How to Purchase a Primary Residence with a Corporation in Canada

Allan Madan, CA
 Aug 8, 2017
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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.

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Comments 24

  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.

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