Purchasing a Primary Residence with a Corporation in Canada

Allan Madan, CA
 Aug 8, 2017
Share
62 Comments
Share

Are you a business owner that would like to purchase a new home with your corporate savings. If yes, read further to learn how.

Suppose that you would like to buy your dream home, but your corporation holds all of your savings. If you withdraw all of your savings, you will get hit with a huge personal tax bill, which you want to avoid at all costs. So, what should you do?

Using this simple strategy, you can utilize your corporate savings to purchase your new home WITHOUT paying any personal tax. Here’s how:

Step 1
Step 1
Incorporate a Canadian company either federally or provincially; let’s call this company “House Inc.”. You and/or your family members can be shareholders of House Inc.

Step 2
Step 2
Make a tax-free loan from your existing company to House Inc. For this example, assume that your existing company is named “Money Bags Ltd”.

Step 3
Step 3
Charge an annual interest rate of 1% on this loan, which is the Canada Revenue Agency’s current prescribed rate of interest. House Inc. must pay the interest to Money Bags Ltd. by December 31 of each year. Prepare a loan agreement or promissory note to document the terms of this loan.

Step 4
Step 4
House Inc. will use the cash from the loan proceeds it received from Money Bags Ltd. to put toward either the construction of a new home or the purchase of a new home.

Step 5
Step 5
House Inc. should get a mortgage from a Canadian bank if it doesn’t have all of the cash needed to purchase or build the new home. For example, if the home costs $1,000,000 and House Inc. only has $400,000 of cash available from the loan, then House Inc. will need to get a mortgage of $600,000 from a bank to cover the shortfall.

Step 6
Step 6
Now that House Inc. purchased the new home, you must begin paying monthly rent to House Inc. House Inc. will pay corporate income tax on the rent received less relevant expenses.

Sometimes, you may have difficulty getting a mortgage for your corporation, in this case, “House Inc.”, from a Canadian bank. Canadian banks make it harder for corporations to qualify for a mortgage.

To solve this problem, 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.

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.

Related Resources

Leave Your Comment Here:
Required fields are marked.

Your email address will not be published. Required fields are marked *

1 × two =

Comments 62

  1. 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

  2. Hi Allan,
    Is it possible to sell my personnal primary residence to my coorporation using this strategy or any other strategy ?
    Thanks

  3. 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

    1. 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.

  4. 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)?

    1. 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.

  5. 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

    1. 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.

  6. 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?

    1. 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.

  7. 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?

    1. 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.

  8. 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

    1. 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.

  9. 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

    1. 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.

  10. 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

    1. 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.

  11. 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.

    1. 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

  12. 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?

    1. 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.

  13. 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?

    1. 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).

  14. This is the third time that my queries have had me directed to your videos. Thank you for the effort, it is appreciated.

  15. 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?

    1. 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.

    1. 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.

  16. 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?

  17. 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.

    1. 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.

  18. 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!

    1. 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.

  19. 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!

    1. 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.

  20. 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?

    1. 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.

  21. 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.

  22. 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?

    1. 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.

  23. Hi there, are the monthly mortgage payments tax deductible to house inc, and the rent counted as revenue minus relaxant expenses?

    1. 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.

  24. 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?

    1. 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.

  25. 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?

    1. 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.

  26. 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!

    1. 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.

  27. 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

    1. 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.

  28. 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!

    1. 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).

  29. 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

    1. 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).

  30. 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?

    1. 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.

Pin It on Pinterest

Share This