Corporate-Owned Property: When Personal Use Creates Tax Risk
Holding real estate inside a corporation can make sense in the right circumstances. But when a corporate-owned property is used personally by a shareholder or their family, the tax consequences can become more complicated.
The corporate structure doesn’t make personal use disappear. How the property is actually used, how that use is documented, and how any future transfer is structured can all affect the tax outcome.
How the property is used matters
When determining the tax treatment of corporate-owned property, actual use matters.
If a property is held by a corporation but primarily used for the personal enjoyment of a shareholder or their family, that use can create tax consequences. Corporate ownership alone doesn’t necessarily make the property a business or investment asset for every tax purpose.
Documents and records can also become important evidence of how the property was used and why it was held.
Personal use can create more than one tax issue
A corporate-owned property used personally can create tax consequences at both the corporate and shareholder levels.
For example, the tax treatment of a loss on the property may differ from what the corporation expects. Personal use can also create shareholder benefit concerns, particularly when the shareholder receives use of corporate property without appropriate compensation.
The result can be more complicated than simply holding the same property personally.
Transfers to family members need careful planning
Additional issues can arise when corporate property is eventually sold or transferred to a shareholder, family member, or other related party.
Related-party transactions require careful attention to fair market value. If an asset is transferred for less than an appropriate value, the Canada Revenue Agency (CRA) may challenge the transaction and assess additional tax consequences.
A credible, independent valuation and clear supporting documentation can be particularly important when the parties aren’t dealing at arm’s length.
Structure personal use properly
If a corporation owns property that will be used personally, the arrangement should be reviewed before the personal use begins.
Consider:
- How the personal use of the property will be treated for tax purposes.
- Whether appropriate amounts should be paid to the corporation for that use.
- How expenses associated with the property are being recorded.
- Whether the arrangement is clearly documented.
- How a future sale or transfer of the property will be valued and structured.
These issues are generally easier to address when the arrangement is established than after the CRA begins asking questions.
Corporate ownership requires planning
The issue isn’t necessarily that real estate is held inside a corporation. The risk comes when corporate ownership and personal use are mixed without considering the tax consequences.
If a corporation owns a property that you or your family use personally, review the arrangement and documentation before assuming the corporate structure provides the intended result.
Davidson can help you review corporate-owned assets, identify potential tax exposure, and structure personal-use arrangements and related-party transactions appropriately.
This article is provided for general information only and should not be considered accounting, legal, or tax advice. Your individual circumstances may differ. Contact your trusted advisor for guidance specific to your tax needs.
