My question is: Canadian-specific
QUESTION: Hi David,
I currently own a rental property and am in the process of purchasing another under mine and my wifes names. My income tax bracket is approx 30% with the wages form my job, excluding the rental income. Does it make sense to start a number company for any tax advantages, or is it not worth while at this pint? At what point does it make sense to start a company on paper only?
Thanks for your help.
Frank
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david ingram replies:
Forget about the incorporation. No tax advantage and a whole lot more accounting and legal costs.
My opinion is that it does not make sense to have a corporation for rental property unless you have a full time employee who is running it or making major decisions. At that point a corporation does protect you a bit from lawsuits which might arise from your employee's actions.
Otherwise as an officer and director of a corporation, you are (or can be found) personally responsible for law suits against the company because you are the "driver".
Think of it this way. Your corporation has not got a lot of money but owns a car that you drive.
You hit an important person with your car and make him a quadriplegic. He sues and wins $5,000,000 and your insurance is only good for $1,000,000 or $2,000,000. At this point, they will go after the company's assets and then when that does not cover the amount, they will go after the assets of you, the driver.
As the manager of your corporation, you are the driver.
What you do have to make sure is that the mortgage on your own home is tax deductible.
For instance, BEFORE you buy the next property, pay down teh existing non-deductible mortgage by whatever amount you have that you were going to use as a down payment on the next property. Then, use your increase equity on the house to borrow whatever you need for a down payment by using the house as a down payment.
GOTO www.centa.com, click on newsletters in the top left box and then read the November 2001 edition to find out tips on how to make your mortgage deductible.
Use Joan Marsh (604) 535-9981 or Glen Kelleway at 476-0053. They are both mortgage brokers who can help make your mortgage interest deductible.
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