Purchasing a Primary Residence with a Corporation in Canada Watch Video
Allan Madan, CPA, CA
Are you a business owner that would like to purchase a new home with your corporate savings. Read More…
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.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Hi Allan, is this program only for those who want to purchase a home? What if an employee already owns a home and would like to transfer the mortgage to the corporation (say, after it matures a 5 year term at regular bank)? Is that possible?
Thank you,
Sonny
Hi Sonny, no, this is not possible.
Hi Allan,
Is it possible to sell my personnal primary residence to my coorporation using this strategy or any other strategy ?
Thanks
Hi Abdoul, if you sell your primary residence to your corporation, then you cannot claim the principal residence exemption. So do not do this.
Hi Allan,
If owner of a company purchases accounting software on Dec 2017 , the amount is $1475,00, and he uses it at that time, (her fiscal year end was 31 March 2018), How will she treat with amortization of that software? (for bookkeeping and also T2 purposes).
I guess, in T2, it should be class 12 and rate 100% and also use of half-year rule. (If yes, I calculated 464 as CCA and UCC is 1011) Was this calculation correct for T2?
For bookkeeping, I also used that method to reach out CCA and UCC. Was it correct? Is there any difference in bookkeeping and also T2 for calculation of CCA & UCC?
Your help is strongly appreciated.
Best Regards
Vahid
Hi Vahid,
Software is a Class 12 asset for CCA purposes with a deduction rate of 100%. The half year rule applies. As a result, the depreciation (or capital cost allowance) should be calculated as follows:
$1,475 (purchase price) x 100% (CCA Rate) x 1/2 year rule = $737.50.
You can follow the same basis of depreciation for accounting and tax.
Interesting strategy. What happens when the home is sold in the future? I assume it won’t get the principal residency exemption? Any issues with the rent rate to a related party (i.e. can rent be equal to the mortgage expense)?
Hi Andrew,
A corporation cannot claim the principal residence exemption. One half of the capital gain realized upon sale of the property will be taxable to the corporation. Note that the tenant must pay fair market value rents to the corporation.
Hi Allan,
Could you please explain why Money Bag Ltd can’t make a purchase of the home directly i.e. what House Inc is needed for?
E.g. if I am a sole owner of a corp, why can’t my corp make a purchase of home directly for me to use as a primary residence?
What is the downside of that strategy compared to the one you’ve described in your article?
Thank you,
Walter
Hi Walter,
Money Bags Ltd. can buy the home directly. However, if Money Bags Ltd. has other assets (e.g. cash, marketable securities, business assets) then it’s not advisable for Money Bags Inc. to also own real estate. Instead, real estate should be isolated in a separate corporation, so that it is not exposed to risk from potential business lawsuits stemming from the operations of Money Bags Inc, and vice-versa.
The rent you are paying to House Inc. is the money you got in first place from Money Bags Ltd. as pay and ‘ll pay income tax on that plus when House Inc. get that as rent it then has to pay corporate tax on that as well. And if you go dividends then Money Bags will pay corporate tax on that plus House Inc corporate tax when it gets them as rent. Seems to me you will be paying double tax, is that correct?
Hi Muhammad,
You are not double taxed. Money Bags Inc. (an operating business) will loan money to House Inc. House Inc. will not pay tax on the loan received. House Inc. will only pay tax on rental income collected in the year.
Sonny, When my mortgage comes due i would like to have monebags purchase my existing house and pay out the mortgage from me with retained earnings and then rent it back to me for a reasonable rent (market value). Moneybags would also then be responsible for maintenance, repairs, taxes, improvements as required. Could i also have money bags include utilities in the rent? Does moneybags have to show immediately a net profit or can break even or small loss or first few years fwith expectation that will make capital gain on the value of the property?
Hi,
I don’t recommend that you undertake the strategy you are proposing. This is because you cannot claim the principal residence exemption on the sale of your home to a company that you control. As a result, the sale of your home to your company will create a taxable capital gain.
Hi Allan,
for this strategy to work does the property have to be a principal residence? If one has cash and would like to buy a home in addition to one owned previous and decides to incorporate for this purpose so that one can lend the funds to the corp to by the home and then receive the loan repayment as monthly rent from the corp to the individual, would this work tax free. The goal being that one would have bought a property and receive income tax free. Would you be kind to explain implications of this strategy?
