Rental transfer to LC

Our Experts Answer:

I would be wary of this plan.

Firstly, any sale to a related party must be at market value. This is likely to trigger a full depreciation recovery with resulting tax payable.

Secondly, there may be a small tax saving in a company given it has a 28% rate. Whether this constitutes tax avoidance is probably determined primarily by whether the decision to restructure is tax motivated. Even then though, a distribution of a dividend by the company will be taxable to the shareholders and if their rate is 33% a top up tax payment is required of 5%.

Thirdly, there is a problem accessing capital gains in closed companies. If they are distributed as dividends these dividends are taxable. The solution is to liquidate the company prior to distribution. This is problematic though if properties remain in the company. Neither the LAQC nor its replacement the LTC suffer from this problem and was a big reason for their popularity over and above the flow through of losses.

Fourthly, the two year clock for the new bright line test will be reset for the company meaning that if the company sold within two years these gains would be taxable to it.

So, overall, I'm struggling to see much of an upside with this for you and can't imagine the goal of "making the reporting easier" is really achieved by this. There are, in fact, more onerous reporting requirements for companies.