Delean: An inherited multiplex raises complex questions

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And a reader wants to know: Can the GST credit be used to pay down income-tax debt?

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Using a holding company to own a rental property and paying a tax debt to government with money it provides were among the topics raised recently by readers. Here’s what they wanted to know.

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Q: I inherited half of a multiplex from my parents, who passed away. My sibling is willing to sell the other half to me. Would there be any advantage to putting it in a holding company (which already exists, but has no income) versus owning it as personal property?

If I go the holding company route, I would be interested in including my children before getting the mortgage, but I’m not sure what that might mean for them in terms of taxes. We had to pay a fortune in taxes when our parents died, and I’d like to minimize that for them.

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A: “This is something we get asked a lot,” said Nick Moraitis, partner at Montreal accounting firm FL Fuller Landau LLP. “The answer changes based on the facts of each person’s situation.”

Placing a rental property in a corporation is a valid alternative to owning it personally, Moraitis said, “but the decision requires an analysis of the facts and the numbers (specifically net rental income and property value) to see what the benefit would be.”

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The corporate tax rate for earning passive investment income such as rent is high at 50.17 per cent, he noted, “so the first question is, what’s the reader’s personal marginal tax rate? If that rate is low, there isn’t really a benefit.”

There is a cost to having a corporation own the property, as it requires its own bank account, set of books, financial statements and tax returns, all of which generally cost more than for an individual, plus the one-time cost of transferring the reader’s 50 per cent to the corporation.

And whoever the buyer is of the sibling’s 50 per cent — the company, the children or the reader — the property must change hands at fair market value.

Moraitis said one of the advantages of having a corporation own it is that adult children can be included as shareholders so that the future growth in value is shared. “This helps mitigate taxes on the increased value of the property if the reader dies, because the portion held by the children is not taxed upon his or her death.”

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Another advantage is a corporation’s limited liability. A liability problem with real estate owned personally exposes all the owner’s assets to creditors, whereas it can be limited with corporate ownership, Moraitis said.

But if you go the shareholder route, you’ll need a shareholders’ agreement to regulate the affairs of the company and involvement of the family. “It’s not a simple question. There’s lots to consider.” Moraitis said.

Q: Because of the pandemic, I was out of work much of 2021 and receiving government benefits. I ended up owing several hundred dollars to Ottawa for income taxes — money I don’t have. Can the federal GST credit that I’m entitled to this next year be used to pay off this debt?

A: You raise an interesting point. It’s a quirk of our tax system that revenue departments both take and give, with most of the back-and-forth occurring in the low and middle income brackets. Why not use future benefits to pay off an outstanding balance when you’re in a pinch? Canada Revenue Agency says it is possible to pay an income-tax debt with the GST credit if the taxpayer is in financial difficulty. It says a CRA employee can work with them on a payment arrangement if they call 1-800-387-1193.

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Q: You recently responded to a question by indicating that management fees relating to the administration of registered investment accounts such as RRSPs, RRIFs and TFSAs generally are not tax-deductible. What about the fees for non-registered mutual-fund accounts?

A: It depends on the situation. If you pay a fee to an investment professional to administer an unregistered investment account for you, that could be tax-deductible. Management fees paid by the mutual fund generally are not for individual investors.

The Montreal Gazette invites reader questions on tax, investment and personal-finance matters. If you have a query you’d like addressed, please send it by email to Paul Delean at [email protected] 

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