must start within two years after the person last ceased to be a director (section 227.1).

What if my own operating company pays the rent?

Rent that an associated corporation deducts from its Canadian active business income is generally treated as active business income of the corporation that owns the building, not investment income (section 129(6)). That keeps it out of the investment-income tax, the refund steps below and the passive-income cut to the business limit described further down. It gets the small business deduction only up to the part of the business limit that the operating company assigns to it, on a prescribed form filed with both companies' T2 returns, because rent from a company in which the rental company's owner also holds an interest is "specified corporate income", unless nearly all of the rental company's business income comes from arm's-length customers (section 125(3.2) and 125(7)). It does not qualify at all when the payer is not a CCPC or has made an election under section 256(2) (section 125(1)). The business limit is shared between the two companies. GST/HST on that rent needs its own look: see the election between related companies.

What happens when I take the money out, and what is refundable?

The corporation pays its tax first, and only part of that tax comes back as you pay taxable dividends. For a CCPC, up to 30 2/3% of its investment income is added to its non-eligible refundable dividend tax on hand, the refundable balance its T2 tracks (section 129). The rest of the corporation's tax is not refunded.

1. The corporation earns the rent and pays its tax.
2. The refundable part is added to the balance tracked on the T2 (CRA T2 guide, Chapter 6).
3. The corporation pays you a taxable dividend other than an eligible dividend. The CRA refunds 38 1/3% of those dividends, up to the balance (CRA T2 guide, Chapter 7).
4. The corporation claims the refund on its T2 for the year it paid the dividend, filed within 3 years after that year ends. Otherwise the refund is statute barred.
5. You report the dividend on your own return and pay personal tax on it. See tax on dividends from your corporation.

Salary is another way to pay yourself, but it is deductible only when it pays for real work and is reasonable (section 67), which a rent-only corporation may lack; see salary or dividends. The combined tax depends on your province, the type of dividend and your other income, so compare it with the same rent reported personally before you decide.

Does rent in one corporation reduce the small business deduction of my other company?

Yes, when the two corporations are associated. The federal business limit, the cap on income taxed at the small business rate, is $500,000 and associated corporations share it under an agreement filed with their T2 returns (Schedule 23). It shrinks when their combined adjusted aggregate investment income (AAII, the passive income measure: mainly net rent and interest plus eligible taxable capital gains) passes $50,000, and it is nil at $150,000 (CRA T2 guide, Chapter 4).

• For a full limit, the reduction is five times the AAII over $50,000 (section 125(5.1)).
• The reduction for a tax year uses AAII from tax years that ended in the previous calendar year, so this year's rent cuts a later year's limit.
• Corporations are associated when the same person or group controls them, or when related owners hold enough shares (section 256). Related companies that are not associated can be treated as associated for this test when one of the reasons for a loan or transfer between them was to reduce AAII (section 125(5.2)). A holding company does not avoid the test; see holding and investment corporations.

How does capital cost allowance work for a corporation that rents property?

A corporation whose principal business is renting real property it owns can claim CCA on a rental building even when it creates or increases a rental loss. Individuals and most other corporations cannot. Regulation 1100(11) limits CCA on a rental building to the net rental income, and subsection 1100(12) lifts that limit only for a corporation whose principal business was leasing, rental, development or sale of real property it owns, throughout the year. The CRA states the personal rule plainly: you cannot use CCA to create or increase a rental loss (CRA: Rental income).

• Principal business is a question of fact. A company that runs another business and owns one rental may not meet it.
• A loss stays in the corporation. It is a non-capital loss the corporation can carry to other years of its own, not a deduction against your salary or other income (section 111).
• CCA can come back. CCA claimed is added to income as recapture on a later sale (section 13). Whether to claim it is covered in should you claim CCA on a rental.

What changes with mortgages, personal guarantees and interest?

Interest on money borrowed to earn rental income is deductible for the one who borrowed and used the money to earn it, whether that is you or the corporation (section 20(1)(c); CRA: Rental income). With a corporation, the borrower and the risk change.

• Lender terms. Ask each lender whether it will lend to a corporation, what rate and down payment it asks, whether it requires your personal guarantee, and whether a property that carries your personal mortgage can be transferred in. These are the lender's terms, not tax rules, and they differ. Get them in writing before you buy or move. See proving income to a lender.
• Money you borrow personally and put into the corporation. Whether that interest is deductible depends on how the money is used. See lending borrowed money to your corporation and interest on money borrowed for rentals.
• Liability. Whether a corporation shields you from claims on a property is a legal and insurance question, not a tax rule, and a lender may still want your personal guarantee. Ask a lawyer and your insurer.
• Your debts paid by the corporation. When the corporation pays your personal mortgage or other debts, the amount can be taxed to you as a shareholder benefit or loan, with exceptions that depend on the facts (section 15). See shareholder loans and the shareholder loan account.

What does it cost to set up, move in and run a rental corporation?

A rental corporation has set-up costs, move-in costs if you already own the properties, and yearly costs that a personal return does not have.

What changes when the corporation sells a rental?

The corporation, not you, reports the gain, and its taxable capital gains count as investment income like the rent, so the refund and dividend steps above apply to them too (section 129). Earlier CCA can be added back as recapture. The untaxed part of a capital gain can be paid out tax-free as a capital dividend if the corporation elects on Form T2054 by the day the dividend is payable or first paid, whichever is earlier (section 83); see holding and investment corporations.

