Why You Should Consider Rolling Your Personally-Owned Real Estate into a Corporation in Ontario

For many real estate investors and business owners in Ontario, holding real estate personally may seem like the simplest option. However, rolling personally-owned real estate into a corporation can offer significant advantages in terms of asset protection, liability limitation, probate tax avoidance, and estate planning. While this strategy may not be right for everyone, understanding its benefits can help you make an informed decision about your real estate holdings.

1. Asset Protection & Liability Limitation

Owning real estate personally exposes you to significant legal and financial risks. If someone is injured on your property, or if the property is involved in a lawsuit, your personal assets could be at risk. By transferring the property to a corporation, you create a legal separation between your personal wealth and the property. In most cases, liabilities arising from the property will be limited to the corporation’s assets, protecting your personal finances from potential claims.

Additionally, corporations provide enhanced protection in the event of a creditor claim. If you own multiple properties personally, a lawsuit against one property could put all of your personal assets — including other properties — at risk. Holding properties in a corporation can shield them from such claims by ensuring each property is legally distinct from your personal finances.

2. Probate Tax Avoidance

When real estate is held personally and the owner passes away, the property must go through probate before it can be transferred to heirs. In Ontario, probate fees (formally called Estate Administration Tax) are 1.5% of the value of assets exceeding $50,000. For a property worth $1 million, probate fees alone could exceed $14,500.

By transferring real estate to a corporation, you can avoid these probate fees. Instead of passing the real estate directly to heirs, ownership of the corporation’s shares can be transferred, which in many cases does not require probate. This strategy can result in significant savings and a smoother transition of wealth to the next generation.

3. Improved Estate and Succession Planning

Holding real estate in a corporation can also simplify estate planning. Instead of dealing with complex real estate transactions, heirs can inherit shares of the corporation, which can be divided in a more flexible and tax-efficient manner. Additionally, estate freezes can be implemented to lock in the value of the shares, allowing future appreciation to pass on to the next generation without triggering immediate tax consequences.

A corporation can also provide a mechanism to manage real estate holdings across multiple generations. Through shareholder agreements, voting structures, and trusts, you can ensure a smoother succession plan that aligns with your long-term estate planning goals.

4. Tax Planning Opportunities

Owning real estate in a corporation opens up several tax planning opportunities that may not be available to individual property owners. Some key tax advantages include:

• Income Splitting – If family members are shareholders of the corporation, dividends can be distributed to them in a tax-efficient manner (subject to tax on split income (TOSI) rules).
• Lower Corporate Tax Rates – Corporations benefit from different tax rates than individuals. While rental income does not qualify for the small business deduction, it can still be managed in a tax-efficient way when structured properly.
• Capital Gains Deferral – When rolling personal real estate into a corporation, a tax-deferred rollover under Section 85 of the Income Tax Act may be available, allowing you to defer capital gains tax.

5. Creditor Protection & Holding Structure Advantages

If you own multiple properties, using a corporate structure can offer enhanced protection against creditors. Many investors use a holding company structure, where one corporation owns the real estate, while a separate operating company collects rental income and manages operations. This separation helps reduce risk exposure and provides a safeguard against creditors targeting real estate assets.

Now is the Perfect Time to Act

With real estate values currently experiencing a downturn in many parts of Ontario, this is an ideal time to roll personally-owned real estate into a corporation. Lower property values mean that the fair market value used in the transfer will be lower, which can result in reduced tax liabilities when implementing a Section 85 rollover. This allows for greater long-term tax deferral and a more efficient estate freeze strategy – more on this topic here. Additionally, if structured properly, rolling over real estate at a lower valuation can maximize future tax planning opportunities, making this an opportune moment to take action before values rebound.

Considerations & Potential Drawbacks

While the benefits of holding real estate in a corporation are compelling, it is important to consider some potential drawbacks:

• Mortgage & Financing Challenges – Some lenders may impose stricter lending terms or require personal guarantees when financing corporate-owned real estate.
• Land Transfer Tax (LTT) – Transferring real estate from personal ownership to a corporation may trigger land transfer tax, which should be factored into the cost-benefit analysis. However, depending on the situation, LTT may be avoided if certain criteria are met during the rollover process.
• Administrative Costs – Running a corporation comes with additional administrative and compliance costs, including corporate tax filings, legal fees, and bookkeeping.
• Loss of Principal Residence Exemption – If you plan to transfer your personal home to a corporation, you may lose eligibility for the principal residence exemption, which shields capital gains on personal residences from taxation. However, with careful planning, this risk may be mitigated depending on the structure of the transfer.

Conclusion: Is Rolling Real Estate into a Corporation Right for You?

Rolling personally-owned real estate into a corporation can provide significant benefits, including asset protection, probate tax savings, enhanced estate planning, and tax efficiency. However, it is not a one-size-fits-all solution. The decision should be based on a careful analysis of your financial goals, investment strategy, and long-term succession planning.

If you are considering incorporating your real estate holdings, consulting with tax and legal professionals is essential to ensure that the transition is structured in the most efficient manner possible. Our team can help you assess whether this strategy aligns with your goals and guide you through the incorporation process. Contact us today to discuss your real estate tax planning options!