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From DXXXXXX XXXXXXX
Hello David, My husband and I are members of Ozzie Jurock's Real Estate Action Group mentor program. Last night during a discussion about owning real estate in a company or in a trust or in our personal name, your name came up as an expert in this area. I was told that you have owned many properties and that you are a tax expert. I am confused. We currently own 2 revenue properties (single family with a suite) and have offers on a couple of others. For the past 10 years we have owned a couple of revenue properties. The mortgages are in our personal name because the banks preferred that, but we have the lawyer put together a letter stating that they are held in trust for our company and for accounting purposes, they are owned by our company, XXXXX Enterprises Inc. Our accountant is happy with this but our lawyer would like to see us put the mortgages in our company name also (I believe, for liability purposes).
He has also mentioned that we look at tax planning as we have
three children
(17, 20, 22) and would like to pass these properties to them with the least amount of taxes payable. We were general contractors for 18 years which is why we started our company - we no longer do that so our company is now mainly our revenue properties and a very small consulting business. Recently, we have started talking to different people as we have become involved with the real estate group and have found out that we should have been deducting our principal residence mortgage interest payments and some other things. An accountant we recently talked to suggested that we own our real estate in a holding company that is then owned by a family trust??? It would cost as much as $8 - 10,000 to set up. I am not convinced that we are ready for this as we aren't making alot of money from our properties each month and our present accountant is usually able to write most of it off or income split with our children. Now that they are working and going to university, those options are becoming limited. (We also had a couple of business losses from non real estate ventures that we are still using. Our accountant likes to put everything in our company but we do also have one marketing business that is still in our personal names). It seems that everyone has a different opinion. I hear that you are a tax expert and also have invested in real estate. In your opinion, taking into consideration liability, income tax and tax planning (to pass on the properties to our family with the least taxes paid when we die) what is the best entity to hold revenue properties in?? We plan to purchase many more properties in the future - some we will fix up and flip for cash, but each year we plan to buy two or more to hold for cashflow and the unearned income that Ozzie talks about. Thank you. DXXXXXX XXXXX
David Ingram replies:
I could write two or three books in answer to your question
and time restraints in our tax season makes this one a short anwer.
What you are describing to me is turning into a business.
It may already be a business because if you plan to buy properties to fix up
and flip, that is a venture in the nature of trade and the profits will be
taxed at full rates, not as capital gains.
You can find out more about taxation of real estate deals at
www.centa.com.
Click on the Tax Guide and go to the chapter on Capital Gains. This chapter is
so old that the taxable Capital gains rate went from 50% to 66 2/3% to 75%,
back down to 66 2/3% and ended where it started in 1972 at 50%.
You ask what the best way to hold the properties is:
There is no best way. It might be that you should get
the family together and work as a limited partnership. It might be that
you should continue with your corporation and it might be that you should have
a family trust. However, I still prefer that people own the properties in
their own name because that is the easiest to administer, the cheapest
accounting for years and simplest for anyone to understand.
There are few things funnier than watching someone try and
explain their multi-layered trusts in my office. And as one recent
visitort to my office found out, he has spent over $250,000 defending his
trusts with the CCRA. By the way, he spent the $250,000 defending his
trusts with the lawyers and accountants who had set them up in the first place
and he was losing big time.
In asking him how, why, what, where and when he had set them
up, he only knew that they had been set up to avoid tax and that other people
he knew had used the same setup and the same lawyers and the same offshore
banks, etc.. But he did not understand them.
If you do not understand them yourself, do not do it. Revenue
agents can smell blood when they find a taxpayer who says, "I don't know why"
or "my accountant set it up. If it does not have an obvious business
reason which YOU understand, do NOT do it.
For instance in the last week, Judge Bonner of The Tax Court
of Canada turned down $27,000 of legitimate receipted travel expenses.
The taxpayer owns his own company. He had filled out his own T2200 which
is the document that the CCRA asks employers to fill out to justify their
employee's travel expenses.
The taxpayer owns the company and has absolute control over
how he pays himself and pays his expenses. In order to qualify for full
Canada Pension Plan benefits in the future, he was paying himself more than he
was actually earning from his company and deducting his travel expenses on line
229 of his return.
This is the way most realtors, life insurance, general
insurance and other commission salespeople are paid. The company pays
them a salary or commission which they have to pay CPP on and the employee
deducts his automobile and sales expenses.
It is very clear.
However, in this case, before 1986 when I suggested the change
after he adopted a child, the taxpayer had been paying expenses through his
company and taking very nominal salary. After the change which was promoted
more by his wife who wanted CPP protection, in his mind, he was only doing this
to qualify for CPP. In court, he could not get his mind around the fact
that this was the way employees are paid and consistently said he was only
doing this to qualify for CPP rather than that it was the way that his own
employees were paid as well.
The Kicker!
In addition, unknown to myself, he had been asked to fill out
a T2200. When filling out his T2200, he checked off that he was NOT required to
pay his own expenses and was NOT required to use his home for an office even
though he has ten employees working in his home office. The form was obviously
wrong and should have been discarded in my opinion. I was shocked when
Judge Bonner rejected two days of testimony about the facts and what the
taxpayer actually did and hung him out to dry (as CCRA had done in the first
place) because of the signed T2200 which stated quite clearly that he was not
required to pay his own expenses.
I had not been able to figure out why the CCRA had turned down
the expenses in the first place. They turned them down because HE SIGNED
A PAPER THAT SAID HE WAS NOT REQUIRED TO MAKE THE EXPENSES.
When you wander around with trusts and companies, you either
have to be prepared to hire a lawyer and accountant to supervise each move OR
be prepared to defend yourself later when you do not have a memory of the
transaction or worse still, do not have a "business" reason for the
transaction.
Paying $10,000 a year in legal and accounting fees for 20
years does not make sense to save $50,000 in probate fees for instance.
------------------------------------
The solution! Public liability is NOT a reason to
incorporate. If you depend on the "LTD" or "INC" at the end of your
company name to protect you, you will lose. As the directors and managers
and main shareholders of a family real estate holding company you have larger
rsik than if it was just you. You are considered more sophisticated with
a company and run into Director's Liability problems.
You are better protected with a good
insurance policy for liability and a life insurance policy to pay the probate
fees in the future.
And "watch out" if you intend to put these
properties in children's names. I cannot begin to count the number of
times that I have seen someone put their sons or daughters name on a piece of
property for estate purposes and watched a son-in-law or daughter-in-law walk
away with a big piece of it in the child's divorce.
Think about this for
a couple of months. Then come and see me in May. I am putting you
on a Q & A list I have. You will likely see more questions like
this and there are some others archived on the
www.jurock.com site.
Hope this helps.
Real Estate Taxation Specialists
US / Canada / Mexico Income Tax and Working Visa Matters 108-100 Park Royal South West Vancouver, BC, CANADA V7T 1A2
(604) 913-9133 Fax (604) 913-9123
Cell (604) 657-8451 10 AM to 10 PM 7 days a week |
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