• Last Updated:
  • Jul 8th, 2018 5:13 pm
[OP]
Newbie
Apr 1, 2016
37 posts

Cottage as Investment Property?

I have a small side business and the money is slowly building. Eventually, I am going to need to do something (invest) with it.

I'm going to talk to my accountant but if I purchased a cottage as revenue property and rented it out - there is lots of demand here - could I do that through the business?

I know you'll ask, yes, i'd use it sometimes as well. Yes, I'd rent a lot assuming the demand is as high as I'd expect.

Thank you.
9 replies
[OP]
Newbie
Apr 1, 2016
37 posts
WinnipegRedFlager wrote:
Jul 4th, 2018 5:44 pm
I have a small side business and the money is slowly building. Eventually, I am going to need to do something (invest) with it.

I'm going to talk to my accountant but if I purchased a cottage as revenue property and rented it out - there is lots of demand here - could I do that through the business?

I know you'll ask, yes, i'd use it sometimes as well. Yes, I'd rent a lot assuming the demand is as high as I'd expect.

Thank you.
I'll add, I have a fulltime job and do not want to pay myself from the business, pay my marginal rate, and then buy the cottage.... at least not if i don't have to.
Member
Jun 25, 2011
322 posts
109 upvotes
Alberta
You did not say what kind of small side business you are running as it will be relevant from some of the tax planning point of view. To answer your question though, you can put cottage as capital asset through the business which I assume is incorporated. Then you will be reporting a rental income, which will be passive income and taxed at much higher rate than normal active business income, and take CCA deductions. You have to break-down the value of land and building separately. However, I will suggest you to not go through this route but keep it personal as you will be using the cottage here and there. If you have another residential property and when you are ready to sell either of those property then whichever appreciate in higher value, you can designate it as principal residence and take a personal residence exemption and you do not have to report any capital gain.

When you decide to sell it, adding it to the corp will deprive you the benefit of not being to able to designate cottage as principal residence just in case it's value become much higher than your current residence.

On a side note, any expense related to cottage can only applied toward the rental income you earn from the cottage. You can not apply cottage expense toward the other side business expense.
[OP]
Newbie
Apr 1, 2016
37 posts
albertaguy wrote:
Jul 4th, 2018 10:18 pm
You did not say what kind of small side business you are running as it will be relevant from some of the tax planning point of view. To answer your question though, you can put cottage as capital asset through the business which I assume is incorporated. Then you will be reporting a rental income, which will be passive income and taxed at much higher rate than normal active business income, and take CCA deductions. You have to break-down the value of land and building separately. However, I will suggest you to not go through this route but keep it personal as you will be using the cottage here and there. If you have another residential property and when you are ready to sell either of those property then whichever appreciate in higher value, you can designate it as principal residence and take a personal residence exemption and you do not have to report any capital gain.

When you decide to sell it, adding it to the corp will deprive you the benefit of not being to able to designate cottage as principal residence just in case it's value become much higher than your current residence.
The side business is an eCommerce business. Unrelated but - I do have a couple of investment properties (personally owner or in partnerships in another corporation) - they aren't recreational properties tho, they are homes in the city that rented on annual leases or AirBNB (which is what I would do with the cottage)

The trouble with purchasing it personally is that I'd have to pull $300K out of the company, pay income tax on it at 46% (or whatever the horrible rate is). As such my idea was to have the business buy it. As far as the capital gains go I doubt it will it appreciate so much more than my principal residence that designating it as principal residence on sale will make that great of a difference.

Just rambling, as I am newbie when it comes to this stuff...
Member
Jun 25, 2011
322 posts
109 upvotes
Alberta
If capital gain is not an issue then you can decide to put it in your corporation but I do not see any added benefit of putting it under the eCommerce business. In fact, by putting it under your existing corp you will be attaching unrelated asset to the eCommerce business which in case of failure will put your cottage at the risk. If you are really inclined to put your asset in a corp then I would suggest setting up a holding corp or totally new corp and put cottage under that business.

If you are not doing external financing but pulling money from your corp, then you can withdraw that money as shareholder loan and pay prescribed interest rate on the loan (which should be in the range of 2% -3%). The good thing with this arrangement will be that you will be able to deduct the payment made on that loan, but your corporation has to report interest income on that loan which should be fine.

