Corporate Held Real Estate

The Advantages and Disadvantages of Corporate Owned Real Estate

There are advantages and disadvantages to investing real estate. The good news is that real estate can increase in value over time. But on the downside, you will not be as liquid as you desire—which is a disadvantage if you are not in the market for long-term revenues. You will also be subject to taxes per year.

The robust Canadian real estate markets have attracted both personal and corporate investors due to low mortgage rates and strong economic growth. However, conventional thinking usually discourages companies to own real estate due to added corporate taxes. While there is truth to that, corporate owned real estate also has its advantages. Let us take a look at its pros and cons.

Companies And Real Estate

Companies work to make profit. Part of ensuring profit is to be knowledgeable about tax and legal principles, and then to take advantage of tax incentives. These are done in an effort to reduce corporate and personal taxes.

Small businesses can qualify for the status of CCPC or Canadian Controlled Private Corporation if they are at least fifty-one percent Canadian owned and “active”, meaning that they offering their product or service publicly. A CCPC that builds and sells homes can get tax reductions.

Canadian-controlled corporations will definitely enjoy reduced tax rates and reap the rewards of generating income. Also, another advantage of corporate real estate is the CGD or capital gains deduction that they can avail upon sale of the corporation’s shares for an active business.

A word of caution—if a company’s main source of income is through the rent of property, the company does not qualify as being “active” so they will not reap the benefits of a CCPC. That is why most experts advise against corporate real estate due to the bulk of taxes and insurance premiums associated to it.

There is a loophole though. Even if a company is not deemed “active”, it can still enjoy the CCPC benefits if it qualifies to become a “property management company”. This means that the company declares rent from its properties as its main source of income. But the business needs to have at least six full-time employees which is a lot of manpower unless you own millions of dollars worth of property.

The bottom line is that investing in corporate real estate without the CCPC exposes a business to up to forty-six percent in corporate taxes plus at least fifteen percent on after-tax dollars issued to shareholders as dividends.

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