Why Buy Property Through a Corporation?

Many real estate investors in Quebec wonder whether it is better to purchase rental properties personally or through a corporation (incorporated company). This decision has significant tax, financial, legal, and estate planning implications. There is no universal answer — the optimal choice depends on portfolio size, the owner's income level, long-term objectives, and risk tolerance.

Advantages of the Corporate Structure

• Limited liability protection — In case of a lawsuit related to the property (tenant accident, hidden defect), only the corporation's assets are at risk, not the owner's personal assets (subject to personal guarantees required by lenders).
• Tax deferral — Profits retained in the corporation are only taxed at the corporate rate as long as they are not distributed as dividends or salary.
• Estate planning — Transferring shares of a corporation is simpler and less costly than transferring real property titles. An estate freeze allows the founder's share value to be locked in, letting heirs benefit from future growth.
• Income splitting — Dividends can be paid to family members who are shareholders, subject to the tax on split income (TOSI) rules in effect since January 1, 2018.
• Corporate deductions — Certain expenses, such as incorporation fees, professional fees, and management costs, can be deducted at the corporate level.

Disadvantages and Limitations

• Higher tax rate — Rental income in a corporation is generally classified as investment income, taxed at approximately 50.17% in Quebec (including refundable tax). The small business rate (approximately 12.2%) only applies to active business income, which typically requires five full-time employees.
• More difficult financing — Major banks offer less favourable terms to corporations: 25% to 35% down payment, higher rates, and no CMHC insurance. Shareholders often must provide personal guarantees, which reduces the limited liability advantage.
• Administrative costs — Corporate accounting, T2 return filing, annual report to Quebec's Registraire des entreprises, and maintaining minute books. Accounting and legal fees can reach $3,000 to $5,000 or more per year.
• No principal residence exemption — A property held by a corporation can never benefit from the principal residence exemption, even if a shareholder resides there.
• Double taxation — When profits are distributed to shareholders, they are taxed a second time (dividends or salary). The tax integration mechanism aims to balance the burden, but integration is not always perfect.

Impact on Mortgage Financing

One of the major obstacles of the corporate structure is financing. A-lenders (major banks) treat loans to corporations as commercial financing, with significantly stricter requirements. The minimum down payment is generally 25%, and can go up to 35% for multi-family buildings. Interest rates are 0.5% to 1.5% higher than residential rates. Mortgage insurance (CMHC, Sagen, Canada Guaranty) is typically not available for corporations, which rules out loan-to-value ratios above 75% to 80%.

Moreover, even with a corporate structure, lenders almost always require personal guarantees from the principal shareholders. This means the limited liability protection offered by the corporation is partly neutralized with respect to mortgage debt. The mortgage broker plays a crucial role in helping the investor compare personal versus corporate financing options and identifying lenders that offer the best terms for corporate structures.