If you are about to purchase a home and are self employed, then it is very important that you read this article, because I am going to tell you how to buy a home with your company’s money, tax-free.
The strategy entails taking money from your corporation and giving it to you on a tax-free basis in order to help you acquire a house that you plan to live in.
The Wrong Way – How to buy a home with a Corporation in Canada
Before I explain how the strategy works, let’s look at the wrong way to buy a home, which is a common mistake that many business owners make. The wrong way is to have your corporation pay a bonus or lump-sum salary payment to you. This way is ineffective, because approximately half of the payment must be remitted to the Canada Revenue Agency to pay for payroll taxes, leaving you with only 50% in your hands to purchase a home in Canada.
The Right Way – How to buy a home with a Corporation in Canada
The right way to purchase a home is to use an Employee Home Purchase Loan.
Here is how the strategy works – “How to buy a home with a Corporation in Canada”:
Step 1 – Loan
Your corporation makes a tax-free loan to you. The loan must be supported by a written agreement and there must be a mortgage in place. This means that the home is used as collateral for the loan. That’s not really a big concern, because it is highly unlikely that you are going to default on your own loan.
Step 2 – Interest
You must pay a reasonable amount of interest to your corporation in respect of the loan received. The amount of interest charged should be equal to the market rate of interest. For example, the market rate may be 2%, 3% or 4%. To determine the market rate, you can refer to the interest rates charged by major banks for mortgages.
Step 3 – Repayment Terms
There must be a reasonable repayment period for the loan, such as 10, 15 or 20 years. To determine the repayment period, refer to the amortization periods offered by major banks on conventional mortgages.
Step 4 – Employment
In order to qualify for an Employee Home Purchase Loan from your corporation, you must be an employee of your corporation. As such, an employment agreement is required and you must be receiving regular payroll cheques.
Conclusion – How to buy a home with a Corporation in Canada
In conclusion, the Employee Home Purchase Loan is an excellent answer to the question, “How to buy a home with a Corporation in Canada?”. This strategy allows you to take money from your corporation, without paying any tax, in order to purchase a home.
While this tax strategy sounds simple, it’s important that you engage the services of a Chartered Accountant in Mississauga or Toronto to ensure that it’s implemented properly. If there are errors, the CRA will include the loan proceeds in your taxable income, which defeats the whole purpose of the strategy.
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.