Entrepreneurship & Small Business

business ownership and buying a midlife-crisis car efficiently

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Deal Addict
Nov 27, 2003
1896 posts
181 upvotes

business ownership and buying a midlife-crisis car efficiently

If you own a corporation that has cash/investments/capital, is there an efficient way to buy a "toy" car using the capital in the corporation. I'm thinking something along the following lines:

- Utilizing a letter of credit to cross-guarantee a personal loan at a low rate (similar to a HELOC, without the home exposure)
- corporation buys the car, leases to me privately

I feel like there is a structure where the capital/value in the company can be utilized other than simply taking out the cash and taking a tax hit.
19 replies
Deal Guru
User avatar
Mar 23, 2008
13006 posts
10009 upvotes
Edmonton
MacBuster wrote: If you own a corporation that has cash/investments/capital, is there an efficient way to buy a "toy" car using the capital in the corporation. I'm thinking something along the following lines:

- Utilizing a letter of credit to cross-guarantee a personal loan at a low rate (similar to a HELOC, without the home exposure)
- corporation buys the car, leases to me privately

I feel like there is a structure where the capital/value in the company can be utilized other than simply taking out the cash and taking a tax hit.
You could look at taking a 1% loan from the corporation... But talk to your accountant first.

C
Deal Addict
Nov 27, 2003
1896 posts
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I dont think a business owner can borrow money like that? It gets pulled into income?
Deal Guru
User avatar
Mar 23, 2008
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Edmonton
Check out the thread in here about the interest free loan to yourself. That was shot down, and would be attributed to income for you. But a low interest loan is a valid investment for the company, apparently. Which makes sense, in a way. You could have the money sitting in a cash account gather very little interest, or give a loan that generates a bit more interest.

C
Deal Addict
Aug 19, 2013
2397 posts
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If the corporation does not have the actual cash and has to borrow the money to buy a car (or loan it to you to buy a car), the interest would not be deductible for tax purposes.
Deal Addict
Nov 27, 2003
1896 posts
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Momof3cuties wrote: If the corporation does not have the actual cash and has to borrow the money to buy a car (or loan it to you to buy a car), the interest would not be deductible for tax purposes.
The corporation has the cash.
Banned
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May 3, 2009
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Whats a midlife crisis car looks like?
Deal Addict
Nov 27, 2003
1896 posts
181 upvotes
TheRed wrote: Whats a midlife crisis car looks like?
Are you asking what I'm interested in buying or what they typically look like? haha

Usually, they are two doors, over-priced, and if the person is having a particularly bad midlife crisis, it might be in sunburst orange, or banana yellow. If a mild midlife crisis is occurring , they color might be blue or red.
Deal Addict
Nov 17, 2004
3236 posts
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CNeufeld wrote: You could look at taking a 1% loan from the corporation... But talk to your accountant first.

C
This is what I've been told as well. I spoke to my accountant about this in the past as well and he said pretty much anything better than a bank savings account rate would generally be acceptable to the CRA.
Deal Addict
Nov 27, 2003
1896 posts
181 upvotes
I'm still at a loss to figure out how this would not fall under the "shareholder loan" rules in ITA 15(2). I don't think those rules depend on the rate charged, but rather the nature of the relationship between me and my company.
Member
May 2, 2010
386 posts
257 upvotes
MacBuster wrote: I'm still at a loss to figure out how this would not fall under the "shareholder loan" rules in ITA 15(2). I don't think those rules depend on the rate charged, but rather the nature of the relationship between me and my company.
It is a shareholder loan -- it has to be repaid within a year or else you are effectively double taxed on it.
Deal Addict
Aug 19, 2013
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hotski7 wrote: It is a shareholder loan -- it has to be repaid within a year or else you are effectively double taxed on it.
No your not. You are allowed to take loans from your corporation and not incur a benefit as long as the corporation charges you interest. What you are effectively double taxed on is the interest amount as the corporation includes it in income but the shareholder is paying with after tax dollars.

But you can loan at a rate of 1% right now so the interest is negligible.
Deal Addict
Nov 27, 2003
1896 posts
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I dont think the question is whether you can take a loan - it is whether the loan is considered a "shareholder loan" by the CRA, which then falls under a bunch of unique rules. The most important of these rules is the fact that it is pulled into your income if not repaid within one year of your fiscal year end.
Deal Addict
Nov 27, 2003
1896 posts
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Momof3cuties wrote: No your not. You are allowed to take loans from your corporation and not incur a benefit as long as the corporation charges you interest. What you are effectively double taxed on is the interest amount as the corporation includes it in income but the shareholder is paying with after tax dollars.

But you can loan at a rate of 1% right now so the interest is negligible.
Bit of a bump here.