Thanks
Ben
Hi Ben,
If you transfer an existing property to a corporation, and the property has increased in value since you purchased it, then there will be a taxable capital gain realized upon the transfer. To get around this, you could transfer the property at its cost amount pursuant to Section 85 of the Income Tax Act.
The debt owing by the corporation to you can be paid to you tax free from the cash-flow the corporation generates from its rental property. However, the corporation will still have to pay income tax on the net rental income each year (approximate corporate tax rate is 50%). As a result, the strategy you are suggesting will not help you save tax.
Hi Allan,
Great post ! If I purchased two identical properties (A and B, and they are both not my primary residence) A personally, and B under House Inc. Could you explain the difference between the property A and B at the time of the selling ? How much tax would I pay for each scenario if I have some gain ?
Thanks
Hi Brian,
When you sell property A, one half of the capital gain will be included in your personal income and will be taxed at your marginal rate. For example, assume that the capital gain is $100,000 on the sale of property A and your marginal tax rate is 46%. In this case, you would pay $23,000 of income taxes on the sale of property A ($100,000 x 1/2 x 46%).
When your corporation sells property B, it will have to include one half of the capital gain in its income. The taxable portion of the capital gain will be subject to a 50% corporate tax rate. For example, assume that the capital gain is $100,000 on the sale of property B. In this case, your corporation would pay $25,000 of income tax on the sale of property B ($100,000 x 1/2 x 50%). A portion of this tax is refundable to the corporation when a dividend is paid by the corporation to you. Furthermore, the personal tax treatment of the dividend paid to you depends on whether the dividend is a ‘capital dividend’ or a regular dividend. Capital dividends are tax free, while regular dividends are taxable to you. One half of the capital gain can be paid to you by the corporation as a tax-free capital dividend. Once you factor in all of the taxes (corporate and personal), and assuming that your marginal tax rate is 46%, the total tax paid by the corporation and by you will equal approximately 23%.
In summary, the total tax liability on the sale of property A by you and on the sale of property B by your corporation will be about the same.
Hi Mr, Madan
question about capital gains.
e.g.
I , as shareholder give corporation a loan for 200k to purchase a property of 575k (including closing cost), spend 200k for upgrades and sell it for profit for 1.1Million. total profit is $325000
1) how is this amount treated in term of taxes?
2) can i deduct my 200k loan direclty as expense from 325k or after taxes?
please advise.
many thanks
mandeep
Belliville, ON
Hi Mandeep,
If you substantially renovated the property with the intention of flipping it for a profit, then the profit of $325,000 will be taxed as business income. The corporate tax rate is approximately 13.5% on business income up to $500,000. You cannot deduct the loan of $200,000 from the profit.
Hello Mr. Allan,
Can I borrow money from my professional corporation to purchase a principle residence?. Given that I am the only Shareholder and Director?
Thank you in advance.
Hi Kan,
An employee (who can also be a corporate shareholder) can borrow money from his employer corporation to purchase a primary residence if the following conditions are met:
1. The amount of the loan is reasonable
2. The loan was obtained by the employee in his capacity as an employee and not because of his shareholdings
3. The amortization period and interest rate applicable to the loan is reasonable
4. The corporate employer has a mortgage secured against the primary residence for the borrowed funds
Hi Allan,
How would this affect residency status in Canada. Suppose the owner of the companies leaves Canada permanently, and House Ltd rents the house to a stranger. A person with a house in Canada would be deemed a resident and have to pay taxes in Canada on worldwide income. If House Ltd owns the company, would this be a way for a non-resident to maintain a house in Canada without being deemed a resident?
Hi Dan,
You will not be classified as a tax resident of Canada just because you own a Rental Property (either personally or through a Canadian corporation). You will be classified as a tax resident of Canada if you have a home / apartment available for your personal use.
Hi Allan,
I own an IT (federal) corporation and own a Single home too personally. I want to by other single home with my corporation savings. I want to keep my existing house. Do I need to create a holding company?.. which house I should make my primary? the current or the new one?