Don't make a withdraw as shareholder benefit which will be punitive as you will be paying very high tax on it.
Deal Fanatic
User avatar
Mar 23, 2008
7136 posts
4089 upvotes
Edmonton
I am NOT an expert... But could you spin off another company to deal with the properties?

C
Deal Guru
Aug 2, 2010
12549 posts
3080 upvotes
Here 'n There
albertaguy wrote:
Jul 5th, 2018 12:35 am
If capital gain is not an issue then you can decide to put it in your corporation but I do not see any added benefit of putting it under the eCommerce business. In fact, by putting it under your existing corp you will be attaching unrelated asset to the eCommerce business which in case of failure will put your cottage at the risk. If you are really inclined to put your asset in a corp then I would suggest setting up a holding corp or totally new corp and put cottage under that business.

If you are not doing external financing but pulling money from your corp, then you can withdraw that money as shareholder loan and pay prescribed interest rate on the loan (which should be in the range of 2% -3%). The good thing with this arrangement will be that you will be able to deduct the payment made on that loan, but your corporation has to report interest income on that loan which should be fine.

Don't make a withdraw as shareholder benefit which will be punitive as you will be paying very high tax on it.
Very bad advice. It will be deemed income to the shareholder receiving the loan if still on the books if not paid in the year after the first year it appears on the financial statements. If it was so easy as to take out a loan for years on end and just pay the 2-3% annual interest we'd all be doing it!

Income Tax Act s. 15(1.2), s. 15(2), s. 80.4(2), s. 110(1)(j)

A loan by a corporation to one of its shareholders, or to a person or partnership who does not deal at arm's length with the shareholder, may result in a deemed taxable benefit to the shareholder.

If a person or partnership is:

a shareholder of a corporation
connected with (not dealing at arm's length with) a shareholder of a corporation, or
a member of a partnership, or a beneficiary of a trust, that was a shareholder of a corporation,
and because of that shareholding, the person or partnership received a loan or incurred a debt to:

- that corporation,
- a corporation related to that corporation, or
- partnership of which that corporation or any related corporations was a member,
then under s. 15(2), the loan amount will be included in the income of the person or partnership for the year in which the loan is made, except in certain circumstances. S. 15(2) does not apply if the entire loan is repaid within 1 year after the end of the taxation year of the lender, as long as the repayment was not a part of a series of loans or other transactions and repayments.
Member
Jun 25, 2011
322 posts
109 upvotes
Alberta
Yeah, it won't be easy to pull off shareholder loan arrangement. However, there are certain exemptions where 15(2) will not apply but it does not seems applicable in your case since you are not specified employee, and loan will be by virtue of you being a shareholder. So I agree with eonibm that loan will be included in your income if remains unpaid for two years.
Deal Addict
Feb 25, 2007
1078 posts
497 upvotes
Ottawa
I have considered something similar in having my holdco purchase some recreational property. As others have said, there are complications. Capital gains is one. The fact that any benefit you obtain personally might be a taxable benefit (and therefore you would pragmatically set and pay your own company a reasonable amount of rent, which would be taxed in the hands of the corporation probably at unfavourable rates) is another.

In my case, it is not advantageous to have the corp purchase the property. It is however helpful to give oneself a shareholder loan *and pay it back within the 2 years (more specifically, current corp fiscal year + 1 year)* since then if you are fortunate/had the forethought to put your FY end not Dec 31, you effectively get the ability to take 3 calendar/taxation years to crystallize capital gains on liquidated personal investments, plus pay yourself dividends, all structured so as to minimize total taxes payable.

In my case, the above is sufficient, so I and my accountant did not explore further my idea of whether my holding company could decide to invest in mortgages, namely (primarily) one mortgage, structured as per private lending common practice, duly registered against a property that happens to belong to myself. It is possible it would run up against the same issues as above, I just have not explored it.
Deal Guru
Aug 2, 2010
12549 posts
3080 upvotes
Here 'n There
albertaguy wrote:
Jul 5th, 2018 4:13 pm
Yeah, it won't be easy to pull off shareholder loan arrangement. However, there are certain exemptions where 15(2) will not apply but it does not seems applicable in your case since you are not specified employee, and loan will be by virtue of you being a shareholder. So I agree with eonibm that loan will be included in your income if remains unpaid for two years.
Actually it could be as little as 1 year if it is taken out just before the end of the financial year as if it appears on the financial statements 12 months later it will be deemed income to the shareholder.

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