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Borrowing Funds From a Corporation
Expert: Garrett Power Chartered Accountants
I am the sole owner and shareholder of a private Canadian Corporation. I would like to know if I could borrow money from the corporation ($100,000 for downpayment on a house) and pay it back over a 10 year period? If I can do it, do I need to use a fixed interest rate, or can it be an interest free loan?
Garrett Power Chartered Accountants answered:
The short answer to your question is no. You can borrow funds from a corporation and you can keep them outstanding for one balance sheet date. If it they aren't paid back you would have to include them in income taxes.
At one time you could borrow cash from a corporation in order to buy a house for your personal use. Today, Revenue Canada has an administrative practice that they will allow you to borrow the money. However, you would have to make that option available to all your employees.
For example if you had 20 employees and the president decided to borrow $100,000 from his company in order to help him purchase a house. He would have to make that available to all the other employees, so all the other employees could borrow $100,000 dollars from the company in order to put the money as a down payment on their house. That would indicate that the loan is given to him in his capacity as a an employee not in his capacity as a shareholder and that's the whole issue.
If you've got an individual who is a sole shareholder in a company it's difficult to demonstrate that that was made available to him because he was an employee of the company or because he was a shareholder of the company. It's likely that Revenue Canada would interpret that you took the housing loan because you were a shareholder of the company and not an employee. So my advice to you would be not to do it.
If it was allowed and you did it as an interest free loan there would certainly be a taxable benefit to you and that taxable benefit would be based on a prescribed rate that Revenue Canada publishes every quarter. They publish an interest rate that people have to apply to any taxable benefits that they have accumulated during the year. But it doesn't apply in your circumstance because you are the business owner.
There are some housing loans that are outstanding and have been for years, when the rules were different. You likely will see people who still have housing loans. However, I think they're running the risk that they could be reassessed by Revenue Canada because they have taken these loans in their capacity as a shareholder and not in their capacity as an employee.
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Garrett Power Chartered Accountants are located in Calgary, Alberta.