Tax advice
Optimizing the taxation of your properties
Optimizing the taxation of your properties requires good planning and depends on several factors (type of property, legal structure, short- and long-term objectives). Here are the main strategies used in Quebec and Canada:
1. Ownership Structure
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Personally (in your name): Simple, but less flexible; rental income is taxed at your personal marginal tax rate.
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Corporation: Allows tax deferral (lower corporate tax rate) and more deductible expenses. Useful when properties generate strong cash flow or for succession planning.
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Family Trust: Good for income splitting and asset protection.
2. Maximizing Deductions
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Mortgage and line of credit interest: Fully deductible if tied to the rental property.
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Depreciation (CCA): You can deduct part of the building (not the land) to reduce taxes. Caution: it reduces your adjusted cost base (ACB) and increases recapture when you sell.
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Repairs and maintenance: Deductible immediately.
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Major improvements: Capitalized and depreciated over time.
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Management fees, insurance, property and school taxes, utilities: All deductible.
3. Long-Term Planning
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Mortgage repayment: Not deductible, but increases equity. It can be tax-efficient to refinance and reborrow (interest remains deductible).
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Capital gains deferral: When selling, you can spread the capital gain over 5 years if using a vendor take-back mortgage.
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Principal residence exemption: If you occupy part of the property, a portion of the capital gain can be tax-free.
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Rollover rules: Transfers to a corporation or children can sometimes be done on a tax-deferred basis.
4. Advanced Strategies
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Income splitting: With spouse or adult children through a corporation or trust.
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Estate freeze: Lock in the current value of the property in a corporation and pass future growth to the next generation.
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Corporate-owned life insurance: To cover tax liability upon death.
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Holding company: To centralize income, deduct additional expenses, and protect assets.
Without Prejudice.