For business owners with significant corporate savings, buying a home through a corporation in Canada is a strategy worth looking into. If taking out those savings means losing a large chunk to personal income tax, there is a better way. You can set up a separate holding company and use your corporate funds to buy or build your home without paying personal tax on the withdrawal. This approach needs the right setup, proper paperwork, and a clear understanding of CRA rules around corporate ownership and rental income.
Calgary Tax Consulting specializes in corporate tax planning and year end tax planning in Calgary that help business owners get the most out of their corporate savings the right and legal way.
The following steps walk you through the exact structure used to purchase a home using corporate savings while avoiding unnecessary personal tax exposure.
Incorporate a Canadian company either federally or provincially; let’s call this company “Dream Home Inc.” You and your family members can be shareholders of Dream Home Inc. This new company will act as the legal owner of your future home, keeping it separate from your operating business and protecting your personal assets at the same time.
Make a tax-free loan from your existing company to Dream Home Inc. For this example, assume that your existing company is named “XYZ Ltd.” This inter-corporate loan lets you move money from your operating company to Dream Home Inc. without triggering any personal tax on the transfer.
Charge an annual interest rate on this loan, which would be the Canada Revenue Agency‘s current prescribed rate of interest. Dream Home Inc. must pay the interest to XYZ Ltd. by December 31 of each year. Prepare a loan agreement or promissory note to document the terms of this loan. Keeping this paperwork in order is important because the CRA can ask for it at any time during a review or audit.
Dream Home Inc. will use the cash from the loan proceeds it received from XYZ Ltd. to put toward either the construction of a new home or the purchase of a new home. All purchase agreements and title documents should list Dream Home Inc. as the legal owner to keep the corporate structure clean and compliant.
Dream Home Inc. should get a mortgage from a Canadian bank if it does not have all of the cash needed to purchase or build the new home. For example, if the home costs $1,400,000 and Dream Home Inc. only has $400,000 of cash available from the loan, then Dream Home Inc. will need to get a mortgage of $1,000,000 from a bank to cover the shortfall. It is a good idea to speak with your bank early since corporate mortgage applications take longer to process than personal ones.
Now that Dream Home Inc. has purchased the new home, you must begin paying monthly rent to Dream Home Inc. Dream Home Inc. will pay corporate income tax on the rent received less relevant expenses. The rent you pay must reflect fair market value to stay compliant with CRA rules and avoid any personal benefit issues down the line.
Sometimes, you may have difficulty getting a mortgage for your corporation, in this case, “Dream Home 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 Dream Home Inc. is the beneficial owner of the new home, and you are merely holding the new home in trust for Dream home Inc. In addition, a loan agreement should be prepared between you and Dream Home Inc. for the mortgage that you personally got from the bank. Dream Home Inc. has to pay you back with bi-weekly or monthly payments.
Q. Is it legal to purchase a primary residence through a corporation in Canada?
Yes, purchasing a primary residence through a corporation is entirely legal in Canada when structured correctly. The key requirements include proper inter-corporate loan documentation, a formal promissory note, payment of CRA prescribed interest by year end, and payment of market-rate rent by the individual occupying the property.
Q. What are the tax advantages of buying a home through a corporation in Canada?
The primary advantage is avoiding personal income tax on corporate savings that would otherwise need to be withdrawn before purchasing a home. Since the inter-corporate loan between your operating company and Dream Home Inc. is generally not a taxable event, you can deploy corporate funds toward a home purchase without triggering a large personal tax bill.
Q. Do I lose the principal residence exemption if my corporation owns my home?
Yes. One important trade-off of this strategy is that the principal residence exemption, which shields individuals from capital gains tax on the sale of a primary home, does not apply to corporations. When Dream Home Inc. eventually sells the property, any capital gain will be taxed at the corporate level.
Q. What happens if I cannot get a mortgage for my corporation from a Canadian bank?
Canadian banks often apply stricter lending criteria to corporate borrowers than to individuals. If Dream Home Inc. is unable to qualify for a mortgage, an alternative approach is to obtain the mortgage personally and hold the property in trust for Dream Home Inc. under a formal trust agreement.
Q. What documents are needed to set up this corporate home purchase structure?
Several key documents are required to ensure CRA compliance throughout this arrangement. These include an inter-corporate loan agreement between XYZ Ltd. and Dream Home Inc., a promissory note outlining the interest rate and repayment terms, a rental agreement between you and Dream Home Inc. at fair market rent, annual financial statements for Dream Home Inc., and if applicable, a trust agreement and personal loan agreement in cases where the mortgage is held personally.
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