Benefits of the Three Tier Structure for Real Estate Investors

Allan Madan, CA
 Oct 20, 2014
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Are you wondering what are the benefits of the three tier structure for real estate investors? Read this article to find out more

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The three tier structure is designed for and used by real estate investors. It consists of three corporations.

  1. A management corporation
  2. A Real Estate company
  3. Holding corporation

The management company provides property management services to the real estate company in turn for a fee. The real estate company owns land and buildings. The holding company behaves like a piggy bank and owns 100% of the shares of the real estate company. I use the term “piggy bank” because the real estate company distributes cash dividends from its rental profits to the holding company on a periodic basis.

There are three major benefits to having the three tier structure.

  1. The management company pays a very low rate of tax of only 15.5% on business profits.
  2. The real estate company has reduced risks for lawsuits because it’s not performing any property management services.
  3. The holding company protects cash retained earnings from creditors.

Here is the tip! If you are a serious real estate investor, use the three tier structure to reduce legal risk, protect cash, and lower your tax bill.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 8

  1. In this 3 tiered structure, then the lease is between the Management Company and the Tenant? Leases are normally between Landlord (the Real Estate Company) and tenant. How is the Property Management Company able to have a lease with the tenant? Is there is an assignment of lease? And if there is an assignment of lease, it is a sale of leasehold interests and there are tax consequences for it.

    1. Hi Khek,

      The lease agreement is with the real estate company. The property management company enters into contracts with vendors on behalf of the real estate company.

      Allan Madan, CPA, CA

    1. Hi Frank,

      You can contact your local accounting professional. While I cannot assure you that they will be familiar with these type of structures. You can also contact me for a consultation.

      Best Regards,

  2. Hi Allan, First, I want you to know that the properties we are talking about are all residential properties.
    In this case who is charging the rent from the tenants (real estate company or the management company). In any case won’t the real estate company be specified investment corporation as there are no employees (or less than 5 full time employees) in the real estate company. As a matter of fact less than 5 full time employees in the whole group of three companies. If it will be a specified investment business then highest tax rate will be charged on the passive income. If management co. will charge the rent from tenants and management company will pay the rent back to real estate company then also won’t it be the same thing. Real estate co. will be treated as specified investment corp (due to less than 5 F/T employees). Thanks

    1. Hi Kumar,

      Thanks for your question. The rent cheques are made payable to the Real Estate Company. The Management Company collects the cheques and deposits them in the bank account belonging to the Real Estate Company.

      Yes, the Real Estate Company is carrying on a Specified Investment Business, unless it is more than 5 full time employees. The ‘5 employees test’ is applied to each corporation separately.

      You are correct that the Real Estate Corporation is paying a high rate of tax. That is why it’s best to pay management fees from the Real Estate Company to the Management Company in order to reduce the taxable income of the Real Estate Company. Remember that the Management Company pays tax of only 15.5% on its business profits.

  3. Thanks for the article Allan, very interesting. A group of friends and I are purchasing residential apartments and we would like to consult you about this structure as the structure we currently have in place is going to be much more complicated than this. We’d like to keep it as simple as possible. We are based in Vancouver. Please advise how to connect with you. Many thanks Allan. Darren

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