Real Estate

Using home loan from corporation for buying a house

  • Last Updated:
  • Oct 6th, 2020 3:52 pm
[OP]
Deal Addict
Mar 22, 2004
3412 posts
847 upvotes
arbytor wrote: Do lenders accept a down payment in this form? none of the mortgage brokers I worked with in the past gave me this as an option for down payment.
I have a HELOC and will be using it for paying for a cottage. I do have downpayment and also want to use my corp money to lower the cost of borrowing.
Jr. Member
Jan 19, 2009
153 posts
31 upvotes
romsan04 wrote: Why do I need lawyers? To put lien on it? I am ok paying market rate for the home loan and making it look like a "mortgage".

The way that I have suggested you proceed is for the corporation to act as the mortgagee and thus the loan of funds is an actual mortgage with the corporation holding a lien. You would need lawyers representing you as buyer and lawyers representing the corporation as lender. I believe this to be a better way to structure the deal in case of the CRA poking around.

Now, it seems to me you believe your case to be straightforward, and if you are confident in that sort of "mortgage", then just borrow the funds how you see fit.
Sr. Member
Jan 5, 2020
705 posts
920 upvotes
This is actually not a simple issue at all which is why you are getting different answers from different accountants.

In order for the standard shareholder loan rules to not apply, you need to receive this loan as a result of your employment and not as a result of your shareholder status. In other words, the loan would need to be considered a reasonable part of your renumeration as an employee which consumerate the work that you perform for the corporation. This is going to be difficult to prove since you are the sole shareholder and it appears that you do not have any employees.

Also, keep in mind that the onus will be on you to prove that you meet the exception if you get selected for a CRA audit. There is a very high chance that you will get selected for an audit as CRA loves to audit shareholder loan issues. You are literally asking for a CRA audit when you have a big shareholder loan balance is your balance sheet.

In conclusion, I'm going to say that in your situation, the answer is a no. There is no indication that you are receiving this home purchase loan as a result of your employment with the corporation. Moveover, I dont want you to get audited by the CRA.
[OP]
Deal Addict
Mar 22, 2004
3412 posts
847 upvotes
hybridfx2 wrote: The way that I have suggested you proceed is for the corporation to act as the mortgagee and thus the loan of funds is an actual mortgage with the corporation holding a lien. You would need lawyers representing you as buyer and lawyers representing the corporation as lender. I believe this to be a better way to structure the deal in case of the CRA poking around.

Now, it seems to me you believe your case to be straightforward, and if you are confident in that sort of "mortgage", then just borrow the funds how you see fit.
Well, for CRA it does not matter how you wording it, they will be looking at how I am benefiting in this transaction. Since my corporation in not in mortgage business, they might as well call it a loan. I am just exploring different legal ways of doing this and since no one can give me a straight answer it is really hard to make a decision.

As I said before I did speak with few accountants and both times I got a different answer. I have also called twice to CRA and talked to senior advisors and guess what, both of them gave me different answers. One of them said that CRA will look at other similar corporations and how are they doing it and then they will decide if I did it correctly or not. One thing she did mention it, if I charge market rate, they probably will allow it, same thing if I went to the bank and the bank would give me this rate.
Deal Fanatic
Oct 7, 2007
7955 posts
3974 upvotes
romsan04 wrote: Well, for CRA it does not matter how you wording it, they will be looking at how I am benefiting in this transaction. Since my corporation in not in mortgage business, they might as well call it a loan. I am just exploring different legal ways of doing this and since no one can give me a straight answer it is really hard to make a decision.

As I said before I did speak with few accountants and both times I got a different answer. I have also called twice to CRA and talked to senior advisors and guess what, both of them gave me different answers. One of them said that CRA will look at other similar corporations and how are they doing it and then they will decide if I did it correctly or not. One thing she did mention it, if I charge market rate, they probably will allow it, same thing if I went to the bank and the bank would give me this rate.
Here is some light reading that may assist with getting you closer to your goals:
https://www.canada.ca/en/revenue-agency ... ml#24.12.0

Also, I didn't realize you were looking at purchasing a cottage but assumed it was your principal residence. Have you considered having the corporation purchase the cottage and then you just using it and paying for the use as a taxable benefit? Perhaps this is simpler and less risky to you from a tax and audit perspective. Just trying to consider all possible options.
[OP]
Deal Addict
Mar 22, 2004
3412 posts
847 upvotes
choclover wrote: Here is some light reading that may assist with getting you closer to your goals:
https://www.canada.ca/en/revenue-agency ... ml#24.12.0

Also, I didn't realize you were looking at purchasing a cottage but assumed it was your principal residence. Have you considered having the corporation purchase the cottage and then you just using it and paying for the use as a taxable benefit? Perhaps this is simpler and less risky to you from a tax and audit perspective. Just trying to consider all possible options.
I have looked into this as well. Unfortunately it will not work in our case since we are planing on using it ourselves. Plus the HST which we would have to pay later if we sell it.
[OP]
Deal Addict
Mar 22, 2004
3412 posts
847 upvotes
Newuserid wrote: This is actually not a simple issue at all which is why you are getting different answers from different accountants.

