Purchasing a Primary Residence with a Corporation in Canada

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

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

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

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

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

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

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.

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.

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