Hi Siddharth,
I’m assuming that you are going to keep your existing home as your primary residence and that the 2nd home will be a rental property. If this is the case, then your IT (federal) corporation can purchase the rental property or a newly created holding corporation can purchase the rental property. The benefit of having a holding corporation owning a rental property, is that your IT company will not be impacted if something bad happens with the rental property (e.g. tenant lawsuit for injury suffered).
This is the third time that my queries have had me directed to your videos. Thank you for the effort, it is appreciated.
Hi Eric,
You’re welcome and thank you for your kind feedback.
What happens when you sell the home, are the gains taxed corporately. And then if you want to take out of the holdco then your paying personal tax right? Purchasing personally you pay no tax.
I dont see the benefit?
Hi Bob,
When a corporation sells a property for a profit and there is a capital gain, the following occurs:
– One half of the capital gain will be taxable at the corporation’s tax rate rate
– The non-taxable portion of the capital gain can be paid as a tax-free capital dividend to the owner(s) through the corporation’s capital
dividend account
– The other half of the gain can be paid (after subtracting corporate taxes) to the owner as a taxable dividend
At the end of the day, you will be no better or worse of by selling real estate either personally or through a corporation. Having said that, many business owners purchase real estate through a corporation because their savings are stuck in a corporate bank account. Note that the downside of selling a primary residence owned by a corporation is that a corporation cannot claim the principal residence exemption, whereas an individual can.
What are the implications or taxes when House Inc sell the house?
Hi Lana,
If House Inc. sells the home in the future for a profit, then House Inc. will have to pay Capital Gains Tax (approximately 25%) on the profit made.
Can house inc purchase a mobile home or build a home on its property and rent it out to it shareholder at a fair market value rent?
Hi Yves,
Yes, House Inc. can do this.
I have an existing conventional mortgage and recently incorporated. I have sold a home, and wanted to transfer the mortgage to the new property that I have put an offer on. Will there be repercussions on this, as I sense the bank is looking at it differently. It is going through approvals right now – and I have answered many questions and provided them with a lot of documentation – including additional 20% down on the new property. I have held mortgages for over 35 years – and do not think this will impact my credit worthiness.
Hi Denny,
Generally speaking, it is more difficult to obtain a mortgage through a corporation. The lender will ask for more financial documents as compared to a personal mortgage. From what you have told me, I don’t see a reason for concern. However, I suggest that you consult with a mortgage adviser who specializes in corporate mortgages.
Hello Allan,
I am a contractor, and have a numbered company, in cooperated. My business is IT consulting.
I sold my property to my business long time ago, and My business sold the property last year. There was a lose on the property sale (say 20k).
I changed my accountant last year. I remember my previous accountant says the lose on the property are different from my business activities, so the lose will not bring me any tax benefit unless I have any earnings on assets, but apparently mine case is different – I make money from IT consulting. I think this make sense and he is right.
However, the new accountant said I can file the loss to deduct my income profit on tax…. I doubt it….. I don’t want to offend any tax rule, but of course if it is a benefit I would take it. Any one know clearly about certain tax rules?
If you agree or disagree, can you please tell me the source?
Thanks a lot!
Hi Tony,
The tax treatment of the loss realized upon the sale of the property depends on whether the property was a rental property, a property used to carry-on the company’s business, or a vacant property held as a long-term investment. If the property was a rental property or used to carry-on the company’s business, then the difference between the sales proceeds (net of selling costs) and the Un-depreciated Capital Cost (UCC) of the property can be claimed as a “Terminal Loss’. A Terminal Loss can be deducted from business income, including the company’s income from IT consulting.
On the other hand, if the property was a vacant property held as a long-term investment, then the loss (the difference between the net sales proceeds and the adjusted cost basis) will be treated as a ‘capital loss’. Capital losses can only be deducted from capital gains.
I would like to purchase a $4M cottage through my holding company so that I can use pre-tax corporate dollars (House Inc) to pay for the mortgage, and all maintenance costs like property tax, insurance, utilities, etc. Let’s say carrying costs are roughly $12k per month.
There is an element of speculation investment based on the property appreciating in value over time, and there is an element of rental investment for us to use it personally.
