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While 2017 saw a bit of a slump for residential properties in Canada, certain markets remained strong (Vancouver, for instance), while real estate investment properties across the country were largely cushioned from the blow. Beginning in Q2 of 2017, Toronto residential real estate was among the hardest hit, impacting many of our clients.
As 2018 progresses, a number of new regulations will change the landscape for real estate. Veteran real estate investors and brand new startups alike can benefit from our top 10 financial management tips for 2018 real estate investments.
The Federal Government has recently put in place rules that minimize the ability to income split with family members. It is important to review your corporate structures to ensure the new rules don’t negatively affect you.
1) The Federal Government has recently put in place rules that minimize the ability to income split with family members. It is important to review your corporate structures to ensure the new rules don’t negatively affect you.
2) Income tax is not the only tax assessed on real estate investments. Land Transfer Tax, HST and probate also require proper planning to avoid penalties, minimize costs and ensure compliance.
3) When working with a partner on a real estate purchase, choose your tax structure wisely. Different structures are available to suit different needs, and each carries significantly different tax consequences.
4) Canadian controlled private corporations that collect rental income frequently pay an income tax rate of more than 50 percent, but this can potentially be reduced with the right tax structure and financing arrangements.
5) Unlike selling a residential property, the sale of a commercial property requires that HST be charged, potentially increasing the cost to the buyer. Proper planning can assist you in avoiding this issue.
6) Effective planning can help you avoid significant income tax consequences when transferring a business to the next generation. Succession planning helps you to:
• Prepare for a lucrative exit from the company,
• ensure continuance of the business after death,
• minimize taxes on death, and
• strengthen the skills of the management team through collective idea processing.
7) When selling real estate, you can reduce or defer income taxes by creating the right structure for your holdings or operations.
8) As non-residents continue to invest heavily in Canadian real estate, they must ensure that a strategy is in place that is fully compliant with the required tax reporting and remittances. Failure to comply can result in severe penalties.
9) If you own real estate investments through a corporation in the US, be aware that the US does not provide a reduced capital gains rate to corporations. There is a flat 21% corporate tax rate on capital gains while individuals can pay income tax from a 0% rate to 20%. Additionally, the US allows maximum depreciation to be used to reduce taxable income to a loss. There are strategies to decelerate US depreciation, which will allow you to match up foreign tax credits.
10) Flipping houses is generally considered a business activity, and as such, is fully taxable (i.e. not eligible for capital gains treatment). But the flipside is also true: A loss is fully deductible and is even deductible against other sources of income.
Zeifmans’ real estate practice advisors provide builders, contractors, developers, property managers, and passive investors throughout North America with financial management, compliance, and tax planning solutions that add to their bottom line. We help our clients create efficient tax strategies, enabling them to keep their focus on opportunities and growth. Canadians face a host of complex issues within the real estate industry. Our hands-on experience and extensive knowledge guide our clients to the best possible solutions, tailor-made to suit their needs.
For more information, contact one of our real estate services professionals, or your Zeifmans advisor:
David Posner, CPA, CA, Partner dp@zeifmans.ca
Jonah Bidner, CPA, CA, Partner jb@zeifmans.ca