For a sale in your own name, see selling a rental property. For selling the corporation's shares instead, see selling your business.

Do provinces tax a rental corporation differently?

Yes. Each province or territory adds its own corporate tax to the federal tax. Its lower rate applies to income eligible for the federal small business deduction and its higher rate applies to all other income, so rent generally bears the higher rate (CRA: Corporation tax rates). Some provinces, including Ontario and New Brunswick, do not apply the federal passive-income cut to their own business limit, so there it changes only the federal rate (CRA: Ontario small business deduction; CRA: New Brunswick corporation tax).

The CRA administers provincial and territorial corporate tax everywhere except Quebec and Alberta (CRA: Provincial and territorial corporation tax). An Alberta corporation also files an Alberta return, the AT1, with Alberta Tax and Revenue Administration (Alberta: Corporate income tax). Quebec runs its own corporate tax, and this page does not give its rate. Land transfer taxes (called property transfer tax in British Columbia) also differ by province; see moving rentals into a corporation.

When is owning rentals personally simpler?

Personal ownership is often simpler when most of the rent is for you, when no operating company needs protecting, and when nothing is waiting to be moved.

• If you need most of the rent to live on: the corporation pays tax first and refunds only the refundable part as you take dividends, so little may stay inside to build up.
• If you have a few properties and no other company: there is no small business limit at risk, and one return covers the rent (reporting rent personally).
• If you already own the properties: moving them in has its own tax and cost; see moving rentals into a corporation.
• If your lender offers better terms to you personally: ask for both sets of terms in writing.
• If you co-own with a spouse or family member: co-owners each report their share (co-owned rental property). A corporation turns co-owners into shareholders, and dividends to a family shareholder can fall under the tax on split income rules (section 120.4); see paying family members.

Example

These examples are illustrative, with round numbers. All amounts are Canadian dollars.

Calgary landlord with three doors

A Calgary landlord's corporation nets C$40,000 a year from three rentals, and she needs most of it to live on. The corporation's tax is about 46 2/3%: 28% federal, 10 2/3% additional federal investment tax and 8% Alberta. That is about C$18,700.

Of that tax, about C$12,300 (30 2/3% of the rent) is refundable. It comes back at 38 1/3 cents per dollar of non-eligible dividends she is paid, so she would need about C$32,000 of dividends to recover all of it. The refund is claimed on the T2 for the year the dividends are paid and reduces that year's tax. If she is paid the C$32,000 in the same year, the corporation's net tax is about C$6,400, the part that is never refunded, and it keeps about C$1,600. She then pays personal tax on the dividends. A corporation may not lower her total tax, and it adds a T2 and financial statements every year. The comparison to run is the same C$40,000 reported on her own return, before anything moves.

Two companies and C$60,000 of new rent

An Ontario owner controls an operating company and a holding company, which are associated. In the previous calendar year they had C$100,000 of AAII between them. Assume the full C$500,000 federal limit, no taxable capital reduction and no other reduction. Five times the C$50,000 over the starting point is C$250,000, so the limit is C$250,000.

The owner then buys rentals through the holding company, let to outside tenants, adding C$60,000 of net rent, and the group's AAII becomes C$160,000. Five times the C$110,000 excess is C$550,000, which is more than C$500,000, so the federal limit for a later year is nil. Federally, operating income that was taxed at the small business rate is then taxed at the general rate. Ontario's own business limit does not include this cut, so the Ontario part of the tax on that income can stay at the lower rate.

Buying the fifth property

A Vancouver investor owns four rentals personally and is told to buy the fifth in a corporation "to claim expenses". The expense rules are the same in both names, so that is not a reason. The questions that decide it are whether the lender will lend to a corporation and ask for her guarantee, how the up-front tax on the rent and the second tax when she takes the money out compare with her own return, and, if the four existing rentals later move in, the income tax and property transfer tax on that move, and GST/HST where it applies. Buying only the fifth in a new corporation avoids moving the others but adds a second set of books and a second return.

Different for you?

• You own several rentals, or are about to buy another and were told to use a corporation: the owner you choose affects the lender's terms, the tax on the rent and, for properties you already own, the cost of moving them in (income tax, land transfer tax and, where it applies, GST/HST). See moving rentals into a corporation, and get corporate tax help to compare personal and corporate ownership before you sign.
• You own an operating company: the rent can cut its small business limit, and a holding company does not avoid that. See holding and investment corporations, and have the rent arrangement and the group's associated corporations checked with corporate tax help.
• You already have a rental corporation, or are about to form one, and need its books set up: see books for a rental holding corporation, and get bookkeeping help to open the books before the first rent arrives.
• The rental corporation's books are behind or its T2 was never filed: start with catching up on overdue books and catching up on unfiled corporate returns, and get bookkeeping help.
• The corporation would own a home you live in: see a home owned by your corporation.
• Foreign owners or US property: a corporation with non-resident owners may not be a CCPC; see non-resident owners of a Canadian corporation. For a US rental, see a Canadian corporation owning US real estate.
• A sale is planned: see selling a rental property and selling your business.
• Your corporation is in Quebec or Alberta, or has a permanent establishment there: it files its own provincial return as well as the T2 (in Alberta, the AT1); ask corporate tax help about both.