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Office Space writeoffs

Question for those that know the ins and outs of how you determine the shareholder benefit for personal use of corporate assets. My kids will be going to a school 45 minutes away and rather than drive them out and back twice a day (3 hours in the car daily) it was suggested that I buy/rent an office in the school’s location to move my tax practice to during the week as it is currently run from my home. I looked at the local offices and nothing seems particularly suitable in the area but there is one interesting possibility. There is a resort property that is run as a condo hotel - each room is owned by individual owners and put into the rental pool when not in use. I was thinking that buying a 2 bedroom unit and using it as an office during the day while the kids are in school and either driving home after school or staying overnight if the roads were bad or a late night (school concerts etc) to avoid the highways in the winter time mostly. I do not need to be able to see clients there as most of my clients are international and I deal with them by phone or email and those locally that really want to come see me can do so on the weekends. If it is in the rental pool on weekend, school holidays and summer breaks then I’d get enough rental income to offset all the annual costs of running the place and also contribute some to go towards any interest expenses on money I’d have to borrow to buy the place. I can either buy it personally or corporately. My gut feel based on limited knowledge of the shareholder personal use rules is that the personal use costs for staying over night would be very expensive over the course of the year if we ended up staying a lot of nights from November through to March or so when the roads are bad around here. My specialty is individual taxes and I do very little for corporations so I don’t deal with these rules much. The kicker is that I have enough saved up in the company brokerage account to mostly pay for the purchase price where as I’d have to borrow the entire amount to buy it personally as the tax on the money to get it out of the company would be more that the interest costs to just borrow the money over the expected life of owning the place. How are the due to shareholder costs for personal use of the place (overnight stays) vs the business use (during the day as an office) likely to be calculated by the CRA if asked and is it likely to be better to buy it personally or corporately? I haven’t tried asking the CRA yet as it is almost Christmas and the chances of getting anybody to answer my questions is not great so I thought I’d ask for opinions here first. I probably don’t have enough info yet to calculate what the shareholder benefit would be but I am looking more for the equation I’d use to figure it out. Thanks! Laurie Yoon

Hi Laurie,

What you have described and seems to be your game plan is a taxable headache even for those who fully understanding the rules. However if you should wish to continue with your plan, the benefit to you would be one either options and more like the second one:

Sorry, here are the options:

  1. Market rate you would have to pay for rent for the days you stay over or personally uses the place. CRA could deemed the place to be constantly available to you and apply this rate for the entire time of ownership (you buy in Jan 2020, then you would be assess a benefit for the entire year). You would have to strongly prove it is not so.

  2. The rate of return (normally apply by CRA) that a corporation would have rented you the same space and time for of which you are not a shareholder. This is when it gets tricky as the rate of return could be through the roof and to get it reduce could mean days/month in court.
    There are a couple of cases such as Mullen V. THe Minister of Revenue 90 DTC 1551, Youngman V the Queen 90 DTC and Fingold V. The Queen 97 DTC 5449 (FCA)

These cases clearly drive the points home.

Thanks. I figured it was probably going to be fair market value for the night (i.e. option 1) - which in the winter off season is still in the $220-$240 range per night. I thought maybe a percentage of actual costs prorata (like you use for home office expenses on T2125) if I was lucky but it doesn’t sound like that is even an option. I will be buying it personally then and charging the company some form of rent. There is a shared office outfit just up the road that charges $15/day for access to the internet and the use of a desk so I may use that as a base price for days that I actually get some substantial work done during tax season.

What is fair market value for one night’s accommodations? I spent three days at QuickBooks Connect in Toronto several weeks ago and didn’t spend more than $240 in total. I had several options in that price range for perfectly acceptable accommodations. Transportation added about $20 plus I got air and exercise.

An option might be buy condo personally, mortgage with company funds. The company charges market rate interest (check with bank for lowest mortgage rates) and pays tax at investment tax rates.

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That is an excellent idea that I hadn’t thought of. My husband’s numbered consulting company has $800k in it’s brokerage account that I could sell some of to buy the condo personally! The brokerage account is currently generating about 4% in dividend income plus appreciation in capital gains. I assume at a minimum I’d need to use the CRA prescribed rate which is “The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 2%.” at the moment. Any advantages to paying my company a higher rate than required? Or do I have to use best 5 year rate currently available - 2.87% fixed from BMO for a 5 year term at the moment according to ratehub.ca?

Laurie, I don’t really have time to check this, and it’s outside my usual area of practice.
(this comment is revised - see next post)

No worries - I will do some research if nobody else responds in the next few days. Thanks again for the idea however - that solves a lot of problems for me.

Section 15(1) or 15(2) of the ITA springs to mind - shareholders benefit. So I’m thinking the BDO article doesn’t apply when a corporation loans funds to a shareholder - oops, my bad!
(otherwise, we’d all be taking loans from our corps, and paying only the prescribed rate).
It would have to fit under another provision.
Check home-purchase loan, but there are some pitfalls.
https://taxpage.com/articles-and-tips/owner-manager-taxation/housing-loans/

I would consider a number of scenarios and evaluate them on the following basis:

  • Corporate Tax
  • GST/HST
  • Capital Gains
  • Personal Benefit
  • Personal Tax
  • Cash Flow
  • Long Term Investment Value

The scenarios that I would consider would include:

  1. Personally held investment such as a vacation property.
  2. Held within your Co
  3. Held within a property holding Co
  4. Rent an office space near by.

I would evaluate each scenario based on your personal, family, and business goals.

Sometimes these decisions are best based on the numbers only. Sometimes there are personal, family, or long term planning considerations.

In any case there are several traps and pitfalls to consider.

  1. GST/HST eligibility based upon the purpose or use of the property - vacation home, vacation rental, or commercial business rental.
  2. Capital Gains exemption based upon which entity owns the property.
  3. Capital Gains exemption based upon the purpose or use of the property - vacation home, vacation rental, or commercial business rental.
  4. Personal Benefit calculations can vary based upon ownership and proportional usage. How is the unoccupied use considered.
  5. Eligible business expense for use of the property for business purpose - utilities only vs commercial rent.

These are just a few links:

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/gi-025/gst-hst-purchase-use-sale-vacation-properties-individuals.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130/employers-guide-taxable-benefits-allowances.html

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130/employers-guide-taxable-benefits-allowances.html#P483_47213