Buying under a corporate name, pros and cons

As an investor, you may have been advised to put your investment properties in a corporate name.  There tends to be two primary reasons for this:

1. Income tax benefits: You can take a dividend income which is taxed at a much lower income tax rate

2. Limited Liability on you personally: If you were sued (ex: a tenant is injured on your property) or had a legal case against you as a landlord, it would be against the corporation and not you personally so it can assist in protecting your personal assets in this type of situation 

So the title of the property will be in a corporate name but you need to know that ALL lenders will require your personal guarantees on a mortgage.

Personal Guarantees: A personal guarantee means that even though the title and mortgage will be in a corporate name, the owners/directors (you as the borrower) are personally liable for loan to be paid. You cannot hide behind the usual corporate protection mentioned above. Should the loan default, the lender can pursue the corporation AND then you personally (and you assets) for full repayment and any default expenses.

The only time personal guarantees may not be required is if:

•      the property is underwritten commercially

•      the corporation is established for at least three years

•      the corporation can provide three years full financial statements and corporate tax filings that are strong

•      the corporation has a high asset base, and

•      the corporation has positive cash flow and consistent net profit

The key thing here is to remember that from the lenders prospective we are asking for the best of both worlds... we want residential discounted rates and terms but we want the tax benefits and limited personal liability of having the property under a corporate name.  More and more lenders are saying you can’t have both so decide where you want to be either residential or commercial? 

Our recommendation: There are still lenders allowing registration under a corporate name under their residential guidelines; however the corporation may have to be a real estate holding company as opposed to an operating company.  Be prepared that you may also have to increase your down payment depending on the overall application. 

And always remember to seek professional legal and tax advise as your situation might be quite different from others