The state of the real estate market has a significant impact on
CPA firms. During down times clients ask for help to wind down and
simplify their corporate structure. When the market is poor it
seems that simplicity, administrative ease and cost reduction trump
tax planning. When the market is strong however, they look for
innovative and tax efficient structures that will work for them and
their investors. So, what sort of structures best serve an active
1. Joint ventures.
This is an option to explore when the project is being developed
for sale, such as a condominium or townhouses. Usually the
developer has the largest share of the project and a number of
other venturers (investors) will contribute some or all of the
capital for the project. A joint venture agreement will specify the
rights and responsibilities of each venturer, indicate how profits
and capital contributions are to be shared, as well as joint and
several liability clauses. Other advantages of joint ventures
include investors having only a limited amount of their assets
invested in a particular joint venture project, the ability to pay
tax on the profits as business income at the corporate level and
the simplicity of wrapping up the joint venture when the project is
completed. There are also recent rules in place regarding deferred
year ends of joint ventures, when its year end is different than
that of the venturer's year end. Using a joint venture for
larger projects can also help in potential avoidance of large
corporation tax issues.
2. Sole Purpose Corporations.
Using a new company created solely for the project at hand,
assists in keeping the administration and eventual conclusion of
the project clean and less integrated into a developer's other
business activities. A new sole purpose corporation may limit the
liability of the developer to only the current project as well as
limit creditor financing guarantees. This can facilitate the
financing for a project and also allows for the effective
administration allowing transparency to those providing the
financing. The project can be wrapped up neatly as the last unit in
the project sells. The share ownership of the new corporation may
be structured to maximize the small business deduction which could
be otherwise lost if the developer combined this project with his
existing development company.
3. Tax Structuring.
A component of a successful real estate project is the tax
structuring to ensure that the developer and others involved pay
the least amount of tax on the profits of the project. Some of this
involves maximizing the use of the small business deduction and
timing the profits from the development to either defer tax or
account for the income over more than one tax year. There also may
be opportunities to choose a year end that will maximize the use of
the small business deduction by attempting to avoid the large
4. Other Structures.
Other options include the use of partnerships, limited
partnerships, trusts, and real estate investment trusts. Each of
these can prove very effective in the right circumstances.
5. Sales Tax.
Appropriate tax advice regarding GST is essential to ensure that
any development structure used in the development of real estate,
is in compliance with the constantly changing tax laws.
Based on the inevitable cycles in the real estate market, there is
a time and place for each option. With our current buoyant market,
developers would be wise to review their structures and consider
what opportunities they should be exploring. In our more than 45
years in Northern and Western Canada, we have helped hundreds of
owners structure their business. Contact us to see how we can
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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