Ask MoneySense
I own a corporation (100%), and it has some money in it. I also own my house, which is fully paid up.
Can I, with my corporation’s money, buy my own house—essentially to take out money tax free—to then rent the house to myself at a fair market value?
—Parmod
Transfer a principal residence to a Canadian corporation
In Canada, you can transfer an asset into your corporation, including cash, investments and real estate. You can even move assets that have deferred capital gains and continue to defer the tax. That’s what’s called a “section 85 rollover.”
In your case, though, Parmod, there’s no tax to transfer your home to your corporation assuming it qualifies as your principal residence for all years of ownership. The real question is: should you?
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read nowPersonally using a corporate asset
As you’ve noted, you may need to pay rent to the corporation after the transfer. The reason: If you use a corporate asset for personal use, you either need to pay for that usage, or include a taxable benefit in your personal income for the year.
In the case of real estate, paying the corporation may be based on fair market value for rent. The rent would be considered taxable income to the corporation with a tax rate of around 50% (the rate varies by province and territory). However, if fair market rent was relatively low compared to the value of the property, it may be necessary to instead determine an “equity rate of return” to accurately ascribe a benefit or determine a payment amount.
If you didn’t pay rent, or you paid below fair market value or below a reasonable equity rate of return, you may need to add a taxable benefit to your T4 slip. You’ll have to report that benefit as employment income, triggering personal tax.
Due to shareholder
If you transfer an asset to a corporation, the corporation owes you money in return. If you transfer $1,000 to your corporate bank account from your personal bank account, for example, the corporation generally owes you back that amount tax-free.
The same may apply if you transfer a $1 million asset like your home to a corporation. The corporation may then owe you $1 million tax-free. This can be an option to take cash out of a corporation instead of selling a personal asset you wish to keep.
Principal residence exemption: personal vs. corporation
The principal residence exemption can be claimed by an individual taxpayer in Canada, but not a corporation. So, owning your home in your corporation, Parmod, will give rise to future capital gains tax.
The inclusion rate for capital gains is set to increase from one-half to two-thirds based on the 2024 federal budget, though this change is not yet enacted into law. Once it has been, it would cause the tax rate on a corporate capital gain to rise from about 25% to about 33%, though it could be slightly lower or higher depending on the corporation’s province of residence.
If you’re transferring a $1-million property into your corporation, and, say, its value grows at 3% per year, you could be committing to about $10,000 per year of future capital gains tax payable.
There would also be additional tax payable to withdraw the eventual sale proceeds of the home from your corporation, and that is difficult to estimate.
The point is: This would be incremental, intentional future tax in exchange for a bit of tax savings today.
You might be able to withdraw tens of thousands of dollars of cash per year from the corporation with less than $10,000 of tax payable, Parmod. This could be accomplished by taking dividends from the corporation using the corporate cash, especially if you can pay those dividends while your personal income is relatively low.
What constitutes low? That depends on your province of residence, tax deductions and tax credits. And it should also be determined based on your expected future income. But dividends can be taxed at little to no tax when income is under $50,000, for example.
What’s involved when transferring an asset into your corporation
Here are other things to note that might lower the tax payable on withdrawing the cash:
- There’s the ability to add a spouse or common law partner as a shareholder and pay them a dividend if it’s not subject to tax on split income (TOSI). This may be easy to accomplish if your spouse or common law partner worked for the corporation, or if you are retired, or if you are 65 or older.
- The ability to pay capital dividends from the corporation based on the balance of the notional capital dividend account (corporate tax-free account for shareholders) that has arisen from past capital gains.
- The ability to recover refundable corporate tax when the corporation pays out dividends to you as a shareholder, particularly if the corporation’s refund is higher than your personal tax rate.
There may be other considerations if you do transfer your home to a corporation. You may have to pay land transfer tax to do so, as well as legal fees.
It may impact your home insurance or your ability to borrow against the home’s value.
You may need to keep your corporation active much longer than you anticipated. This has accounting and legal costs.
Canadian tax rules could also change in the future. (We saw this recently with the capital gains inclusion rate changes.) Initially, a corporation would have had to file an Underused Housing Tax (UHT) return to claim an exemption from paying the UHT. This was changed in 2024 to exempt most corporations as excluded owners. But there could be future tax or other implications for unconventional situations like owning your home in a corporation, Parmod.
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Should you transfer a home into a corporation?
It’s difficult to say for sure whether you would be better or worse off transferring your home to your corporation. It will depend on factors like future real estate price appreciation, your age, your personal and corporate income, your expenses and your other assets.
Frankly, Parmod, you might need to crunch the numbers on your own or with an advisor. Right off the bat, it’s important to look beyond the potential to withdraw the cash from your corporation tax free. That’s just one part of the equation. There may be other tax increases and other costs that make the short-term gain into long-term pain.
Ask MoneySense
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email nowRead more about owning a corporation:
- Investing inside a corporation: what you need to know
- Should you buy real estate through a corporation?
- When should you withdraw money from your corporation to invest?
- Should you leave corporate savings in your company?
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