In order for the standard shareholder loan rules to not apply, you need to receive this loan as a result of your employment and not as a result of your shareholder status. In other words, the loan would need to be considered a reasonable part of your renumeration as an employee which consumerate the work that you perform for the corporation. This is going to be difficult to prove since you are the sole shareholder and it appears that you do not have any employees.

Also, keep in mind that the onus will be on you to prove that you meet the exception if you get selected for a CRA audit. There is a very high chance that you will get selected for an audit as CRA loves to audit shareholder loan issues. You are literally asking for a CRA audit when you have a big shareholder loan balance is your balance sheet.

In conclusion, I'm going to say that in your situation, the answer is a no. There is no indication that you are receiving this home purchase loan as a result of your employment with the corporation. Moveover, I dont want you to get audited by the CRA.
Thank you for your detailed explanation. If I am an employee of the same corporation and I have a T4, will CRA still consider myself as shareholder only?
The determination rules are not clear that's why it is very confusing.
Sr. Member
Jan 5, 2020
705 posts
920 upvotes
romsan04 wrote:
Thank you for your detailed explanation. If I am an employee of the same corporation and I have a T4, will CRA still consider myself as shareholder only?
The determination rules are not clear that's why it is very confusing.
Nothing in tax is straightforward lol. It doesn't matter if you have a T4, the CRA may still conclude that it is not a valid home purchase loan.

Ask yourself this question: if you were to hire someone off the streets to replace your current position as director of the corporation, and you paid him the same compensation, would you be willing to provide this employee the same home purchase loan if they approached you and asked for it?

If your honest answer is yes, then you can claim that you are receiving the home purchase loan as a result of your employment and the loan would be exempt from the normal restrictions.

At the end of day, your not directly breaking any tax laws by giving yourself a home purchase loan - its really a matter of professional opinion. But you have to understand that the CRA may have a different opinion and the tax implications if the CRA disagrees.

You should also ask yourself if this home purchase loan is actually beneficially for you. It may be better for you to just have the bank finance a bigger portion of the home and keep the funds in the corporation.

Another option would be to simply take out a normal shareholder loan which would be subject to the typical shareholder loan rules, which will provide you up to 2 years to repay the loan. If you fail to repay the loan, you can just declare dividends in lieu of the loan repayments.

I recommend that you consult with an accountant before doing anything.
Newbie
Sep 29, 2020
2 posts
What would be the interest rate for normal shareholder loan that CRA would be fine with?
Newbie
Sep 29, 2020
2 posts
Newuserid wrote: Nothing in tax is straightforward lol. It doesn't matter if you have a T4, the CRA may still conclude that it is not a valid home purchase loan.

Ask yourself this question: if you were to hire someone off the streets to replace your current position as director of the corporation, and you paid him the same compensation, would you be willing to provide this employee the same home purchase loan if they approached you and asked for it?

If your honest answer is yes, then you can claim that you are receiving the home purchase loan as a result of your employment and the loan would be exempt from the normal restrictions.

At the end of day, your not directly breaking any tax laws by giving yourself a home purchase loan - its really a matter of professional opinion. But you have to understand that the CRA may have a different opinion and the tax implications if the CRA disagrees.

You should also ask yourself if this home purchase loan is actually beneficially for you. It may be better for you to just have the bank finance a bigger portion of the home and keep the funds in the corporation.

Another option would be to simply take out a normal shareholder loan which would be subject to the typical shareholder loan rules, which will provide you up to 2 years to repay the loan. If you fail to repay the loan, you can just declare dividends in lieu of the loan repayments.

I recommend that you consult with an accountant before doing anything.
what interest rate would work a shareholder loan?
Newbie
Mar 20, 2006
46 posts
5 upvotes
Woodbridge
Could a shareholder of the corp
- take out a shareholder loan
- then pay the loan back just before the two year term at the prescribed rate (currently 1%)
- then take out a new loan the following day for another 2 years
- keep doing that?

