How to Buy Primary Residence Using a Corporation

It’s a big day here in our new office.  We’re expecting new furniture to come in and security system to be installed. 

I got into my car at 8:30am, turned on my audiobook for the first time in a very long time, started heading to the office.   We’ve been extremely lucky that we got to work from home most of the time.  

Although I didn’t run into any traffic like I would before the pandemic, QEW was getting busy. 

Seeing these many cars on the road make me excited for once.  It’s a signal that our economy is slowly going back to normal. 

Of course, it’s also exciting to see the office furniture being delivered – we’re coming down to the final stretch!

We even have a feng shui master picking an office opening date.  😉 

Now onto this week’s topic.  A client of mine recently shared with me a Youtube video on a tax strategy, whereby a small business owner can use the excess cash available in the corporation to purchase his/her primary residence. 

It works something like this. 

Oscar owns a small business in a corporation.  As we are all aware, owning an active business in a corporation provides significant opportunity for tax deferral.  

As a result, Oscar Owner accumulates a large amount of cash in the operating company and now he wants to buy a nice home for himself to enjoy. 

Oscar Owner wonders how he would be able to use his cash saved up in the operating company to purchase his primary residence without triggering significant personal tax.  

One strategy was to have the operating company (OpCo) lending the money to a second corporation that we call primary residence company (PR Co).  

In exchange, the PR Co pays interest on the loan borrowed.  Interest rate is based on the prescribed rate as set out on CRA’s website.  Currently the prescribed rate is 2%.

PR Co purchases the primary residence, qualifies for the mortgage and pays for the expenses that a landlord would normally pay for.  

Oscar Owner makes a fair market value rent payment to PR Co.  

In this case, Oscar Owner does not need to withdraw a large amount of dividend from OpCo as the downpayment to purchase his primary residence.  

Bingo!

Well…it isn’t that simple. 

There’re a few points missing in this strategy. 

Missing primary residence exemption

Although Oscar Owner is able to save personal taxes that would otherwise be triggered from withdrawing a large amount of dividend from OpCo, he would misses the opportunity to shelter the tax on capital gain on the primary residence. 

Since the PR Co owns this home, it is treated as an investment property in the eyes of CRA.  One day, when Oscar Owner decides to sell the property for a large gain, the realized profit would be considered capital gain and therefore be subject to the corporation tax.  

Oscar Owner would have to weigh the amount of taxes that he has to pay when he withdraws the dividend out to purchase the property, compared to the potential appreciation of the property to decide whether this setup is more beneficial. 

Extra filing obligation 

PR Co is a corporation after all. 

A corporation is required to file it’s tax return on an annual basis. 

There’s extra administrative cost on maintaining the corporation’s record for annual filing purpose.  This would not have happened if Oscar Owner owns his primary residence outright. 

More difficult to qualify for financing and potentially higher finance cost

Generally speaking, most banks do not like to work with corporation on financing a residential property.  Only a couple of top tiered banks are willing to work directly with corporation owner. 

In most cases, interest rates are higher.  Consult with an experienced mortgage broker before proceeding.  

Would I still consider this as a viable strategy to recommend to my clients?  Absolutely.  

I would also consider a couple other strategies before jumping to conclusion. 

Let’s discuss how we can apply the same strategy to buy rental properties next week!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

6 replies
  1. Anthony L
    Anthony L says:

    Seems like a lot of work and the rent is taxable for the Residence Corp. Why not do a straight shareholder loan that you repay each year as you take out another? No extra filing fees, still have Personal Residence Exception and you’ve taken money out of the Corp.

    Reply
    • Lena
      Lena says:

      a series of loans and repayments will be viewed as one continuous loan.
      if a shareholder owes money to the company on two consecutive year-end balance sheets, the principal portion of the loan must be included in the shareholder’s income tax return.

      Reply
  2. Elvis Jose
    Elvis Jose says:

    Thank you for the great highly informative topics that you have been sharing.

    Reply
  3. hash residency
    hash residency says:

    For the first time in Bahria Town Phase 8 Hash Residency provides you a better experience and deep-rooted heritage, exquisite architecture, world-class luxurious living experience and incomparable infinity pool entertainment experience under one magnificently opulent roof.

    Reply
  4. samreen akhtar
    samreen akhtar says:

    Thanks for sharing your information. This is very informative description for me. All you have mention in this article is very helpful.

    Reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

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