The Advantages and Disadvantages of Purchasing Real Estate Using a Holding Company

By Patrick Westaway and Jacquelyn Johnson

What is a Holding Company?

A holding company is a company that does not carry on business. It sells no goods and provides no services. Instead, it typically holds investments, such as real estate or shares in public or private companies, or it holds shares in related companies for tax or other planning purposes.

Advantages of a Holding Company

Asset Protection

The primary advantage of purchasing real estate through a holding company is creditor protection. Companies and individuals alike are exposed to risk, either by carrying on business or through everyday activities, such as buying on credit. If you or your company default on your bills, or you or your company are sued, your assets could be in jeopardy. If, however, your assets are held either “upstream” in a holding company or in a sister company so that the entity that incurs the risk does not own the assets (either directly or through downstream companies), such assets would be beyond a creditor’s reach.

Tax Advantages for Property Flippers

A holding company can also be very useful from a tax perspective if you are purchasing real estate with the intent to flip it. If you buy and sell a property with the intention of generating a profit on the sale, rather than rental of the property, the sale proceeds could be taxed as business income (or as income from “an adventure or concern in the nature of trade”, which comes to the same thing). And, a company’s business income, unlike its investment income, is taxed at little more than half of the top marginal rate applicable to individuals. A holding company would therefore have more after-tax dollars than an individual to reinvest in other properties or to spend, for example, on capital improvements. Similar considerations may apply to your rental income if you carry on a property management business.

Disadvantages of a Holding Company

Increased Cost

Holding companies quite simply cost more, in dollars and in time. Between the startup costs associated with incorporating a new company and the ongoing annual costs of maintaining the corporate records, these costs add up over time. However, annual legal costs are minimal in comparison with the costs associated with filing financial statements and corporate tax returns

Tax Disadvantages

The tax consequences of purchasing real estate in a holding company are not one-size-fits-all. There is a possibility that holding investments in a holding company could result in paying more tax than if you owned them directly. For example, a “Canadian-controlled private corporation” would be taxed on passive rental income, i.e. rental income not attributable to an active business, at a flat rate roughly equal to the highest marginal rate applicable to individuals. It is therefore imperative that (a) the income be characterized as proceeds from flipping; (b) the income be characterized as income from an active business (which, in the rental property context will require more than five full-time employees); or (c) that the company not qualify as a Canadian-controlled private corporation.

Finally, it should be noted that only individuals, not companies, qualify for the principal residence exemption on the sale of a home. If, therefore, the real estate in question might be alternately used both as an investment property and as a principal residence, there could be a significant tax cost to using a holding company.

It is highly advisable to seek legal and financial advice when considering the tax consequences of purchasing real estate using a holding company.

Real Property Registry Requirement

If purchasing real estate using a holding company is right for you, note that Ontario companies need to maintain a register of their “ownership interest in land in Ontario”. It is prudent to keep a register of both registered and beneficial titles to property.

The register must identify each owned property, the date on which the property was acquired, and the date on which the company sold or otherwise disposed of the property. The register must also include supporting documents, such as deeds or transfers, with respect to each property listed in the registry.

What Can SorbaraLaw Do For You?

At SorbaraLaw, we can help you with each step of the process of purchasing real estate. We can work with you to decide whether buying real estate with a holding company is right for you. If it is, our corporate law team can incorporate your new holding company quickly and efficiently. We can also perform all necessary annual filings related to your holding company and any other legal maintenance as required.

If you are looking for assistance incorporating a holding company, please contact Jacquelyn Johnson at jackie@sorbaralaw.com. If you have any questions about the tax advantages and disadvantages associated with purchasing real estate through a holding company, please contact Patrick Westaway at pwestaway@sorbaralaw.com.