The loan would then be used for downpayments/stocks/etc. as long as the shareholder would have access to cash for basically a few days every two years to pay the loan back, and then take out the loan again.
Deal Fanatic
Oct 7, 2007
7955 posts
3974 upvotes
helius wrote: Could a shareholder of the corp
- take out a shareholder loan
- then pay the loan back just before the two year term at the prescribed rate (currently 1%)
- then take out a new loan the following day for another 2 years
- keep doing that?

The loan would then be used for downpayments/stocks/etc. as long as the shareholder would have access to cash for basically a few days every two years to pay the loan back, and then take out the loan again.
The loan needs to be treated as a loan that is following all of CRA's rules for it to be exempted from shareholder income. If it looks like the loan is just being repaid back and then borrowed again without truly paying it down, CRA is most likely going to deem it as income. My understanding is that loan repayments are applied in a first-in-first-out manner so as long as the loan is properly repaid, new monies can be borrowed and still considered a loan. The timeline of withdrawals and repayments will tell the story to an auditor if this is in question.
Sr. Member
Jan 5, 2020
705 posts
920 upvotes
helius wrote: Could a shareholder of the corp
- take out a shareholder loan
- then pay the loan back just before the two year term at the prescribed rate (currently 1%)
- then take out a new loan the following day for another 2 years
- keep doing that?

The loan would then be used for downpayments/stocks/etc. as long as the shareholder would have access to cash for basically a few days every two years to pay the loan back, and then take out the loan again.
No, you can't do this. The CRA will not consider the repayment as valid as you took the money back out.
Newbie
Mar 20, 2006
46 posts
5 upvotes
Woodbridge
The loan would be paid back (i.e. bank statements to show transactions), but looking to find out how soon (after the loan is repaid) it can be taken out again. In my example I was using "within days" as extreme example, but I'm wondering if months or within the next fiscal year is still acceptable. I haven't found specific rules around this on the CRA website, but there may be some general accounting standards.
Sr. Member
Jan 5, 2020
705 posts
920 upvotes
helius wrote: The loan would be paid back (i.e. bank statements to show transactions), but looking to find out how soon (after the loan is repaid) it can be taken out again. In my example I was using "within days" as extreme example, but I'm wondering if months or within the next fiscal year is still acceptable. I haven't found specific rules around this on the CRA website, but there may be some general accounting standards.
There's no specific rules, its on a case by case basis. But generally speaking, the CRA would look at the shareholder loan balance outstanding over several years and if the balance doesn't drop permanently, this would indicate that there is no repayment.

Individual transactions don't matter. What's relevant is the shareholder loan balance outstanding over several years. If the balance remains consistent or even increasing, then you have a potential problem.

Your accountant should be reviewing the shareholder loan balance every year when they prepare your corporate tax returns.
Newbie
Mar 20, 2006
46 posts
5 upvotes
Woodbridge
Newuserid wrote: There's no specific rules, its on a case by case basis. But generally speaking, the CRA would look at the shareholder loan balance outstanding over several years and if the balance doesn't drop permanently, this would indicate that there is no repayment.

Individual transactions don't matter. What's relevant is the shareholder loan balance outstanding over several years. If the balance remains consistent or even increasing, then you have a potential problem.

Your accountant should be reviewing the shareholder loan balance every year when they prepare your corporate tax returns.
Great point. The CRA sees the year by year balances, so probably prudent to leave at least a fiscal year in between loans.
Member
May 12, 2003
352 posts
223 upvotes
GTA
Yes, the CRA sees year end balances.

But the CRA can quite easily ask for all the transactions done through the shareholder loan account throughout the year. As well as Bank statements to back up those transactions.

Simply put: Under the current rules, OP you cannot get a loan from the corporation since you are the sole shareholder and do not have any other employees (as mentioned in this thread, correct me if I am wrong).

There may be aggressive ways to get this done, but those come at their own legal/accounting cost, as well as audit/denial risks.
helius wrote: Great point. The CRA sees the year by year balances, so probably prudent to leave at least a fiscal year in between loans.
[OP]
Deal Addict
Mar 22, 2004
3412 posts
847 upvotes
ssj4_ootaku1 wrote: Simply put: Under the current rules, OP you cannot get a loan from the corporation since you are the sole shareholder and do not have any other employees (as mentioned in this thread, correct me if I am wrong).
This is wrong, you can get shareholder loan for a two year period but you need pay interest rate back to corporation or include the interest in taxable benefits. Also shareholder loan cannot be in consecutive series. (i.e. cannot take it out, pay it back and then take out again)

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