We will only use it personally for a couple of months out of the year. So would fair market rent for two months be $24k? Could you make a case for charging even less?
Thanks!
Hi AL,
Purchasing a $4M cottage through a corporation, where the cottage has a personal use element is aggressive. You will have to make the case that this is a genuine investment and that you are paying fair market value rent.
if I get a mortgage personally in trust for House Inc and House Inc buys the house with the proceeds of the mortgage ( tax free loan from Moneybags), where does House Inc get the money to pay me back personally for the mortgage payments? It seems to me that House Inc has no money left after using the tax free loan and the proceeds of the mortgage. It owes MB 1% interest at dec 31 AND has to make monthly//biweekly payments back to me personally. So where does House Inc get the money to make those payments?
Hi Mike,
House Inc. should collect rent from its tenants. If you are the tenant, then you should pay fair market rent to House Inc. pursuant to a lease agreement. Ideally, House Inc. should obtain a mortgage in its name.
Hi Allan,
House Inc has purchased a rental property for $600,000.
$300, 000 came as a loan from My corporation and $300, 000 from Myself.
When property is sold how my personal loan $300,000 is repaid.
Thanks,
Yuri.
Hi Yuri,
House Inc. can use the proceeds from the sale of the house to repay the $300,00 personal loan to you on a tax-free basis.
Hi There
Doesnt the government prohibit lending a mortgage to a business owner? for example if i try to lend myself the business owner $1million the gov will say that you need to pay tax on the loan wont they? and if you buy a house with a corporation does that then mean you need to pay hst?
Hi Matt,
There is no prohibition. Shareholder loans are taxable to the recipient unless repaid within 1 taxation year. However, there is an exception for employee home loans to purchase a primary residence, if certain conditions are met. Also, a corporation can purchase a ‘rental property’, which can be rented to a shareholder, so long as the shareholder pays fair market value rent. Note that HST applies to the sale of newly constructed homes.
Hi there, are the monthly mortgage payments tax deductible to house inc, and the rent counted as revenue minus relaxant expenses?
Hi Roland,
The interest paid on the mortgage is tax-deductible. The other expenses such as repairs, insurance, property taxes, utilities, accounting fees are also tax-deductible.
A question regarding House Inc that holds the house and mortgage as.you outlined in your article. I understand what happens when the house is sold, either by House inc or personally. Capital gains taxes one way not another end up being similar.
However, what happens from a tax perspective if I sell House Inc (which holds the house as an asset) to someone or a family member? Does the sale have to be at market value of the house or any arbitrary number or even at a loss, eg. $1? Then, are my personal taxes going to be on the sale of the business or still on the value of the house?
Hi Val,
The sale has to be at market value. Do not sell the shares, because the cost basis of the shares is a nominal amount and that will result in a large capital gain for you personally.
Hi Allan, The agreement you mention in step 6 (an agreement that says that ‘House Inc.’ is the beneficial owner of the new home, and you are merely holding the new home in trust for ‘House Inc.’), can you elaborate on what type of agreement that is and if its something a lawyer needs to draft? Same question goes for the Loan agreement mentions.
Does this method change the ownership of the property from a tax perspective to be ‘House Inc.’? If so that would mean ‘House Inc.’ is eligible to claim the interest on the mortgage, as well as other expenses incurred during the operation of the property as a rental, correct?
Hi Nick,
A lawyer can prepare a bare trust agreement. This agreement will specify that you are a ‘bare trustee’ and registered on title to the property. Furthermore, according to the bare trust agreement, you (as a bare trustee) are holding the property in trust for the beneficial owner, House Inc. The loan agreement should also be drafted by a lawyer.
House Inc. reports the rental income and deducts the rental expenses such as mortgage interest, property tax, utilities, insurance, and repairs.
Hi Allan,
I am currently considering refinancing my current principal residence to take out equity to buy my new principal residence, then renting the current home. Will the interest on the full mortgage which will now be higher due to the refinance be deductible if converted to a rental property!? If not, are there betters ways of handling this type of transaction!
Thanks very much for your time!
Hi Cyril,
The interest paid on the amount borrowed in excess of the current mortgage on your rental property will be non-deductible. This is because the borrowed funds will be used to buy a personal property and not an income-producing asset. However, the interest paid on the amount of the current mortgage will continue to be tax-deductible.
