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  1. #1

    Incorporate or not - Family-owned Investment property

    Long time lurker, first time poster.

    Along with my parents and my brother, we own an investment property that has gained substantial value throughout the years (purchased 400k, worth 1.1M today) and my parents went on retirement this year and I was wondering if we should be incorporating to gain from income splitting.

    My train of thought is that since their revenue will be reduced substantially while my brother and I are currently gaining, should we incorporate, transfer the building ownership into it, and then distribute dividends only to my 2 parents?

    We plan on refinancing it to acquire a 2nd building in 2017.

    I am in the process of taking an appointment with a tax lawyer in the upcoming weeks to also discuss this but wanted to get a first impression from the pros here.

  2. #2
    It all sounds so simple...but like anything, it won't be.

    An accountant is probably better than a tax lawyer, and cheaper.

    You can flip the property into a corporation without triggering the capital gains by filing the proper paperwork, section 47 I believe.

    You can also create two different types of shares, so that you can pay out dividends to the class a shareholders but not to the class b shareholders. Technically, the other family memebers should put some money into the corporation as well.

    I don't think you'll be allowed to refinance the property to acquire it and then deduct the interest on it though, since you aren't using it for new investments...though you may be able to pay back the original $400k and still write that off.

    The messy part comes when your parents die as the shares become part of the estate and will trigger a capital gain. You may want to get insurance to cover this as well.

    It can, of course, all be done, but it will involve a lot of paperwork, and not necessarily go exactly the way you wanted...but you should be able to get close.

  3. #3
    Pardon the newbie question but why is this required? Can't we just pay out dividends to any shareholder we want with "standard shares"?

  4. #4
    Dividends are issued to a class of shares. If you declare class a gets a dividend, every holder of class a shares receives the same amount of dividend per share. The company deals with its shares, not the owner of the shares.

    If you wanted your parents to get a dividend, but not the kids, you could declare a dividend for holders of class a, but not class b. It's just a way to control payouts. You could also make shares voting or non-voting which can also be important when making decisions.

    Estates are always messy, but can be worse with shares of a company with illiquid assets and multiple shareholders as the holdings are deemed sold at fair market value upon death and can trigger huge taxes. Since there are other shareholders who may not want to sell, this can cause cash problems. If they owned it personally, it's easier to sell.

  5. #5
    You know, thinking about it, it may be simpler to get added to the title of the existing property, through a buyin or gifting.

    Then, all of you are on title and can refinance it, buying the new one with everyone on title.

    Not sure of the capital gains in this case, you'd need to talk to an accountant.

    Of course, there are those who believe that an incorporation can somewhat protect liability, but any good ambulance chaser can get around that.

  6. #6
    I am in the process of taking an appointment with a tax lawyer in the upcoming weeks to also discuss this but wanted to get a first impression from the pros here.


 

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