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The possible transfer of the property offers the opportunity to take back tax-free money from your company

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By Julie Cazzin with Andrew Dobson

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Q: Are there any tax consequences if I transfer my investment property – a duplex that I own 100 percent – to my limited liability company? If so, how can I minimize this tax? -JohnnyL.

FP answers: If you transfer certain types of real estate to a company, you may be able to defer some or all of the income that would otherwise accrue simply by making a choice under Section 85 of the Income Tax Act.

A section 85 rollover from your investment property to your business can be done on a tax-deferred basis. In some cases, a transferor may choose to generate a partial capital gain, such as when you have a relatively low annual income or if you have capital losses that you can use to offset the gain.

One requirement is that you must receive “share consideration” – shares of the company – back from the company. You can also receive “non-equity compensation” such as a receivable note, but it will create a capital gain if it exceeds the tax cost of the property.

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Also, future rental income from the duplex will be taxed as passive income in your business, which will be a rate comparable to the highest personal marginal tax rate. And if you withdraw this income from the company in the future, taking into account the potential tax refundable to your company when it pays a dividend to you, the combined corporate and personal tax may be more than you would have paid to cover all the income. to earn personally in the first place.

If the purpose of the transfer is to reduce your rental income tax, depending on your income and the province or territory of your residence, it may not happen.

If you decide to sell the property in the future, the capital gains will be taxable to the company. It can pay taxes at a higher rate than what you might have paid if you continued to hold it in person, as companies pay tax rates on investment income that are comparable to the highest personal marginal tax rates.

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One of the main advantages of this transfer strategy is that you may be able to get tax-free money from the company.

For example, if you bought the property for $800,000 and it is now worth $1 million, you may be able to take up to $800,000 tax-free cash back from the company in exchange for your transfer.

This could be an opportunity if you have a lot of cash or investments in the business that you want to access in person, or if you will have a lot of cash flow going forward.

Keep in mind that holding investments like this rental property in your business can negate other tax benefits, such as the lifetime capital gains exemption.

If your business could one day be sold, you may not want to hold rental properties, stocks, or mutual funds there. Otherwise, you may not be able to claim the Lifetime Capital Gains Exemption on the sale of the business, which could be up to $913,630 in capital gains tax exempt.

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If this were a consideration, you could set up a separate holding company to hold assets such as the rental property and retain access to the capital gains exemption for life.

This may also be advisable if your business may be subject to creditor risk or other potential liability. If you keep the rental property in the same business as your active business and the latter is sued, it could expose your rental property or other assets that could otherwise be isolated by owning them in a separate company.

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Keeping your real estate in your business can also prevent you from accessing small business tax rates because of the investment income the real estate generates.

If your investment income exceeds $50,000, your company may begin to lose the benefit of the small business deduction, allowing the company to pay taxes at lower rates on active business income.

In addition, transferring real estate to a company can result in real estate transfer taxes and legal fees. In a city like Toronto that charges a municipal transfer tax in addition to the provincial real estate transfer tax, a $1 million property can result in $32,950 in real estate transfer taxes.

If the property is mortgaged, make sure that the lender can have the mortgage taken over by the company. You may have to transfer the mortgage and there may be fines or other costs involved. Business borrowers may have to pay higher interest rates and face other restrictions.

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The possible transfer of the property offers the possibility to take back tax-free money from your company now or in the future. However, there should be no tax savings on the rental income or the ultimate capital gain. There may be direct transfer taxes and legal fees and longer term costs due to higher mortgage interest rates. Obtain legal and tax advice to assess the process, implications and costs/benefits of such a strategy.

Andrew Dobson is a Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) at Objective Financial Partners Inc.

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