In regards to “Bare Trust”, I live in a condo and the title of the condo is under my son’s name. My son has his own principal residence and just sold it as he is going to work in another country. Can you please let me know, if I draw a bare trust agreement, can I use the condo as my principal residence? Would any capital gain be consider as my PRE (principal residence exemption) even though the title is under my son’s name?
Thanks, Ellen
Hi Ellen,
For a bare trust to be valid, it should ideally be prepared at the time the condo was purchased. In addition, your son (the bare trustee) cannot contribute toward the purchase of the property, and cannot pay for the mortgage payments or any costs associated with the condo. If there is a valid bare trust in place, and the conditions as discussed have been met, then you will be the ‘beneficial owner’ of the condo. As the beneficial owner of the condo and having lived in the condo for all of the years you owned it, you could claim the principal residence exemption for the entire capital gain realized upon the sale of the condo.
am I paying for my monthly mortgage payment + my loan monthly payments towards my corp.?
or is the loan paying only paying the mortgage monthly payment?
thanks!
Hi Dee,
In this example, House Inc. will be responsible for paying the following (a) annual interest of 1% on the loan received from Money Bags Inc. and (b) Monthly mortgage payment to the bank. You (tenant) will be responsible for paying a monthly rent to House Inc. (landlord).
Hi Allan,
If House Inc buys a property cash and you start paying rent to House Inc, wouldn’t rental income be considered a passive income for House Inc, and be taxed at 50%?
Serge
Hi Serge,
House Inc. will pay corporate income tax of approximately 50% on net rental profits (i.e. rental income less relevant expenses). About 1/2 of this tax can be refunded to House Inc. upon the payment of dividends from House Inc. to you (individual shareholder).
Hi,
I would like my corporation to loan money to a family member. Interest payment will be made every month. The term of the loan is 24 months. What is the best way to structure this?
Hi Yvonne,
Generally speaking, loans made to a family member of a shareholder of a corporation are taxable to the family member as personal income. There is an exception, where the family member is an employee of the family corporation and he/she receives a loan to purchase a primary residence in his/her capacity as an employee.
In reply to comment #7, you said that an individual cannot sell the principal residence to their company and claim the principal residence exemption. Are you sure? Because my cousin just said he did that in 2019 on the advice of his accountant and the plan is to claim the exemption.
Hi Roger,
There is a specific rule in the Canadian income tax act that prevents an individual taxpayer from claiming the principal residence exemption in respect of the sale of his primary residence to a corporation that he owns.
Hi,
Thanks for this post. Let’s say that I am in the highest tax bracket. If I pay rent with post-income tax money, there will be a point in time where the income tax paid on the rent surpasses the differential between the house price after highest tax bracket income tax vs buying the house in the corp.
Hi Paul,
That point in time will be way in the future. Based on the time value of money concept, you will still be ahead of the game by buying a house through a corporation and paying rent to that corporation.
Furthermore, if you are in the highest tax bracket, you will lose more than 50% of the money that you pull out from your corporation, which will be used toward the down payment on the acquisition of a primary residence. This high level of personal taxation reduces your buying power significantly.
Will this strategy so hold in 2020 given the 2019 tax rule changes?
Hi Ali,
Yes, this strategy still works.
This is a great video and many of my questions were answered in the comments. One of them was if it was possible to get a loan from your Corp if you already have a home. The answer being ‘no’ 🙂
I am wondering though, could a corporation buy some of or all of the outstanding mortgage debt from the bank–essentially, buying the debt and in turn earn interest income from this new asset? If the money never goes to the employee or shareholder and goes straight to the bank.
Thank you again!
Hi Elliott,
Ultimately, the debt will be owed by you to your corporation. As a result, this is a shareholder loan and will be personally taxable to you.
Hi thanks for the video… in summary two things bug me about this strategy…
1. Yes you can utilize money within the corp to purchase the residence but aren’t you creating a new layer of tax that has to be paid when the House Inc has to pay taxes on the rent it collects?
