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Why isn’t every doctor taking a tax-free loan from the Inc to pay for your home?

You and your spouse just finished building your $1 million home which you financed with a loan from your medical corporation. The company has no employees other than the two of you. To finance the loan, you liquidated $600,000 of investments and used your corporate line of credit for the additional $400,000. The loan agreement calls for equal annual repayments over 10 years.

At first sight, using the company to finance a home gives you a tremendous tax benefit because you do not have pay tax when you receive the money. Instead, you can spread the tax over the loan amortization period, which is 10 years in our example.

However, CRA regulations state a housing loan can only be made to an employee, not a shareholder. Here is a Tax Court case which illustrates how not clearly drawing those lines can cause you trouble with a housing loan down the line. The taxpayer was the sole employee and shareholder of a corporation that operated a home-based business. He and his wife received a $2 million housing loan from the company, which was repayable in minimum annual payments.

The business owner was reassessed, including the draws he made from the corporation and reported as income on his personal tax return. As the business had no other employees, he failed to prove that the loans were made to him and his wife as employees of their business and not in his capacity as a shareholder, he lost his appeal.

You can count on losing the argument with the tax department that your housing loan is legitimate.  If you have employees, do you offer them housing loans as well?

How else would you argue that the loan was made to you as an employee and not to you as a shareholder?

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