Confusing real estate development with real estate investment impedes tax efficiency, says Chartered Professional Accountants in Vancouver
Vancouver, BC -- (ReleaseWire) -- 06/25/2019 -- Tax planning is a tricky subject at the best of times. According to a new article that's just been posted by the Vancouver Chartered Professional Accountants at Mew + Company, understanding the distinction between real estate investment and development is imperative to developing an efficient tax strategy for real estate holdings. For more, go to: https://www.mewco.ca/blog/vancouver-real-estate-investments-personal-or-corporate-ownership/
Taxpayers often confuse real estate development with real estate investment. If a taxpayer is planning to buy a piece of land and build a new house or substantially renovate an existing house, this is real estate development, not real estate investment. The distinction is important because the tax treatment of the profits from development versus investment is very different.
The tax differences between real estate development and real estate investment are broadly outlined. For example,
"Real estate development…is considered active business income ("ABI"). As such, if development is done in a CCPC, like all ABI, up to the first $500K of profit each year would be taxed at the 11% corporate tax rate."
In contrast, "the profit from renting real estate is not considered ABI by the Income Tax Act. Net rental income is taxed as investment income. Hence if the real estate investment is held in a CCPC, the initial corporate tax rate is a whopping 50.67%. However, 30.67% is refundable tax upon the distribution of dividends to the shareholder…"
The article acknowledges that real estate investment is a much easier concept for taxpayers. This is where a property is purchased and rent is collected from a third party. It also briefly discusses why most people should hold real estate investment personally but for exceptional case.
"If the taxpayer owns a CCPC and his main source of income is from the profits of the CCPC, then it is very likely that all the free cash is held as retained earnings in the CCPC. Remember that CCPC shareholders generally extract just enough income personally to pay for living expenses. The remaining funds are left in the CCPC as corporate tax rates are much lower than the personal tax rates. Hence, if the shareholder is contemplating a real estate investment, if the decision is to hold it personally, personal taxes would have to be paid first on the draws–which is not tax efficient. If the CCPC buys the investment directly, there is no tax consequence on the purchase."
Ultimately, the blog advises that if a "taxpayer earns most of his income through employment, then it only makes sense to hold the investment property personally. However, if the taxpayer earns most of his income through a CCPC he controls, then holding the investment property in the CCPC makes more tax sense."
As a team of Chartered Professional Accountants in Vancouver, the professionals at Mew + Company are experts in trust & estate planning services in Vancouver. To learn more about tax efficient strategies for owning real estate, contact 604-688-9198.
About Mew + Company
Mew + Company, Vancouver, is an ideal solution to the taxation problem. With a simple philosophy of building long-lasting customer relationships, the company has been serving corporate clients in a variety of fields—including restaurants, real estate, retail, and the service industry. Investing in their specialist services will undoubtedly be fruitful for all kinds of clients.
To learn more about Mew + Company and discuss their services, log on to https://mewco.ca/
Lilly Woo, CPA, CA, CFE, CFP
Mew + Company Chartered Professional Accountants
604 688 9198
Company Website: https://www.mewco.ca
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