Structuring Your Stocks and Real Estate Investments: Some Considerations, Part II

Posted by admin on May 8, 2007 in Real Estate, Taxes

In the first post on this topic, I outlined some considerations in structuring real estate investing. This post continues these considerations in the context of stock/dividends and other income:

Stocks/Dividends and other investment income:

Outside of a corporation, consider having all the stocks issued jointly with your spouse to avoid probate and other estate taxes.
Remember that passive income made inside a corporation in Canada is taxed at a higher tax rate than if the stocks were held individually.
It may be a good idea to have an investment “holding corporation” if you are self-employed to creditor-proof yourself or if you are in the highest tax bracket; for high earners, you are being taxed heavily already so the tax disadvantage is not that great and the corporation may allow you some credit-proofing.
Please note that the lifetime capital gains exemption on the sale of an investment holding corporation does not apply if 50% or more of the income that is being derived is passive income (the rules are complicated- please see an accountant about this). The lifetime capital gains exemption only applies to corporation generating active income.
HOWEVER, an investment holding corporation may be structured in such a way that the shares in the corporation are simply passed on from family member to family member so that wealth is transferred generationally with minimal tax consequences (again, see an accountant about this).
An investment holding corporation is more suited towards high income individuals, self-employed or a family with a lot of investment income.

Do NOT mix a real estate and investments in one corporation for liability reasons. Real estate holders are subject to a wide variety of liabilities which holders of investments are not (slip and fall, building code violations, tenant issues). You do not want the money you make in non-real estate investments to be subject to these liabilities.

The above is not for everybody and some of the structuring is quite complicated but, for anyone who has accumulated significant assets, these are some issues to consider. As always, this is purely informational and not tax and/or legal advice. Please talk to your accountant before doing anything. Good luck.

3 Comments on Structuring Your Stocks and Real Estate Investments: Some Considerations, Part II

By The Money Diva on May 8, 2007 at 8:28 pm

It is great to find someone who is blogging about corporate/individual structuring and choices from a Canadian point of view. I have sort of felt alone in caring about this topic. My understanding of tax rules is not very advanced yet, and I appreciate your concise summary!

MD:)

By FinancialJungle.Com on May 13, 2007 at 1:13 am

“An investment holding corporation is more suited towards high income individuals, self-employed or a family with a lot of investment income.”

I’m wondering what’s the line between high and low income/net worth. When an individual eventually reaches that line, how can he move his investments into a corporation without triggering too much capital gain tax.

By admin on May 14, 2007 at 5:34 pm

I have spoken to enough accountants that there is no “magic number”. It really depends on your mix of assets, tax history, personal history (are you married? If so, what is your partner making?) and earning potential in the future.

I have been told that some people in high liability fields (i.e. surgeons) go immediately to a holdco for liability protection and tax planning.