Structuring a Real Estate Portfolio for Tax Efficiency

The client

An individual investor who had accumulated a portfolio of four residential rental properties in Ontario over ten years, all owned personally.

The challenge

The properties were generating significant positive cash flow. Because they were owned personally, the net rental income was added to the investor's high salary from their primary career, pushing their marginal rate above 50%. The investor wanted to sell one highly appreciated property to fund the purchase of a multi-unit commercial building, but was paralyzed by the anticipated capital gains hit.

The solution

A comprehensive real estate tax strategy addressing both ongoing income inefficiency and the upcoming capital gain.

• Expense optimization (Form T776): a deep review of past rental statements found they had not been deducting the interest portion of a refinanced mortgage used to improve the properties, nor capturing all eligible travel and property management expenses. We amended prior year returns to capture these missed deductions
• Capital gains planning: for the property slated for sale, we meticulously reconstructed the Adjusted Cost Base. The investor had spent $80,000 on capital improvements (a new roof and HVAC) five years prior but had never recorded it. Adding this to the ACB significantly reduced the taxable gain
• Corporate restructuring: for the acquisition of the new multi-unit commercial building, we established a real estate holding corporation

The result

The ACB reconstruction saved the investor over $20,000 in capital gains tax upon the sale of the residential property. By purchasing the new commercial building inside a corporation, future rental income will be taxed at corporate passive rates — initially high but refundable when the corporation eventually pays dividends, giving the investor total control over the timing of their personal taxation in retirement.