Corporate Home Ownership and Shareholder Benefits
Many business owners believe having their corporation purchase or construct their home is an effective tax planning strategy. If they simply pay market rent, they assume there can be no tax consequences.
The reasoning seems simple. The corporation has cash available, it acquires the property, and the shareholder pays rent just like any other tenant. Many assume that as long as the rent reflects fair market value, there can be no tax problem.
Unfortunately, Canadian tax law does not work that way.
If a corporation acquires or builds a residence primarily for the benefit of a shareholder or the shareholder’s family, the Canada Revenue Agency (CRA) may assess a taxable shareholder benefit under subsection 15(1) of the Income Tax Act. In some cases, paying fair market rent will not be enough to avoid that result.
One of the leading decisions on this issue is the Federal Court of Appeal’s decision in Youngman v. Canada.
The Facts
Mr. Youngman controlled a corporation that owned land intended for residential development.
Rather than purchasing a home personally, the corporation constructed a custom residence designed specifically by Mr. Youngman and his wife. After the home was completed, Mr. Youngman and his family moved in and paid monthly rent to the corporation.
Mr. Youngman argued that the residence was intended to serve as a model home for the corporation’s planned subdivision. According to him, the home was intended to serve as a model home for the corporation’s proposed subdivision development.
The CRA took a different view, arguing that the residence had been built primarily to provide a home for the shareholder and his family.
The Court’s Decision
The Federal Court of Appeal agreed with the CRA.
The Court found that the corporation had not constructed the residence for a bona fide business purpose. Instead, the evidence showed that the primary purpose of the construction was to provide a personal residence for Mr. Youngman and his family.
That distinction was critical.
A corporation can certainly transact with its shareholders. However, where corporate funds are used primarily to satisfy a shareholder’s personal objectives, subsection 15(1) may require the shareholder to include the value of that benefit in income.
Why Paying Market Rent Wasn’t Enough
The most important part of Youngman is the Court’s discussion of fair market rent.
Mr. Youngman argued that because he paid approximately the fair market rental value of the home, he had received no shareholder benefit.
The Court rejected that argument.
The Court explained that the issue was not simply the market rent for a comparable house. Rather, the question was what an arm’s length person would have paid to obtain the same overall benefit from the corporation.
In Youngman, the benefit was not merely the right to occupy a house. It was the right to live indefinitely in a custom-built residence that the corporation had constructed specifically to the shareholder’s own specifications.
An arm’s length corporation would ordinarily expect an appropriate return before making that type of investment. As a result, ordinary rental comparisons did not necessarily measure the full value of the shareholder benefit.
The decision demonstrates that paying “fair market rent” does not automatically eliminate a shareholder benefit.
Why Youngman Still Matters
More than thirty years later, Youngman remains one of the leading cases involving corporations that own homes occupied by their shareholders.
The decision illustrates several principles:
- A corporation owning your home does not automatically produce a tax advantage.
- Paying fair market rent does not necessarily eliminate a shareholder benefit.
- The courts will examine the true purpose behind the corporation’s acquisition or construction of the property.
- The value of any shareholder benefit depends on all of the surrounding circumstances, not simply comparable market rents.
For business owners considering having a corporation purchase or build a residence, the case serves as an important reminder that tax planning should focus on substance rather than form.
How Kirshen Tax Law Can Help
If the CRA believes a corporation has provided a shareholder benefit, it may assess additional tax, interest, and penalties. These cases often involve complex questions regarding corporate purpose, property use, and the proper valuation of any benefit.
If you are being audited, have received a shareholder benefit assessment, or are considering having your corporation purchase or construct a residence, contact Kirshen Tax Law for a free consultation with a Toronto tax lawyer.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
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