Use Retained Earnings for Real Estate Growth

How retained earnings and Holdcos can support real estate investing

Using retained earnings and a Holdco for real estate investing is common in Ontario and across Canada among successful private business owners. HVAC, refrigeration, elevator, diesel, fire systems, and other service operators often use this structure to move excess retained earnings from the operating company into long-term multifamily and other durable real estate investments through a Holdco.

Here is a simplified overview of how the structure typically works.

Basic structure

1. Operating Company (Opco)

This is:

• HVAC company
• Refrigeration company
• Service business
• Has technicians
• Earns active business income

The Opco:

• Pays corporate tax on business profits
• Keeps retained earnings inside company
• Can pay intercorporate dividends to Holdco

2. Holding Company (Holdco)

This company:

• Receives excess retained earnings
• Holds investments
• Buys real estate
• Can own multifamily buildings
• Can flip properties
• Can partner with investors

Usually:

• Same owner owns both companies
• Or family trust owns both

Step 1 — Moving money from Opco to Holdco

Example:

• HVAC company has $2M retained earnings

Opco pays:

• Tax on active business income first

Then:

• Remaining after-tax retained earnings can usually move to Holdco as an intercorporate dividend

Usually:

• No immediate personal tax
• No immediate additional corporate tax
• Done accountant-to-accountant properly

This is one of the main reasons Holdcos exist.

Step 2 — Holdco buys property

YES — Holdco can buy:

• Multifamily
• Mixed-use
• Commercial
• Rental buildings
• Fix-and-flips

Example:

Purchase:

• $650k property

Uses:

• 30% down payment
• $200k renovation
• Closing costs
• Reserve fund

Mortgage:

• Bank finances remaining amount

Very common:

• Owner personally guarantees mortgage

Lenders often want:

• Corporate guarantee
• Personal guarantee
• Net worth statement
• T2s and financials from Opco

Step 3 — Renting the property

After renovation:

• Holdco rents property
• Rent goes into Holdco

Cash flow treatment:

Rental income minus:

• Mortgage
• Taxes
• Insurance
• Repairs
• Interest
• Utilities

Remaining profit:

= Rental profit inside Holdco

Holdco pays:

• Corporate tax on rental income

Important:

Rental income is generally considered passive income.

Passive income tax rates are usually higher than active business income tax rates.

BUT:

Some tax may later be refunded when dividends are paid to shareholders.

Your accountant tracks this through:

• RDTOH accounts
• CDA accounts
• Refundable taxes

Step 4 — Selling the property

Example:

• Total project cost = $850k
• Sold later for $1.2M

Profit:

Approx:

$350k before selling costs/taxes

Now important:

Capital gain vs business income

This matters A LOT.

If CRA sees it as:

LONG-TERM INVESTMENT

Then:

Profit may be treated as CAPITAL GAIN

Example:

• $350k gain

Only 50% taxable

Very favorable tax treatment.

If CRA sees it as:

FLIP / BUSINESS ACTIVITY

Then:

Entire profit may be BUSINESS INCOME

100% taxable corporately.

CRA looks at:

• Intent
• Time owned
• Renovation activity
• Frequency of flips
• Advertising
• Experience
• Financing structure

Holding for 2+ years as rental helps support investment treatment, but does NOT guarantee it.

What happens to the profit?

After sale:

Cash stays inside Holdco unless distributed.

Holdco can:

• Reinvest
• Buy another building
• Pay shareholder dividends
• Lend money
• Invest in stocks/GICs
• Partner in other deals

Does Holdco pay money back to Opco?

Usually:

NO NEED.

Normally:

Money flows:

Opco → Holdco

Not usually back.

But:

Holdco CAN:

• Loan money
• Invest into Opco
• Pay dividends if structured correctly

Accountants structure this carefully.

Can a co-investor invest using their corporation?

YES.

Very common.

Example:

Your Holdco owns:

• 50%

Investor Holdco owns:

• 50%

Profits split:

• Cash flow
• Appreciation
• Sale proceeds

Could be:

• Joint venture
• Shareholder agreement
• LP structure
• Tenant-in-common structure

Lawyer/accountant sets this up.

Simple example flow

HVAC Opco

• Earns profits
• Keeps retained earnings

↓

Dividend to Holdco

• Tax-efficient intercorporate dividend

↓

Holdco buys multifamily

• 35% down
• Mortgage for 65%
• Owner guarantees loan

↓

Holdco renovates and rents

• Rental income collected
• Pays expenses
• Keeps cash flow

↓

Property appreciates

• Sell later

↓

Profit stays in Holdco

• Lower tax if capital gain
• Higher tax if treated as flip

↓

Holdco reinvests or pays dividends personally

Very important items

You need:

• CPA experienced in Holdco structures
• Real estate lawyer
• Proper bookkeeping
• Proper shareholder structure
• Tax planning BEFORE transfers
• Mortgage broker familiar with corporate borrowing

Big picture

This is exactly how many successful service business owners:

• Diversify away from only business value
• Build hard assets
• Create long-term appreciation
• Reduce dependence on future EBITDA multiples
• Build retirement income outside operating company risk

Especially common among:

• HVAC
• Refrigeration
• Elevator
• Waste management
• Heavy mechanical
• Fire systems
• Trades businesses with strong retained earnings