2. Aren’t you also in essence slowly transferring capital from your personal side to corporate side… by paying rent to the corporation which you pay with after tax money, and eventually way down the line when you need to take the money out of the corporation again in the future you will pay personal tax on that money again?
Obviously I see the benefit of using pre tax money to purchase a principal residence but I feel that you’re also committing yourself personally to be paying rent with post tax money…
Hi Bart,
Thank you for your questions and comments. My responses are as follows. First, rental income received by the holding company can be offset by claiming expenses and by claiming tax depreciation (capital cost allowance). This will reduce the taxable income of the holding company. Second, you are correct that the corporation will eventually have to pay tax when the property is sold and as the balance available for depreciation declines. However, by deferring the payment of personal income tax with this strategy, you are significantly increasing your buying power. I many cases, without this strategy, taxpayers may not have the personal after-tax funds available to purchase the property they desire.
Hi Allan, Is it possible to just buy the home with your existing Corp and move in and then only charge yourself a taxable benefit of living in the house? You claim that taxable benefit on your income tax every year – say whatever rent might be for that house.
Hi John,
You should not do that because if you do, then you will be required to include the entire purchase price of the home (funded by your corporation) in your personal income and you will have to pay personal income tax.
If House Inc. buys a property this way, then years later it is sold, does House Inc. pay capital gains, or can it avoid capital gains by claiming that it is the primary residence of the House Inc. shareholders?
Hi Josh,
House Inc has to pay capital gains tax when the property is sold for a profit, and cannot claim the principal residence exemption.
We don’t have enough liquid capital to purchase a new home, but when we sell our home and complete another year’s round of dividends from our company, we should be OK. We want to be able to quickly close on a house we like when it comes available, but it we have to wait for our home to sell, or for the dividends to be paid out, we will miss opportunities. Are there any CRA issues with this scenario?
1. Buy the house with corporate funds
2. Accumulate personal money during the year (through selling previous house, dividends at lower tax rates, etc)
3. Buy the house personally from the company before the house has appreciated in order to eliminate capital gains
This would seem to allow us to quickly gain primary residence status in the house, with personal rather than corporate ownership, while taking temporary advantage of the capital in the business to make the purchase happen.
Thank you!
Hi Josh,
If House Inc. sells the property in the future for a profit, then House Inc. will have to pay capital gains tax at that time.
I’m about to purchase a house. Sounds like I can do it through my holding company to avoid the taxes from taking a draw out. I’m 100% share holder and there is enough to pay in full. Will my accountant know what to do if I ask about this.
Hi John,
Please check with your accountant. Certain agreements need to be prepared to document the transactions as part of this process.
Oldco lends funds to newco, newco buys house, I then pay rent personally to newco. My current example looking at $500k cottage second home for own use not revenue. If I pay rent at say $1500/month do I offset all that with expenses? Property tax, hoa fees, utilities, insurance etc? So basically newco never shows income? And does newco ever have to pay loan back to oldco as now those funds are the cottage?
Hi Norm,
The rent charge has to be at market value. The tenant usually pays for the utilities. Newco will pay for property tax, HOA Fees, insurance, and repairs. If the rent received by Newco is more than the expenses, then Newco will pay tax on the profit. The loan between the 2 companies can have no fixed terms for repayment.
Hello, in regards to your comments, “consider obtaining a mortgage personally and purchasing the new home in your name. Then, prepare an agreement that says that House Inc. is the beneficial owner of the new home, and you are merely holding the new home in trust for House Inc. In addition, a loan agreement should be prepared between you and House Inc. for the mortgage that you personally got from the bank. House Inc. has to pay you back with bi-weekly or monthly payments.”. Since the house is now purchased under my name and I’m just holding it in trust for House Inc. Am I personally making the mortgage payments and paying rent to House Inc? Can you please explain this structure how it will work in more details. Thank you and appreciate the insight.
Hi Raj,
House Inc. must reimburse you for the mortgage payments. House Inc. is also responsible for paying for property taxes, insurance, and repairs. You will pay utilities and rent to House Inc.
Hi Allan, Does this stratrgy only apply to primary residence? If I already own a home, can I use this method for a second property which is a cottage?
Hi Sandeep,
Yes, you can use this strategy for the 2nd residence like a cottage.
can’t i just use my existing business Corp to own the house? why do i need a house inc?
