Purchasing a property through a corporation

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Summary

(Nov 6, 2020) To incorporate, or not to incorporate?

The following is discussed in this episode:

Purchasing a property inside of a corporation:

OPERATING COMPANY or HOLDING COMPANY?

*this a decision you will want to discuss with your accountant as there are reasons to do so in both cases. However, as far as mortgages are concerned most lenders require that the property be held in a holding company. There are a select few that allow one to do so in an operating company, but the interest rates are typically higher. I have reached out to lenders and asked why this is the case…they mostly replied that the exit strategy of the property could become difficult or problematic in the event the corporation (the operating company) is sold, or confronted with some type of creditor challenge, thereby coupling the property with the corporations resulting outcome

*when it comes to mortgages, not all lenders allow for purchasing within a corporation…but enough of them do. It is important to disclose your intent to do so to your mortgage broker PRIOR to placing an offer on a property. Failure to do so results in re-routing of your mortgage application to other lenders, which in turn could result in radically different terms, conditions and interest rates than what you had already been pre-qualified for. I cannot stress how important this is!

WHY PURCHASE A PROPERTY WITHIN A CORPORATION (holding company)?

(i) Protection from creditors – by holding the property within the holding company (rather than the operating company), it is essentially removed from any liability that the operating company may encounter.

(ii) Tax advantages – All I will say here is that tax advantages could potentially exist. Many people seem to think that taxes are unanimously lower within a corporation, then they are personally…but this is not always the case! Consult with your accountant regarding your specific tax advantages and explore if this approach is even worthwhile for you. Here are two amazing accountants that I personally deal with:

Michael Kovac (Vancouver and surrounding area) – 604-319-6044 direct

Rob Kubik (Calgary and surrounding area) – 403-238-1505

(ii) Estate Planning Strategies – As with tax policies, I have absolutely no expertise in this field. Consult further with an estate planning lawyer on this.

IS IT HARD TO QUALIFY FOR A MORTGAGE WHEN GOING THIS ROUTE?

*it’s not that it’s hard – it’s just a bit more detail oriented and document intensive. Basically, you would qualify as though you are buying a property in your personal name…but the difference is simply the way your application is packaged to the lender…you would be qualifying as a corporation with a personal guarantee.

*technically, you can also purchase a property personally and transfer into a corporation after you’ve made the purchase and qualified for the mortgage, personally. Again, consult with an accountant on this strategy as it involves a sequence of actions and specific drafting of documents/agreements

WILL MY CORPORATE OWNED PROPERTY & MORTGAGE BE ON DISPLAY IN MY PERSONAL CREDIT REPORT?

*it shouldn’t be. But…sometimes it will (this depends on the lenders credit reporting policy)

IS IT EVEN WORTH PURCHASING A PROPERTY WITHIN A CORPORATION?

*this is definitely a question you have to explore further. Be honest and realistic with yourself – determine what your end-game is. Is this gonna be a one off, short term kind of experiment? If so, save yourself the costs and complexities that come with incorporating (both one time and ongoing fees) and purchase the property, personally.

Here are some popular scenarios where purchasing a property through a corporation might make sense:

(i) FLIPPING PROPERTIES: If your intent is to flip properties rather than hold them as rental revenue, it might make sense to consider holding it through a corporation

(ii) YOU OWN A BUSINESS AND YOU’VE ACCUMULATED SUBSTANTIAL SAVINGS: retained corporate profit can be used to buy a property without withdrawing money personally and incurring personal tax.

SOURCES:

Michael Kovac (Vancouver Chartered Professional Accountant), Rob Kubik (Calgary Senior Accountant), Madan Chartered Accountant (Toronto), Money Sense Article

Mortgage Interest rates and promos:

>for the 7th consecutive week 5 year fixed rates are available for as low as 1.79%. Even lower rates are available for no-frills products (I’ve seen rates as low as 1.59%). One other rate promo to be aware of -> 1.89% for a 5 year fixed, but no interest for the first three months (and it’s not tacked on to the mortgage either! This is the real deal, no smoke in mirrors). Enjoy the savings and the reduced mortgage payment, or lump sum the difference directly into your principle to accelerate your amortization!

**Inquire for other promotional rates that may arise throughout the week

**be aware, interest rates are priced depending on the loan to value ratio of your mortgage. Most of the rate specials you see and hear about are for mortgages that are higher than 80% loan-to-value and less than 65% loan-to-value

That’s all I got. Check in next week for more.

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