The CRA closed this loophole. Even a 1% loan to yourself is brought into your income if not paid back the following fiscal year.

I'm still struggling with a way to do this (maybe I shouldn't be so cheap and dividend the cash out to myself. But I REALLY hate those tax bills.)
Member
Jul 5, 2006
480 posts
407 upvotes
MacBuster wrote: Bit of a bump here.

The CRA closed this loophole. Even a 1% loan to yourself is brought into your income if not paid back the following fiscal year.

I'm still struggling with a way to do this (maybe I shouldn't be so cheap and dividend the cash out to myself. But I REALLY hate those tax bills.)
So the shareholder load is considered as income now? What is the difference between borrowing money from your own company and another company (like bank)? Why one is income while the other is not?
Deal Addict
Sep 30, 2008
1277 posts
311 upvotes
MacBuster wrote: Bit of a bump here.

The CRA closed this loophole. Even a 1% loan to yourself is brought into your income if not paid back the following fiscal year.

I'm still struggling with a way to do this (maybe I shouldn't be so cheap and dividend the cash out to myself. But I REALLY hate those tax bills.)
The shareholder loan and the shareholder/employee benefit provisions have been there for decades. Any charges by the shareholder of a corp reduces the s/h loan balance, and it becomes a debit and not repaid by end of next yr, it becomes the shareholder's income under 15(2). But, it is deductible under 20(1)(j) if repaid. So basically, it is in and out.

Shareholders who are also employees can be exempted from the above rules. However, only certain types of loans qualify, such as a loan that enables you to finance an automobile (in addition to buy a house or treasury stock) to be used in performing your employment duties. To qualify for the exemptions, at the time the loan is taken out, bona fide arrangements must be made to repay it within a reasonable period.

However, you will still have to report a deemed interest benefit. This amount is equal to the amount of the loan, multiplied by a prescribed interest rate (to the extent this amount exceeds any interest actually paid on the loan no later than 30 days after the end of the calendar year). If you use the loan to acquire eligible investments or to earn income, as opposed to using the funds for personal purposes, you can claim the amount of the deemed interest benefit as a deductible interest expense.

The current prescribed interest rate to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans is 1%.
http://news.gc.ca/web/article-en.do?&nid=1170719
Deal Addict
Nov 27, 2003
1896 posts
181 upvotes
jedi1648 wrote: The shareholder loan and the shareholder/employee benefit provisions have been there for decades. Any charges by the shareholder of a corp reduces the s/h loan balance, and it becomes a debit and not repaid by end of next yr, it becomes the shareholder's income under 15(2). But, it is deductible under 20(1)(j) if repaid. So basically, it is in and out.

Shareholders who are also employees can be exempted from the above rules. However, only certain types of loans qualify, such as a loan that enables you to finance an automobile (in addition to buy a house or treasury stock) to be used in performing your employment duties. To qualify for the exemptions, at the time the loan is taken out, bona fide arrangements must be made to repay it within a reasonable period.

However, you will still have to report a deemed interest benefit. This amount is equal to the amount of the loan, multiplied by a prescribed interest rate (to the extent this amount exceeds any interest actually paid on the loan no later than 30 days after the end of the calendar year). If you use the loan to acquire eligible investments or to earn income, as opposed to using the funds for personal purposes, you can claim the amount of the deemed interest benefit as a deductible interest expense.

The current prescribed interest rate to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans is 1%.
http://news.gc.ca/web/article-en.do?&nid=1170719
I think then I am correct in my assumption that if your corp lends money to you as a shareholder, even if the term is 5 years, with the established rater, you STILL need to bring that into income if not paid back in the following year. Correct?

Does the CRA create a "test" for the car loan - ie. does the car loan need to be below a certain size, or can it be a luxury/sports car and the sky is the limit?
Deal Addict
User avatar
Jan 9, 2002
2712 posts
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Burlington
Can you not purchase the car through the corporation, and count the personal mileage as a taxable benefit?
Not your standard VoIP. Different and novel options & advice for my RFD friends.
Deal Addict
Nov 27, 2003
1896 posts
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Casper wrote: Can you not purchase the car through the corporation, and count the personal mileage as a taxable benefit?
I have no idea if you can do this or not. It's something I've contemplated. But I'm pretty sure that the taxable benefit is calculated by determining the "standby charge", and that gets complicated. Also, I'm not sure I can justify a sports car as a business need.
Deal Fanatic
Jul 4, 2004
7430 posts
4677 upvotes
Ottawa
You should probably consult an accountant but from what I've read and been told, unless the vehicle is for business use (tractor, truck with plow, etc), you're better off buying personally than through the corp.

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