Matthew (anonymous) MadanCA Team edited answer

First off, thank you for your informative videos. They have helped me tremendously.

I have made some really good stock investments in my TFSA and was planning to withdraw 600K (tax-free capital gains) in order to open up a new corporation that deals solely with commercial real estate investing.

Basically, the plan was to find good deals in the commercial real estate space, use the 600K to leverage debt mortgaging with a bank, buy the property, renovate, refinance to take out my initial investment and at this point that commercial property would have enough income to pay for its operating costs and debt mortgaging as well as provide additional “passive income”. With my initial investment out, I would repeat this strategy with other commercial real estate properties and continue until I have enough “passive income” to “retire” comfortably.

After watching your video on how the Canadian government considers this passive income and will tax it at an incredibly high 50% tax rate, it leads me to the title of this question “is it worth incorporating a business that solely deals with commercial real estate investing?”

I understand that some of the 50% is put into a “refundable tax on hand” credit for when the corporation issues a dividend to its shareholders, but I understand this is only a 10-11% tax credit and the shareholders STILL have to pay additional personal tax on the dividend income they receive.

I understand that there is a legal precedent that allows passive income businesses to take advantage of the small business deduction on the first $500,000 (the main reason I wanted to incorporate a business) if they employ 5 full-time employees. But hiring 5 full-time employees is a huge expense and since I am just starting out seems like an unnecessary one.

I’m just wondering how to avoid paying a hefty 50% tax on what will likely be a 100K or lower passive (my entire) net business income for the first few years of commercial real estate investing? How am I supposed to pay myself a decent dividend and also expect the company to grow?

I appreciate and thank you for your response in advance.