A common question I encounter from fromhealthcare professionals is whether their professional corporation can own personal use property such as artwork or expensive jewellery. While technically possible, this often leads to complex tax issues and potential pitfalls. This article will explore the reasons why owning personal use property through a corporation can be problematic and provide practical guidance to avoid common mistakes.
- Taxable Benefits: Ownership of personal use property by a corporation can result in taxable benefits for shareholders, complicating personal tax situations.
- Double Taxation and Loss of Exemptions: Potential for double taxation and loss of principal residence exemption when personal properties are held in a corporation.
- Practical Guidance: Best practices to avoid owning personal use property through a corporation, including fair market rent and extracting property from the corporation.
The Risks of Personal Use Property Owned by a Corporation
One of the primary issues with having personal use property, such as artwork or jewellery, owned by your professional corporation is the risk of taxable benefits being conferred upon the individual shareholder(s). Under the Income Tax Act, specifically subsection 15(1), any benefit conferred on a shareholder by a corporation, other than through specific exceptions like dividends, must be included in the shareholder’s income.
Taxable Benefits
This provision is broad and can apply to a variety of scenarios, making it difficult to determine the exact taxable benefit. For instance, if your corporation owns a luxury watch and you, as a shareholder, use it, the value of this benefit needs to be included in your personal taxable income.
Common Examples and Pitfalls
1. Taxable Benefits
If a corporation owns a personal use property like a cottage or a home and the shareholder uses it, the shareholder must include the value of the benefit in their taxable income. The difficulty lies in determining this value. It’s not merely the cost of a comparable rental but typically a percentage of the property’s value.
2. Double Taxation
There is no step-up in the cost base of the property for the taxable benefits received each year, potentially leading to double taxation. When the property is sold, the corporation will realize a capital gain that is not offset by the personal use taxable benefits previously reported by the shareholder.
3. No Principal Residence Exemption
If the property could otherwise be treated as a principal residence by the individual shareholders, owning a home or a cottage, used personally, through a corporation forfeits the ability to claim the principal residence exemption on any gain realized upon sale.
4. GST/HST Implications
There may be additional GST or HST issues that arise with corporately owned personal use property, complicating the tax situation further.
Listed Personal Property
Listed personal property (LPP) includes items that are likely to increase in value and are typically bought for investment purposes. Examples of LPP are:
- Artworks
- Jewellery
- Coins
- Stamps
- Antiques
- Real estate
These items are unique and potentially problematic because they combine personal use with the potential for investment returns.
Recent Tax Cases on Personal Use Property and Shareholder Benefits
The Canada Revenue Agency (CRA) has successfully litigated several cases where personal use property was owned by a corporation, reinforcing the pitfalls of such arrangements.
Schwartz v. The Queen (2012 TCC 124)
In this case, the court determined that the taxable benefit of a shareholder’s use of a corporation-owned yacht was not based on the market rental value but rather on the actual cost incurred by the corporation to maintain the yacht. This precedent emphasizes the complexity and potential high cost of such arrangements.
Youngman v. The Queen (1990)
The Tax Court of Canada found that the taxable benefit of a shareholder using a corporation-owned cottage was not equivalent to the hotel rate but rather based on the cost of the property multiplied by an applicable rate of return.
Practical Guidance
1. Avoid Ownership
Whenever possible, avoid having your professional corporation own personal use property. The potential tax complications and costs often outweigh any perceived benefits.
2. Fair Market Rent
If your corporation already owns such property, ensure you pay fair market rent for its use. This can help mitigate the taxable benefits issue but requires proper documentation and valuation.
3. Extract Property
If you find yourself in a situation where your corporation owns personal use property, consider extracting the property. This can be done through available tax-free accounts, but if not possible, paying the personal income tax on the extraction might be the most cost-effective solution.
Conclusion
Owning personal use property through a professional corporation can lead to significant tax issues and complexities. It’s crucial to understand the risks and ensure proper planning and documentation. For personalized advice and to avoid these pitfalls, contact Jonathan Tucker, CPA, CA, LPA, at [email protected] or by phone at (905) 601-5659, x101.
Jonathan Tucker, CPA, CA, LPA, focuses his time and firm resources on providing tax and business advisory services to healthcare professionals across Canada. Reach out if you have more questions or need further assistance!