Hi Mohamed,
You can use your existing corporation. However, it’s always better to separate your real estate assets from your business assets to reduce risk (e.g. lawsuit).
Hi Alan,
We are selling our home. We will receive substantial cash in our pocket as the home is paid for. My wife wants to purchase a new home and we are trying to calculate the benefits, if any, of using a corporation instead of personal. We own a small online business. I also worry about the issues regarding divorce, should this occur. Your thoughts? John
Hi John,
If you are purchasing a new home that will be your primary residence, then do not purchase it through a corporation. This is because a corporation cannot claim the principal residence exemption, and you have the cash available to you personally to make the purchase.
Please speak with a family lawyer about your questions relating to protecting assets in the event of marital separation.
Hello Allan Madan
I have several similar kind of questions for my newly formed corporation. I have a job and a business, and i am in a high tax bracket. I am new in Canada and have many confusion … How can i get your advise on regular basis.
Thanks
Thanks
Hi Sameer,
I would be pleased to answer your questions and provide you with the tax advice you require. The fee for a 30-minute phone / online session with me is $110 + tax. To book an appointment, please contact my assistant Navpreet, navpreet@madanca.com I look forward to hearing from you.
Hi Allan – what if I used my holding company to put up $100,000 towards a million home and the other 90 percent was my personal down payment and mortgage. Can I still claim the personal residence exemption for the 90 percent I put up personally once I sell (and 10 percent would be attributed to holding company with no exemption?)
Thanks!
Hi Mike,
If your holding company is on the title to the property, you cannot claim the principal residence exemption when the property is sold.
Hi Allan,
Thank you for this information.
I would like to implement this strategy of buying a house with corporate profits but I have a business partner in my company. How would I use this strategy with my 50% share of profits in Money Bags Inc – but yet separate the ownership of the house from my partner?
Thank you in advance!
Hi Scott,
You will need to transfer your shares in your operating corporation to a newly incorporated holding company. Then pay a cash dividend from your operating corporation to the holding company. Next, incorporate a Real Estate Corporation, the shares of which are owned by your holding company. Finally, make a tax-free loan from your holding company to the Real Estate Corporation. The Real Estate Corporation will use the loan proceeds to purchase real estate.
Hi,
Thank you for being so kind with these.
I own a primary residence which I intend to renovate and sell so to avoid all tax on the sale.
However, I am trying to purchase a second property, if I purchase this second property under my corporation and hold it until my primary residence is completed, would I be able to transfer or sell the property to myself for 1$? And what are the tax implications of such a transaction?
Thank you
Hi Karl,
Transactions between you and your corporation should be priced at their fair market value. Therefore, it is not reasonable to transfer a real estate asset from your corporation to you for $1. And if you do transfer the property at $1, the CRA will assess a taxable benefit to you based on the difference between the market value of the property and $1.
I have a Personal Real Estate Corporation.
Am I able to use the employee principle home mortgage program and use the cash from the PREC as a Secondary Position Mortgage on a home or does the PREC have to be primary position?
Basically, would I be able to have my downpayment, get a mortgage with a main bank and a second mortgage to cover the rest through my PREC?
Can’t do shareholder loan as I would intend to live there longer than a year.
Hi Jp Letnick,
Money loaned by your PREC to you to purchase a primary residence as an ’employee home loan’ should be classified as a ‘second mortgage’. The primary lender (e.g. bank) will be in the first position. A regular shareholder loan (not an employee home loan) must be repaid in full in 1 year, or else it will become taxable income for you.
Hello Allan,
What a great information to know. My question is: if a small business corporation owns a residential property and use part of it as warehouse for storage of goods and the sole shareholder use the rest as residence (will pay rent). Is the property considered as being used in active business? What business expenses can be claimed? Is the house now exempted from capital gains in the future? Thank you:
Hi MB,
The property is not considered as being used in an active business. The rent paid by the company to the property owner for the storage of goods is tax-deductible to the company and taxable to the landlord. The principal residence exemption can not be claimed on the part of the home that is used for rental purposes (i.e. warehouse area).
Hi Allan,
Thanks for this post, wondering if you can clarify the following.
