Buying an Alberta rental through a corporation

"Should I buy it through a corporation" is usually asked as though it has one answer. It does not, and the reason is a definition most investors have never heard of.

What follows is the CRA's own language on how corporate rental income is classified, quoted rather than paraphrased, because the classification is what decides the tax rate. It is not tax advice, and the section at the end explains why you still need an accountant.

The definition that decides it

The CRA defines a specified investment business as "a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties."

Read that once more with a rental building in mind. A corporation whose principal purpose is collecting rent is describing a specified investment business almost word for word.

That matters because of what comes next. The CRA states that income from a specified investment business is "generally not considered active business income" and is "not eligible for the SBD", the small business deduction.

There is an exception, and it is narrower than most investors expect. Income from a specified investment business is treated as active business income, and is eligible for the small business deduction, if:

• the corporation "employs more than five full-time employees in the business throughout the year", or
• an associated corporation provides managerial, financial, administrative, maintenance or similar services, and the corporation "would have to engage more than five full-time employees to perform these services" if the associated corporation were not providing them.

More than five full-time employees, throughout the year. An 8-door building with a property manager on contract is not close to that threshold, and no amount of structuring makes a contractor into a full-time employee.

One further note from the same CRA page, because it is regularly misapplied: the business of leasing property other than real property is not considered a specified investment business. Real property is precisely the case that does fall in.

What the classification costs

The federal arithmetic is published and worth knowing in outline.

The basic rate of Part I tax is 38% of taxable income, 28% after the federal tax abatement. After the general tax reduction, the net federal rate is 15%. For a Canadian-controlled private corporation claiming the small business deduction, the net federal rate is 9%.

So the practical question is not whether a corporation pays less tax in general. It is whether this particular income sits at 9% or at 15% federally, before provincial tax, and the specified investment business rules are what answer it.

Aggregate investment income is also what determines the refundable portion of Part I tax, calculated on Schedule 7. Some of the tax paid on investment income is refundable to the corporation later, which is why comparing headline rates alone gives a misleading answer in both directions.

The passive income grind catches people who own other businesses

This is the part that surprises investors who already have an operating company.

The CRA states that a CCPC's business limit "is also reduced if the CCPC, and any other corporation it is associated with, earn combined income from $50,000 to $150,000 from passive investments", and that the business limit "is nil once the combined income from passive investments is more than $150,000". The measure used is adjusted aggregate investment income, calculated in Part 2 of Schedule 7.

Follow that through. A rental corporation throwing off passive investment income can reduce, and past $150,000 eliminate, the small business deduction available to an associated operating company that has nothing to do with real estate.

The building does not have to be a bad investment for this to be an expensive surprise. It only has to be associated with a company that was relying on the small business rate.

Alberta administers its own corporate tax

Alberta and Quebec do not have corporation tax collection agreements with the CRA, so the CRA's provincial rate table excludes both. Alberta runs its own program.

Alberta's small business threshold is $500,000, and Alberta states that Canadian-controlled private corporations "in an associated group share the maximum small business threshold." The associated group point is the same trap as above, arriving a second time at the provincial level.

Current Alberta rate percentages are deliberately not quoted here. They are set by the province, they change, and this page will not be updated the day they do. Read them from the province directly, which is the practice this whole section is arguing for.

What a corporation does not change

The GST rebate. The federal purpose-built rental housing rebate is 100% of the GST with no cap on qualifying new rental housing. It is a rebate on the housing, not on the owner's structure.

The program parameters. MLI Select's point tiers, the loan-to-cost ceiling and the debt coverage minimum are set by CMHC and the participating lender and vary by file. They are not a function of whether title sits in a company. What a corporate borrower can change is the covenant the lender wants behind the loan, and that is a question to put to the lender early rather than discover at commitment.

Where this actually goes wrong

The structure gets chosen before the question is asked. By the time a corporation owns the land, undoing it is a disposition rather than an edit.

The associated corporation rules get missed. Investors think about the rental company in isolation. The CRA does not.

"Corporations pay less tax" gets treated as a rule. For a building whose principal purpose is deriving income from property, and which will never employ more than five full-time people, that belief is closer to backwards than to right.

What this does not tell you

This is a summary of published CRA rules, current as at the review date at the top of this page, and nothing more. Tax rules change, they interact with facts this page knows nothing about, and the outcome for any particular investor depends on their other holdings, their associated corporations, their province and their intentions for the building.

It is not tax advice and it is not a recommendation about any structure. The purpose of this page is to let you ask an accountant a sharper question, not to replace one. Anyone deciding on a structure should get advice from a professional who has looked at their actual situation.

Specific projects are presented by licensed representatives, not by this platform.