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Buying a condo for company use?

Expert: John R Mott

Charlotte asked:

We are thinking about purchasing a condo through our company (with corporate dollars, with the company's name on the title). We are not going to be living in the residence, it will be used for out of town employees, or rented out. Is this a smart idea? Or should we buy this personally? What are the implications (if any) of purchasing through the company?

John R Mott answered:

If the actual use of the condo complies with your plans, then it would be accounted for in the corporation as an investment. The corporation would report the rental income and, when the condo is ultimately sold, be taxable on the capital gain (if any).

The corporate and personal tax rates applicable to rental income and capital gains are generally intended to be comparable. In other words, you should be neither rewarded nor penalized for holding this investment in a corporation versus personally.

If you chose to purchase the condo personally, but required corporate funds to finance the purchase, then you would likely incur a significant tax cost to distribute these funds to you (e.g. by dividend or bonus). This distribution cost is avoided if you purchase corporately.

One thing that might give you pause, is the possibility of extraordinary business liabilities and claims arising from your active business. Many business owners avoid building up large surplus assets, for fear that they are at the risk of creditors.

The Canada Revenue Agency is keenly attuned to corporate-owned assets that have a potential for conferring employee and shareholder benefits (e.g. yachts, airplanes, real estate). Keep good records regarding any use of the condo beyond arm's length rental arrangements. There should be a strong legitimate business purpose for any employee use, especially if any of those employees happen to be family members.

The employer has a responsibility to compute and report the benefit of any personal use of the condo.




About the author


John Mott is a chartered accountant and tax specialist with a private practice in mid-town Toronto. He provides tax, accounting and advisory services to individuals and small businesses. He may be visited online at: johnmott.com.

 
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