As a real estate investor, you know all too well about taxes and their impact on your wallet. You pay land transfer taxes to buy property, you pay property tax for as long as you own a property, and you will probably end up paying capital gains taxes when you sell. On top of these are the myriad of other taxes that reduce your overall investment gains and slow your journey of growing your wealth.
What many investors may not realize are the many opportunities that exist to legally reduce your taxes and regain those returns. Proper structuring of your business and portfolio can end up saving you thousands on taxes if you know where to look.
To learn more about how you can improve your tax efficiency, we spoke to Robert Gauvreau, Chartered Professional Accountant, author, and founder of Gauvreau Accounting Tax Law Advisory. He specializes in helping business owners and entrepreneurs to transform tax burdens into savings.
According to Gauvreau, tax efficiency is an area in that many investors have room for improvement. He recounts his time as a presenter at Tony Robbin’s Business Mastery events, in which he polled data from thousands of attendees on their tax practices.
“It actually came up that 92% of all business owners or real estate investors were paying more tax than they legally had to,” remembered Gauvreau. “That means in that sample pool of thousands of people, only 8% were paying what they should have been. Expand that over a business population and there is obviously a lot of room for people to take advantage of savings opportunities by making sure that their tax structure is right for them.”
So what can one do to reduce their tax burden? Gauvreau says it depends on personal circumstances, but one of the best ways is to use a corporate entity when acquiring property.
“From my perspective tax efficiency, especially on investment income, is going to be imperative to maximizing wealth accumulation in the long run. The first thing to do is to understand the structures in which we can acquire real estate investments. What is the best position we can put ourselves in?”
“Although everybody's individual circumstances might be a little bit different if our plan is to generate wealth and income from these properties, a corporate structured real estate investment portfolio is going to be the direction we need to go. The investment income tax rate is over 50%, whereas the tax rate for a small business in real estate is just 12.2% in Ontario, and close to that rate all across Canada. By taking essentially 30% plus in tax savings and being able to reinvest that back into a real estate portfolio, you will be able to maximize your wealth accumulation.”
It may seem strange for a new investor just getting started with their first property to start right into a corporate business structure, but Gauvreau argues even newer investors can benefit. Not only do you get an early head start on your business, but it can also help you avoid difficulties down the line as you work to expand your portfolio.
“If your personal tax rate is somewhere around 15% and you’re making a one-off purchase, you may be inclined to buy it personally. But the challenge becomes down the road if you do end up acquiring more and more properties. All of these loans get tagged onto your personal credit rating, and when you go to apply for a loan for your next property, they'll look at all of your income and your principal repayment components, or even your blended repayment components and see if you can cashflow the next property. It all of a sudden becomes challenging to expand your portfolio. Also from a personal financing standpoint, we don’t want to be in a position where because we're trying to acquire real estate we can't get financing for anything else personally.”
Even for those who are already established, or may already be using a corporate structure, the journey of tax efficiency is not over. Tax efficiency is, according to Gauvreau, an ongoing process that requires careful attention from investors and their tax advisors. Rather than simply filling tax forms mindlessly, it is in your interest to actively be keeping up with new tax options or have someone on your side who can do it for you. It’s not about abusing tax laws - these are fully legal opportunities that may only present themselves when you take the time really explore your options.
“Every now and again, we have somebody come in and say “Well, my neighbour just told me that they bought a motorhome and they wrote it off in their business, and they didn't have to pay any tax this year!” Well, that's great for them. However, it's not a legitimate deduction, and if they get reviewed, they're gonna be in some trouble.”
“Part of the idea is that we always need to work with those advisors who are on the cutting edge of finding the newest solution that's actually viable, not just trying anything and hoping it works out. From the standpoint of a real estate investor, it’s a pretty unique tax situation, so people need to work with advisors who have knowledge of that industry. I would say one of the important elements for any real estate investor is to consciously and proactively invest in the right advisors, who can put them in the best position to maximize their wealth.”
In terms of the changing market conditions, it presents an even greater argument for why investors need to be proactive in identifying tax savings. Doing so not only protects their wealth in a declining market but can also help them identify opportunities for growth despite that.
“We have to continually be aware of the opportunities that lie ahead for acquiring certain types of properties because it could mean that our strategies need to change. Right now we're looking at a bit of a market disruption with the recession that we're falling into.”
“So I think it's so important that we don't put our blinders on and that we're constantly aware of what's going on in the economy and what opportunities lie ahead from a tax standpoint. Those that take advantage of them early on, when they're eligible to are going to be the ones that win, right. The early changes are where the taxpayers are winning before the tax laws catch up to it and close off loopholes.”
For those looking to make their first steps into tax efficiency and the savings it can bring, Gauvreau offers a simple guideline:
“If anyone is paying more than 12% tax on a personal rate, then they should be considering whether or not their structure is appropriate because we know we can use structure planning to get tax rates down to 12%. That doesn't mean that we can work magic and everybody's suddenly paying 12%, but it means that there's likely an opportunity out there for them. If you're at 12% or lower already, you're likely in a spot where it may not be as necessary.
“The second piece of advice would be to keep following the experts, speak with other real estate investors, and see what they are doing and what opportunities lie ahead. If you identify an opportunity, that would be a great time to reach out to someone like us. We can have a consultation to help explore your opportunities and the ways we can help you realize those savings.”
Finally, Gauvreau invites any interested investors to get in touch to open a conversation on how he and his team can help you to improve tax efficiency and grow your wealth. Gauvreau and his team are not only qualified tax professionals, but they also specialize in helping entrepreneurs and small business owners like yourself in maximizing their wealth accumulation through tax efficiency. For more information, visit gauvreaucpa.ca today.