I posted about this but would like to discuss it again because it’s been over a year. Thank you @dominique_dabolczi for your original replies.
Shareholder owns 100% of a service-based business
Purchased a second house (small townhouse) and used it exclusively for business rather than renting a commercial space. *Paid for this second home with personal funds
Two work vans wrapped in the business logo out front for employees to use.
Basement - completely refinished with a commercial-grade exhaust system (professionally installed requiring special electrical, etc). Used to prepare items for sale.
Main floor - used as a boardroom, administration, sales & bookkeeping area.
Upstairs - two bedrooms used for storage and master bedroom with office set - office furniture, computers, whiteboards, filing cabinets, printers, scanners, and employees working there.
How shall the shareholder treat the expenses including utilities, insurance, property tax, mortgage interest, repairs & maintenance that they personally paid for? DT Expenses (to Corp) CT SH loan?
First off, the use of the townhouse for business purposes was likely against the bylaws of the community association / condominium corporation. The renovations made to the unit may have also been a breach of these very same bylaws.
That said, why would this individual just not rent the facility to the company? As long as it is a reasonable rent there should be no problems. The shareholder would then report the rent collected and expenses on a T776 within their personal tax return. KEEP IT SIMPLE.
The type of income that “SHAREHOLDERS” may have is called DIVIDENDS (Investment income).
NONE of the expenses mentioned appear in any way at all to be related to DIVIDEND INCOME, and therefore all would be wholly improper against Dividend Income.
In addition to the infractions suggested by @cracctg, the corporation or its shareholder may be in violation of city zoning bylaws if this property is not zoned for commercial purposes. But, ignoring that, the accounting and tax issues are quite simple.
The corporation would record rent expense (or rent plus occupancy costs if you consider it a “triple net” lease arrangement). If the owner of the house does not want to pay tax on rental income, the rental income (from the corporation) should equal the total costs of owing the house. For example, on the T776 of the homeowner’s personal tax return:
The corporation would record rent expense of $20,000 (plus GST). Alternatively, the corporation could record all the expenses except mortgage interest. Then the homeowner’s T776 would be:
Rental income: $5,000
Mortgage interest: 5,000
And the corporation’s rent expense would be only $5,000 (plus GST).
Of course, all of the above assumes the house is used 100% for business purposes (i.e. shareholder does not LIVE there or use it for anything personal). Otherwise, the business portion of all expenses would be some percentage of the total, and the homeowner would have to pay a portion out-of-pocket.
My recommendation is to treat this as you would a 3rd party.
Assuming the Service Based Business is a Corp and is HST Registered:
All expenses for property should be treated as commercial rent to the business.
Business should self-assess and remit HST on rent
Suggest a contract also be executed between the Corp and SH for the business rent.
Shareholder declares rent on T1 return, all or mostly all, offset by the costs of the building, (challenge would be the principle repayment on the mortgage would not be sheltered and therefore would be taxable in the SH hands). I would not recommend taking depreciation on the building but your choice if SH is trying to offset some profit (ie. Principle payments portion of the mortgage rolled into the monthly rent) on the rent paid by the business.
Gregory Marko PEng, MBA, CPA CMA
Gregory Marko Chartered Professional Accountant
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Also, based on your description, the extensive renovations are not really “repairs” or “maintenance”. It sounds like they were done to accommodate the business, which would be a legitimate business expense if the corporation paid for them - i.e. Leasehold Improvements. Otherwise, to the homeowner, it would be considered capital additions to the property, which may be recovered only when he sells the house for that much more than he bought it (not deductible on his taxes).
The shareholder may have an issue with HST when he sells the property since it has been used in a business. I’m not going to venture into analyzing this situation. I would check it out before deciding which way to go since the existence of HST in a sale of what is otherwise a residential unit could complicate a sale.