Smart Strategies for Toronto Real Estate Investment Business

With real estate in Toronto sizzling, many are finding lucrative business opportunities.  Whether it’s developing homes from scratch, developing commercial real estate, renovating and flipping homes, Toronto has seen development like never before.  With our experience, we have determined our top 5 strategies to ensuring you have a successful real estate business.

Protect Yourself from Legal Liability

Real estate development and rental business can lead to legal matters through the normal course of business.  Incorporate your real estate business to protect your personal assets from legal issues and liability.  A corporation is a separate legal entity under the eyes of the law, and the risk applies to what shareholders have invested in the company.  Without incorporating, business insurance can help mitigate some of the risks as well.

What is Your Main Business?

Now, the nature of the real estate business has different tax treatment.  If the assets are held in the corporation for rental purposes, the rental business can fall under two categories: 1) specified investment business or 2) an active business. 

A specified investment business is deemed to exist when the company employs less than 6 full time employees (has 5 or less employees).  In this case, the corporation cannot benefit from the low CCPC (Canadian Controlled Private Corporation) corporate tax rate and there will be no benefit in holding the property in the company from the tax perspective rather than legal.  Therefore, if you have a smaller rental business, to incorporate from legal and tax perspectives, you should consider your overall business goals and whether you plan on growing the business.

If development and flipping assets is the main business activity, then the corporation can benefit from lower tax rates available to CCPCs.

Use a Smart Corporate Structure

Development business can possibly lead to issues where development fails and lawsuits may be common.  Many times, there can be multiple properties in development.  In these circumstances, it would be ideal to incorporate a holding company that owns an operating company for each development property.  Therefore, if one development project runs into issues, only that asset is at risk and the other assets held in the other operating companies will be safe as each operating company is a separate legal entity.

How to Value the Asset

When it comes to real estate as well, assets need to be valued similar to any other asset.  When it comes to residential real estate, factors other than supply and demand should be considered whether determining the property should be acquired.  Consider valuing the asset from a cash flow standpoint.  Assessing how much cash can be generated from renting the asset and using financial tools such as the present value calculation; you can determine the value of the asset and compare it to the market value.

Income Splitting Opportunities

You can issue shares to your spouse or adult children (older than 18 years) in an attempt to income split using your real estate business corporation.  Furthermore, your spouse can flat out incorporate a company instead and have the ability to run some operations through that corporation.  You can also consider providing a salary to your spouse and employ them on a full time basis.   The salary will be a tax deductible expense to the company and reduce corporate taxes.  Also, the family members, if employed on a full time basis, can be included in the number of employees count to get out of the deemed specified investment business scenario. 

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