Well, I have at least two people who read my blog.

Update to last week, apparently no one knows exactly what the new rules are and how they apply with 100% certainty. There was an email yesterday indicating that purchasers will still be able to buy with 5% down. That’s owner occupied and don’t anyone tell me they will occupy a building the fully intend to rent. I don’t play those games. I understand things can change (postings, new jobs, etc.), that’s reasonable.

If a lender finds out it’s a rental, they first think that I’m the one who is dirty. Suddenly my deals get declined and I find I can no longer do deals with that lender. I need all the lenders I can get some days.

On to today’s topic, suggested by a… dare I say… loyal reader? I’m really hoping there’s a large majority of silent readers out there and people actually enjoy some of my rants and learn a little bit about this crazy business. If spam is any indication, then I have thousands of readers.

Buying real estate through a corporation or a numbered corporation.

This is one of those really hot topics once people start buying and realize at some point that owning EVERYTHING in your personal name can be a rather large exposure shall we say. I’ve got people I know on both sides of this issue. Some that argue you need to FIRST start with a corporation and others that content having one is merely additional cost for no real benefit except… what did that guy tell me once… if you plan to die?

First off, there is a lot of misinformation due to our proximity to our neighbour to the south.  We have the Kiyosaki’s, Trump’s, Whitney’s, etc. all these famous real estate educators, influencers, traders, peddlers, seminar leaders, whatever you want to call them, writing books/articles on how you should be using corporations for various advantages.

The trouble of course is they are all US based, where a corporation can take on an almost full identity and live on in perpetuity. Just look at anything to do with copyright law and corporations to understand this better. I believe Disney Corp will hold copyrights to all its movies indefinitely.

In Canada we’re a little more pragmatic. We also have very different copyright laws, but that’s a whole other topic. Corporations are seen as entities, but not without limits.

Let me just preface here that I am not a lawyer, nor an accountant and you should seek professional advice at all times.  What I know (which I’m certain is very small) is based on my experience as a broker/agent/investor.

Thinking about this now, this is going to be a long post. Hold on.

Where to begin…

Let’s start with the simplest case. You create a numbered corporation. You can do it, on your own, quick and easy by simply stumbling through the process. Minimal cost and you can now say I am the “owner” of 1234567 Ontario Inc or 12345678 Canada Inc. Don’t forget to file your returns and keep your registration with Industry Canada active….every year.

Or you can go the expensive route and get a lawyer or an accountant to do all the work for you and charge you for their time. Follow that up with paying your accountant to file all the returns for you. Potential cost $10K + ongoing fees.

In either case if you do nothing with your corporation, then at some point it will have value as it will have a clean history, which then can be merged with another “new” active company and they can leverage the clean history with their income and somehow manage to get credit for their company. The idea here is you can “sell” your shelf corporation to someone in need of credit with not enough history. Prices vary with age and what activity if any the corporation has done. There are agencies in the US that sell corporations that already have established lines of credit.

In Canada, corporations can take on legal entities. They can be named as a purchaser or seller, in our focus, of real estate. If the corporation is set up correctly and has passed the necessary resolutions that it may borrow or be allowed to register a mortgage, then we’re all set. Right? Technically yes. In reality, in Canada, all lenders will require some form of guarantor for their mortgage (there are exceptions, but lets just say that’s currently out of most of the readers of this blogs league).

But the US Guru’s say that nothing should be registered in your name. Again, technically it isn’t. The corp is registered on title. If someone does a title search they will find the name of the corporation, not the individuals. If they are only looking for individuals, they may not find them registered on any title. If they know the corp name/number they may find what the corporation owns, but not who the owners of the corporation are. That will require a little more effort/time/money.

Now this is where we could step off into left field and I could regurgitate the useless info that a certain real estate seminar company told us about bearer bonds and Nevada corps and even as far as Nevis corporations. Feel free to google or wikipedia to find out more. Let me summarize by just calling it layers of an onion (or parfait?) whereby you want to make it as difficult as possible for someone to find out who the owners of a company are. Company A owned by Corp B owned by Nevada Corp C, etc. etc.

OK, so we have a company, an active company. Let’s say for argument sake you make the proverbial widgets. Your company decides it wants to buy real estate.

This is where we take another fork in the road. If you want to buy a building to put your company in, say a manufacturing plant, then the corporation can buy it as “owner-occupied”. Presumably this would have to be considered a commercial deal as a company (corp or limited liability partnership) is purchasing a place to house a business. In this case, the corporation can buy the building, but we still need the company directors to provide guarantees that the mortgage will be paid.

This is where I throw in a quick advertisement for the CSBL or Canadian Small Business Loan that allows small businesses to own their own properties for as little as 10% down. In commercial circles, this is unheard of. Typically in commercial we talk in terms of 35% down… or more. Amortizations to a maximum of 20 years, typically 15. CSBL 20, possibly 25.

Now, if you have an active company and it wishes to buy investment real estate (i.e. not directly related to its primary business), then we have to take the tact of having an umbrella company or a holding company (HoldCo). The thought here is the lenders want a clear way to be able to distinguish between the active business income and the passive rental income (and I’m sure CRA would like to know the same as well). There’s also that fear in the backs of lenders minds (this seems to be a natural state for lenders, pessimism) that what happens if the active company folds for whatever reason. Wouldn’t it be really nice if there was a HoldCo that was separate from the active business that could continue on as a separate entity and either sell the real estate holdings or keep them and retain the earnings/cashflow? If the active company goes bankrupt (OK I’m really assuming here) that the HoldCo assets could be sold separately from the proceedings of the bankruptcy or maybe the assets would be excluded from the active corp.

The concept here being the active corp could disappear without affecting HoldCo and or any other companies held within HoldCo. Even if HoldCo goes down with the company, the directors are still personally responsible for the mortgage. All the layers of the onion can disappear, but the lenders still have an entity/person to pursue. This of course is the major item for the lenders. They can’t take legal action against a company that has folded.

Everyone confused yet? I’m not done.

Now a little bit on the accounting side (again seek professional advice). You have an active company held by a HoldCo. HoldCo buys investment properties. Go a little further and HoldCo also has a property management company. HoldCo has retained earnings for the year and directors decide it would be best to declare dividends to the share holders. Did you know that dividend income is TAX FREE up to certain limits ($40K+ in Ontario). Think about that for a minute. How much gross do you have to make in order to take home $40K net? I think that’s pretty sweet in its self. There’s also the fact that corporate tax rate is 28%. Do you want to pay tax at the personal level, potentially 48%, or would you rather pay corporate income tax?

SOOOOOOO… Should you start by creating the corporate structure and start buying your properties in the HoldCo from the start…. Seems like a good idea. Lots of advantages. My recommendation/suggestion however is not to start this way, unless you already know that this is the future for you and it will work or you will die trying. My recommendation is to start with 1 (one) rental property and see how it goes. IF this is the right thing for you AND you understand and treat it like a business, THEN consider moving to a corporate structure as you move forward.

Now having said that, I have come across 3 (maybe more) investors who think this is bunk and they have the portfolio of at least 7 properties behind them that says otherwise. They continue to buy and there’s nothing to stop them as they know how to manage their real estate business. They are of the opinion that the corporations only cost them more money in maintenance (and confusion) paying legal and accounting costs. The run it as a business, but don’t see the need for any formal corporate structure.

Well, once again this has taken me two days and three attempts to write this blog entry. I really need to set aside a block of time or make shorter entries. I’m also sure that over the next day or so I’ll wake up in the middle of the night and think, “OH, I forgot to talk about XXX.”

Now back to putting out fires and battling with CMHC and their new view on rentals.

Take care everyone.