# Purchase a commercial building for my business personally or through my Holding Co?



## Synergy (Mar 18, 2013)

Background (Ontario). My holding company (holdco) currently owns my business / operating company (opco). I have excess earnings that could be used to purchase the building.

PROS. By purchasing the building through my holdco I can use "pre-tax" dollars and reduce my personal liability exposure. Any capital expenses that can not be expensed through the opco can be paid by the holdco (upgrades to the building, additions, etc.).

CONS. Rental income generated inside the holdco will be taxed at or above the highest personal tax rate. Legal and accounting fees will be somewhat higher, a little more complex, etc.

Will the benefits of using corporate dollars to purchase the building offset the higher tax rate - in the long run? I'll be getting some opinions from my accountant and lawyer but I thought I'd get some insight from some of the savvy CMF members.

If I didn't have an operating business I would never consider using a holding company for passive investments (RE, etc.) unless I had numerous properties, a team of employees to manage said properties, etc.

Thanks in advance for your input!


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## tdiddy (Jan 7, 2015)

Many businesses will be looking at owning real estate corporately if it is involved in active business as a way around changes to passive investment. Probably worth waiting a few week/months until passive investment piece is clarified


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## Synergy (Mar 18, 2013)

tdiddy said:


> Probably worth waiting a few week/months until passive investment piece is clarified


Thanks for your input. That was similar advice I received from an accountant a few months ago. More recently I was under the impression that if the business income was generated from "active" business operations that this would not fall under the new passive income restrictions ($50k limit, etc.). Perhaps this is still being "worked out"?


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## tdiddy (Jan 7, 2015)

The business income shouldn't be affected by the new rules as you said -- until you invest it. My understanding is if the office/retail space one runs a business out of does not count as passive investment (but this can get really complicated so check with accountant), then retained earnings going towards this mortgage would have very favorable tax treatment on any cap gains of property down the road compared to say stocks (once you are over 50K limit). But really depends on how the details are written. My lease is up in 2019 and I'll certainly be thinking about this as well so keep us posted what you find out/decide.


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## Synergy (Mar 18, 2013)

^I thought one of the proposed changes was to eliminate the benefits of a Capital Dividend Account (CDA).



> For investment income earned on retained active business income that was originally taxed at the small business tax rates, the non-taxable portion of capital gains can no longer be added to the Capital Dividend Account (CDA).


This would be "unfair" as the shareholder would end up paying more tax than if the investment was held personally. Rates up to 70+%:confused2: I wish they would just spill the beans and let us know.


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## domelight (Oct 12, 2012)

The rent income to the holdco is active (not passive) provided you have the same common shareholder structure for both companies. There are a few rules but if the share structure is the same and the rent fair market you have no issues https://www.taxtips.ca/glossary/activebusinessincome.htm
Unless theres a rush i would definitely wait for the budget before proceeding, however at present the purposed legislation is the removal of the CDA will only apply to passive investments, capital property used in an active business will continue to be able to make use of the CDA.


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## Synergy (Mar 18, 2013)

^ Thanks for the info. I had a chance to review things with my accountant and he confirmed that the rental income would be considered "active", so long as Finance doesn't decides to come out with another new rule! I don't have the option to wait, the closing is schedule for April 1st. It was a tough decision considering all the uncertainty but we leaned slightly in favor of using the holding company. Only time will tell whether this was the right decision or not.


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## Synergy (Mar 18, 2013)

One thing we forgot to account for in the above discussion was HST. HST applies to the sale of all commercial buildings in ontario. Purchasing through a holding company allows one to recover the tax through an input tax credit (ITC). One would not be able to recover the tax if the building was purchased personally.

It's not a huge win, as I will now be required to charge HST and my opco will not be able to recover the tax (on the rent) as the operating business is tax exempt. Not having to pay the 13% up front still seemed like a better idea to me. If my opco was a registrant the advantage would be much clearer.

Now to wait until the spring budget ;o)


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## domelight (Oct 12, 2012)

Synergy said:


> One thing we forgot to account for in the above discussion was HST. HST applies to the sale of all commercial buildings in ontario. Purchasing through a holding company allows one to recover the tax through an input tax credit (ITC). One would not be able to recover the tax if the building was purchased personally.
> 
> It's not a huge win, as I will now be required to charge HST and my opco will not be able to recover the tax (on the rent) as the operating business is tax exempt. Not having to pay the 13% up front still seemed like a better idea to me. If my opco was a registrant the advantage would be much clearer.
> 
> Now to wait until the spring budget ;o)


 I'm not aware of your exact situation, but you should talk to your accountant about structuring a cost sharing arrangement, for prop tax, ins, interest. \etc. With regards to paying rent to which you will pay \hst that you will not recover. my response is |WHo said you HAVE to pay rent to the Holdco. The ITA says transactions must take place at FMV. It dosent say a transaction has to take place. Specific to rentals, you just cant claim a loss if your collecting less than FMV rent from a non-arms length party. That said the only thing your missing out on is building depreciation, which I am not always a fan of depending on the circumstances. Reverting back to your original comments, this structure may cause an issue with your Holdco's Liability exposure as associated with the Opco, consult your legal council regarding.


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## Synergy (Mar 18, 2013)

^ I meet with my laywer next wk so I'll ask some additional questions. If one didn't charge rent do you think you'd still be able to recoup the HST through an ITC? I was under the impression that I was required to charge rent. I believe my accountant wanted to me to collect rent (at FMV) or management fees in order to help spread my profits around - shared between the two companies - help reduce taxation, etc.

Owning the bld through the holdco will add some liability exposure, but less than if the bld was held personally. At least that's how I see it.


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