I would like to purchase a new home, but will need to finance a significant portion of the purchase. I have a consulting corporation in which I am an employee and the sole officer and shareholder. I have two full-time employees. I was wondering if instead of going to the bank for a traditional mortgage if I could borrow the money from my corporation?
Generally, if a shareholder borrows or withdraws money from their corporation the amount borrowed or withdrawn needs to be repaid by the shareholder within one year after the end of the taxation year of the corporation in which the loan was made. If the loan is not repaid in time, the full principal amount of the loan must be included in the shareholders income.
For example, if the corporation’s taxation year end if December 31st and it loaned money to the shareholder on January 15, 2015, the shareholder would have until December 31, 2015 to repay the loan without it being included in the shareholders income. This is assuming that one loan and one repayment is made, not a series of loans and repayments.
There is an exception if the loan is made to you in your capacity as an employee of the corporation and not because of your shareholdings and the loan is used to purchase a home in which you will live.
If the loan qualifies for this exception, there will also need to be a bona fide written arrangement detailing the repayment of the loan. The arrangement should also include an adequate interest rate on the loan to avoid any deemed interest benefit. To avoid the deemed interest benefit, the corporation should charge interest equal to the CRA prescribed rates.
To meet this exception, the CRA would determine whether it is reasonable to conclude that the same loan would be have been made to an arms-length employee who is not a shareholder of your corporation.
Generally, owner managed businesses would have a very difficult time taking the “in the capacity of an employee” position for housing loans and the CRA would consider the loan a shareholder loan and include it in your income pursuant to subsection 15(2) of the Income Tax Act.
We always recommend consulting with a qualified professional before considering taking any large sum of money from your corporation.
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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.
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