Under this strategy let’s say a shareholder of MB inc, wants to build a new house to become his principal residence (if I understood correctly this is allowed as long as it pays fair market rent to House inc), thus buys a lot under House inc, by borrowing the funds from MB inc, then builds a house by using funds from bank mortgage, and so on, it then has to pay interests on the loan from MB inc every year, but how about re-paying the loan itself? does it have to do it over a specific period of time like a regular “mortgage” let’s say in 30 years? or can it keep paying interests only to MB inc until the loan is pay in full, let’s say when the house is sold or eventually has enough to pay that loan completely?
Hi SR,
An interest only loan is possible, with a pay-off of the principal balance when the home is sold. Charge the CRA’s prescribed rate of interest.
Hello Allan,
I see this is an older topic, still never out of fashion. If you are still available to answer questions , please give me your insight regarding the following: a corporation is buying a property from a private person (non-business), what are the implications regarding the HST? Kind regards
Thank you, Gabriela
Hi Gabriela,
It depends on the last-use of the property. For example, the resale of residential real estate is not subject to HST, whereas the resale of commercial real estate is subject to HST. Newly constructed properties, regardless of the type of property, are subject to HST.
Hi Allan,
This is the strategy I am using to purchase my current home. With this method, what type of business expenses can House Inc. deduct to offset rental income for annual filings? Are expenses such as furniture, property insurance, property taxes, legal fees, utility fees, etc. eligible expenses?
Thank you.
Property insurance, property taxes, legal fees, utilities, mortgage interest, and repairs are deductible from rental income. Furniture and fixtures are depreciated at an annual rate of 20%.
Hi Allan, great article exactly what I was looking for. Since the article is rather old and it’s now 2023, am I safe to assume that everything still holds true?
I have a corporation federal (IT Industry) and live in Ontario. I am sole shareholder and pay myself a salary. The corp has a high cash flow about $100k a year with about $400k sitting in the bank. I currently have a home with a mortgage with about 50% equity in the home, home value ~$650k. I would like to purchase property and build a house (my dream), to live in as primary residence. I work from home so my office is in my house. What would be my best route? I was thinking of going the In Trust route, and keeping the current home and renting it out. This rent would be to me personally, and I would personally be paying rent to House Inc. What do you think? Any other options?
Title to new residence should belong to House Inc. In addition, you must pay fair market value rent to the corporation if you live in the home.
Note: there have been cases where the Courts have ruled that a taxable benefit applies to the shareholder who is renting the property from House Inc., even if the shareholder is paying rent at market rates. The Courts argued that the rent paid was not sufficient to offset the economic loss that the corporation suffered by not having the ability to invest the funds tied up in the new residence into another investment opportunity. The economic loss was then assessed as a taxable benefit to the shareholder.
hi Allan, thank you for writing this. I have a question: what if I sell Money Bags Inc, but wish to keep my house and the House Inc. Corp? How can I handle the outstanding debt that House Inc has to Money Bags? Whats the main downside to all of this – losing the capital gains exemption? thank you, Rod
Hi Rod,
Before the sale of MoneyBags Inc., any assets that the buyer does not want (e.g. Receivable from House Inc.) should be transferred to a separate holding company owned by you. This is called a purification prior to sale.
The main downside is that House Inc. cannot claim the principal residence exemption on the sale of the property.
Hi Allan, great article. If we have an existing mortgage of 660k and owe 400k, want to buy 410k land and build a 1.1m home. Would this strategy still work by selling the existing home and using that equity as a down payment to the holding company?
Hi Curtis,
Yes, this is possible. However, if the funds to construct the new home are available to you personally, there’s no need to involve the holding company.
This tread is gold – thanks a million
I wonder if the corp is restricted in terms of how much home improvement / landscaping it can write off. Say i build a new kitchen and put a pool in the yard for instance. Is it at the corp’s discretion (will CRA take issue with that) and does it have to lead to a rent increase? Can the corp rent fully furnished so that furniture can be bought through the corp?
Thanks
Hi Dominick,
There isn’t a specific restriction. However, you have to be very careful because the CRA could determine that the improvements made are for the shareholders’ benefit and are taxable to the shareholders.