Should you hold rentals in a corporation? Usually not — here are the exceptions

The rate problem: rent gets no small business deduction

Rental income is income from property, and a corporation that exists mainly to earn rent is a specified investment business unless it employs more than five full-time employees. That single rule removes the 12.2% Ontario small business rate from the conversation. Net rent inside a Canadian-controlled private corporation is taxed at about 50.17% in Ontario — investment-income rates, not business rates.

Part of that tax — 30.67 percentage points — is refundable, returned to the corporation at $38.33 for every $100 of taxable dividends it pays you. Integration means the combined corporate-plus-personal tax on a dollar of rent ends up close to what you would have paid earning it directly. But the refund only arrives when you pay the money out, which is exactly the opposite of deferral. The incorporated dentist keeps 88 cents on a retained dollar; the incorporated landlord keeps about 50 until the dividend flows.

What incorporating an existing portfolio costs

Moving properties you already own into a corporation is a real disposition with real friction, even when the income tax is deferred. Three costs dominate:

• Land transfer tax. A section 85 rollover can defer the income tax on the transfer, but Ontario land transfer tax is still payable on fair market value, and Toronto adds its municipal tax on top. On a $1M property that is a five-figure cheque for a change of name.
• Financing. Your lender must consent, and corporations typically lose access to the best residential mortgage pricing. Expect commercial terms — and a personal guarantee that puts you back on the hook the corporation was supposed to take you off.
• Trapped losses. A money-losing year on a personally held rental offsets your salary on your T1. The same loss inside a corporation waits for future corporate income and never touches your personal return.

Personal versus corporate, honestly compared

When a corporation still wins

The strongest case has nothing to do with rental tax rates: you already have corporate money. An incorporated professional or business owner sitting on retained earnings taxed at 12.2% would have to pay themselves at rates north of 40% to buy a rental personally. Buying inside the corporate group skips that extraction cost entirely — a down payment funded with 88-cent dollars instead of 55-cent dollars. The trade-off to plan around: passive income above $50,000 inside the group starts grinding the operating company's small business limit, so the structure and the portfolio size have to be modelled together.

Beyond that, corporations earn their keep when the portfolio employs more than five full-time staff (the income becomes active and the small business rate applies), when multi-unit or mixed-use buildings carry liability a numbered company should absorb, when unrelated partners co-own and need a share register instead of a handshake, and when a family succession plan calls for an estate freeze. If you are a non-resident owner — or plan to become one — the NR6, section 216, and withholding rules change the analysis again; that lives on our cross-border tax page for landlords.

Decide with a spreadsheet, not a slogan

We model both structures in a discovery call: your bracket, your financing, your province of purchase, your exit horizon, and whether corporate retained earnings exist to deploy. When incorporation wins, we set up the corporation, its CRA accounts, and the inter-company loans documented properly, then keep the T2 and corporate registers current through our incorporation and compliance service. When it loses, we tell you that too — a T776 and good records cost far less than an unnecessary corporation.

Source: CRA — Corporation tax rates.