When considering the purchase of property for investment or other purposes, but not your principal residence, you need to consider whether to purchase in your own name, or through another vehicle such as an incorporated company. It is important to take a holistic approach and understand the goals and reasons for investing in the property. Some of the most common considerations are set out below.

Sole proprietorships

You can purchase the property in your own name and operate it as a sole proprietorship. This is an entity registered with the government and is, in effect, you the person carrying on a business under a different name. You still have all of the liability and personal responsibility.

Partnerships

More than one person goes into business with another, and together they buy property in their own names. They have the same responsibilities that they would in a sole proprietorship, and each partner has the authority to bind the other. Sometimes, complex partnership agreements are drafted, setting out each partner’s rights and responsibilities, and how the partnership will operate. A partnership can be registered pursuant to the Partnership Act of Ontario.

Corporation

A corporation is an entity that is created pursuant to Statute (in Ontario the Ontario Business Corporations Act) and owned by its shareholders. It has directors who report to the shareholders, and officers who manage and run the company and answer to the directors. It is a common structure in which to do business in Canada. It is a separate legal entity from the shareholders, and thereby provides limited liability to the shareholders. A corporation is essentially like a person. Corporations file their own tax returns, have addresses and can sign contracts.

Now, it gets more complex because we get into Limited Partnerships under the Limited Partnership Act and joint ventures. If the deal is big enough to merit this, then you need to seek proper legal and accounting advice to help with the setup and organization of your transaction and structure.

What if you buy a house on your own?

Principal residence

One of the main benefits of personally owning real estate in Ontario is the ability to claim an unlimited principal residence exemption on the appreciation of the property value. The principal residence exemption is an income tax benefit that exempts you from tax on the capital gains when you sell a property that is your principal residence, and provided you can demonstrate that it truly was your principal residence.

What many people don’t know is that there is a place in the Income Tax Act, and on your tax return, to designate your principal residence; you have an obligation to do this every year to avoid issues when you sell your home.

Corporations may be very useful structures for holding real estate in some situations, but in others, the cost, tax efficiency and complexity could be detrimental. This is why it’s important to seek good tax and legal advice prior to any property purchases.