Owning Rental Property Through a Corporation
Owning rental property has become an increasingly popular and effective strategy for long-term wealth accumulation. In response, individuals are becoming increasingly creative, seeking out tax and legal strategies to maximize their tax planning outcomes for these properties. One popular, but not always effective, strategy is to hold rental property through a corporation.
By owning rental property through a corporation, individuals can limit their personal liability associated with the property. However, this decision carries significant income tax implications that must be carefully considered. The following blog outlines two advantages and two disadvantages of holding rental property through a corporation.
Tax Advantages
- Income Timing and Tax Deferral
One of the primary tax benefits of owning rental property through a corporation is the ability to control the timing and method of income distribution. Rather than being taxed immediately on rental income, individuals can defer personal taxation by retaining earnings in the corporation and choosing when (and how) to pay themselves—through salary, dividends, or a mix of both.
This flexibility can be especially beneficial for individuals with fluctuating income. In high-income years, you may choose not to withdraw rental income, thereby avoiding higher marginal tax rates. In lower-income years, you can draw income from the corporation to optimize your marginal tax rate and reduce your overall tax burden. This approach allows taxpayers to leverage Canada’s progressive tax system.
- Estate Planning and Succession with an Estate Freeze
Holding rental property in a corporation also opens the door to advanced succession planning, such as implementing an estate freeze. This strategy allows a taxpayer to “freeze” the current value of their shares and transfer future growth to their children or other beneficiaries—typically through a family trust or preferred/common share structure.
The benefits of this approach include:
- Deferral of capital gains tax on growth
- Predictable estate tax liability
- Facilitated intergenerational wealth transfer
When structured properly, an estate freeze can allow for tax-efficient ownership succession, reducing the ultimate tax cost of transferring a real estate portfolio.
Tax Pitfalls
- Loss of Principal Residence Exemption
If you rent out a portion of your primary residence, such as a basement apartment or secondary suite, it is generally not advisable to transfer the property to a corporation. Doing so may jeopardize your ability to claim the Principal Residence Exemption (“PRE”) on the sale of the property.
The PRE can fully or partially eliminate capital gains on the disposition of a qualifying home. Since corporations cannot claim the PRE, incorporating a primary residence, even if partially used for rental, may result in unintended tax consequences upon sale.
- Passive Income and High Corporate Tax Rates
Another key disadvantage is that most rental income is considered passive income for tax purposes. Unless you’re providing substantial additional services (e.g., meals, cleaning, concierge), rental operations usually don’t qualify as an “active business.”
As a result:
- The income does not qualify for the Small Business Deduction (SBD)
- It is taxed at the general corporate rate (approximately 50% in Ontario, including the refundable portion)
- Refundable taxes may be recovered only upon payment of taxable dividends, reducing deferral benefits
In short, passive rental income earned in a corporation can face higher effective tax rates than personally held income—especially for those who are not actively managing or growing a real estate business.
Final Thoughts
While holding rental property through a corporation can provide limited liability protection and estate planning flexibility, it also introduces significant tax complexities, particularly around passive income, corporate rates, and the loss of the Principal Residence Exemption.
If you’re considering incorporating your rental property, it’s important to consult with a tax professional who can help you weigh the legal, tax, and estate implications. A tailored approach will help ensure that your real estate investment strategy aligns with your long-term financial and tax planning goals.
Elias Zafiridis