Maximize Your Savings by Flipping Houses in a Corporation in Canada
If you’re flipping homes in Canada, your best bet is to do it through a corporation. As always, don't hesitate to reach out to us for assistance.
What is it?
Flipping homes is all about buying a property, sometimes giving it a makeover, and then selling with the main goal of earning a gain on the home. Income from flipping homes can generally fall under two categories:
Capital gain
Business income
Usually, when you sell a property, it is generally considered a capital gain however, if the intention of buying a property is to sell it for a profit, rather than earn rental income from it or for personal use, then the income would be characterized as business income.
Why does the categorization matter? This categorization of income is important because different types of income are taxed differently. If you’re home flipping activities results in business income, earning that income through a corporation is generally preferable than earning it directly as an individual or sole-proprietorship.
Anti-flipping tax
Recently, Canada introduced the anti flipping tax for individuals that buy and sell a home within a year. The new rule treats any home that is bought and sold within a year as business income, regardless of the reason behind the sale with some exceptions. Needless to say, if you buy a property with the purpose of selling the property (as opposed to renting it out or using it for personal purposes), it would still be characterized as business income even if it was bought and then sold for longer than a year.
What business structure should I use if I’m flipping homes?
If you’re flipping homes as the sole buyer, there are generally two structures you can use:
As an individual - the highest marginal tax rate for business income for an individual is 53.53% in Ontario. It is similar in other provinces. As such, doing business as an individual can become very costly due to taxes.
As a corporation - a Canadian owned corporation can generally qualify for a reduced corporate tax rate of 12.2% in Ontario. It is similar in other provinces.
Since flipping homes falls under business income, flipping through a corporation will let you take advantage of the 12.2% small business corporation tax rate, allowing you to defer 41.33% of tax if you’re at the highest tax bracket. You can then use those proceeds to continue to flip homes rather than having to pay the additional tax. You only have to pay the personal tax rates when you take money out from your corporation to pay yourself for personal expenses, not related to flipping homes.
If you’re flipping homes with a partner(s), a more customized solution is better suited for your needs. You can contact us at Tax Heroes to discuss the best structure.
Example: Meet Sam and John
Let’s run a comparison of Sam and John. Each of them is interested in flipping homes but Sam will flip the home as an individual while John will flip the home through a corporation. Sam and John are both subject to tax at the highest marginal tax rate of 53.53%.
Sam bought a home for $30k as an individual and sold it 6 months later for $50k. He has business income of $20k and will need to pay tax of $10,706. That leaves him with $39,294 of cash after tax.
John bought a neighbouring home for $30k through a corporation and also sold it 6 months later for $50k. His corporation has business income of $20k and will need to pay tax of $2,440. That leaves him with $47,560 of cash after tax in his corporation.
| Client | Formula | Sam as an individual ($) | John through a corporation ($) |
|---|---|---|---|
| Proceeds from Sale | "A" | 50,000 | 50,000 |
| Cost | "B" | 30,000 | 30,000 |
| Gain (Business Income) | "C = A - B" | 20,000 | 20,000 |
| Tax rate | "D" | 53.33% | 12.20% |
| Tax payble | "E = C * D" | 10,706 | 2,440 |
| After tax proceeds | "F = A - E" | 39,294 | 47,560 |
| Tax deferral from corporation | $8,266 |
The Lesson
If John wants to pay himself personally that entire amount from the corporation so he can use the funds for personal expenses, he will end up in a similar situation as Sam.
If John wants to use the proceeds to continue to flip homes in his corporation, he will now have an extra $8,266 of cash to use for flipping compared to Sam, which will make him better positioned to keep flipping homes.
Ready to save tax while flipping homes? Contact us at Tax Heroes, we’re happy to walk you through the steps.
