Any Canucks own U.S. timeshares thru your private company?

[X-ring]

I'm thinking of buying a U.S. timeshare but I'm wondering if I should use my own capital or that of my private company.

My situation is that I no longer seek work (travel is infinitely more fun!) and the surplus assets are in various stock holdings which now generate income for the company. I was thinking of using some of these assets to buy a timeshare as an investment in U.S. real estate, rather than tying up my own capital. I would normally expect to use the unit myself and pay the company fair market rental whenever I used it.

Have any of you done this, or have thoughts on the idea?

 

[caribbeansun]

Always a questionable thing to do from a tax perspective since you would have an asset presumably for personal use in the company which would create a taxable benefit to you each time you used or exchanged it. You have stated that you'd pay fair market rent so you've mitigated most of the benefit. That leaves the capital to be dealt with which could give rise to a taxable benefit in one of two ways - it could be considered an interest-free loan in which case you'd be assessed the tax on the interest you didn't pay to the company for the capital or CRA could potentially assess you the value of the capital as a taxable benefit as a lump sum - chances of this are somewhat remote but it could happen.

It's a similar problem with personal vehicles and other property - always better to keep the company "pure".

Please note that the tax rate on investment income in a company is at the highest rate possible although the non-taxable portion of any capital gains (ie from your stock portfolio) is available to be taken out free of tax as a capital dividend. If you have built up a sufficient balance in your capital dividend account you may be able to take the cash out tax free.

 

[X-ring]

you would have an asset presumably for personal use in the company which would create a taxable benefit to you each time you used or exchanged it.

Thanks for your reply.

I couldn't quite follow your mention of a taxable benefit at first but then I re-read my original and realized I wasn't totally clear when I spoke about using the company's capital. I should have specified that the timeshare week would be purchased by the company and registered in the company's name (so no interest-free loan involved).

Once purchased, the company would pay the annual maintenace (say $800).

The unit would then be

- used by the company's board of directors (i.e. my family) as the venue for its AGM; or

- rented out. If our family were to use the week for personal purposes, we would pay fair-market value to rent (say $1600).

BTW, when are you at the Royal Mayan? If week 7 or 8 we're at the Tri-Royals so we could discuss in person, margarita in hand

 

[Smooth Air]

Not on your topic but I have to ask...X-ring...did you go to St. FX?

 

[X-ring]

Not on your topic but I have to ask...X-ring...did you go to St. FX?

Sure did - a most special place!

 

[caribbeansun]

Sorry, tax stuff can get rather difficult to explain at times - the "loan" is implied by CRA not an actual loan. If you use company money for essentially a personal asset they will treat this as if you've taken an interest free loan - sort of like the company is holding the TS in trust for you.

The test will be what actually happens with the TS - if you do actually rent to unrelated people then your arguement will have a good chance of standing up, if however, you use it yourself then you are at risk of having a benefit assessed.

The AGM thing is a nice idea but won't hold up under scrutiny.

I've seen people use the same arguements for summer property ie. cottages and they gotten some rather nasty surprises from CRA. Of course the interesting piece here is that the TS isn't going to appreciate in value so there's no capital gains tax involved.

Having said all that given that you are prepared to pay twice the mf for a personal rental I think I'd roll the dice and give it a shot but always keep in the back of your mind the potential downside.

FWIW the $800 profit will be subject to tax in the company at a rate of 36% as passive investment income as opposed to the 18% you were used to paying for active business income (nothing you can do about this one).

I rented my Mayan week this year so won't be there until 2007 week 13.

 

[X-ring]

Sorry, tax stuff can get rather difficult to explain at times ...

You did an excellent job! Thank you very much for taking the time - much appreciated.