Lending money from one company to another

[JordanRich]

Hi there,

A person I know tells me that they lend themselves the money for their properties.

each property is held in a numbered account and they lend themselves the money for the properties and charge interest to the lending company.

Is this possible? with todays interest rates it would be a great way to earn interest... would it be recommended if one had enough money to do that? thanks in advance.

 

[Mike Milovick]

QUOTE (JordanRich @ Jan 15 2009, 07:40 PM) Hi there,

A person I know tells me that they lend themselves the money for their properties.

each property is held in a numbered account and they lend themselves the money for the properties and charge interest to the lending company.

Is this possible? with todays interest rates it would be a great way to earn interest... would it be recommended if one had enough money to do that? thanks in advance.


Hi Jordan;

Can you be more specific? Maybe an example.

I have some thoughts - and put something down three times. Just to re-read. Not sure if I completely understand. I have some property owned by a corporation and have good handle on how it works. I also always have an active understanding of where my shareholder loan account balance is at - and if I am trying to take money out - I look at that account first - and pay myself a dividend second - as opposed to paying myself interest : )

Mike

 

[chargerharry]

Yes you could, but why? If it was your money, just write a cheque for the prop and save the additional mortgage registration fees, as well as the costs associated with operating the other company. If you want to buy mortgages as an investment, they are available from companies like Capital Direct and Alpine mortgage. Just be careful and make sure there is plenty of equity in the prop before you buy the mortgage.
Harry

 

[JordanRich]

Sure, husband and wife have a million dollars in company A which wife owns sitting there getting shabby interest.

Husband opens company B and buys a property, decides not to get the mortgage for the bank but from wife in Co A.

They decide that 8% is a good rate or 12% whatever and co A lends Co B the money.

So Co A earns 8-12% interest and Co B pays 8-12% but rights it off as an expense.

Can that be done? is it legal? does it make sense or is it a wash?

 

[GarthChapman]

Hmmm... Money going from one pocket to another. Seems to me it would only make sense if there is tax to be saved. Kind of a fancy version of income splitting. Interest income in a corporation would attract the high rate of tax, no? And I suspect you would have to watch out for the anti tax avoidance rules.

 

[gwasser]

QUOTE (GarthChapman @ Jan 15 2009, 09:39 PM) Hmmm... Money going from one pocket to another. Seems to me it would only make sense if there is tax to be saved. Kind of a fancy version of income splitting. Interest income in a corporation would attract the high rate of tax, no? And I suspect you would have to watch out for the anti tax avoidance rules.

You would have to pay the maximum corp tax rate on interest income. In Alberta that is nearly 40% this does not qualify as small business income. It may be cheaper to pay yourself a special dividend (tax advantaged) and invest the money directly in the property. Rental net income can be offset (for a while) by building depreciation and is nearly tax free.

Check first with a tax expert before considering such a course.

 

[Thomas Beyer]

QUOTE (JordanRich @ Jan 15 2009, 09:32 PM) Sure, husband and wife have a million dollars in company A which wife owns sitting there getting shabby interest.

Husband opens company B and buys a property, decides not to get the mortgage for the bank but from wife in Co A.

They decide that 8% is a good rate or 12% whatever and co A lends Co B the money.

So Co A earns 8-12% interest and Co B pays 8-12% but rights it off as an expense.

Can that be done? is it legal? does it make sense or is it a wash?
yes, you can do that, and yes, it may make sense as each company may have different goals / expenses / revenues !

CRA may audit you and you have to charge what is "commercially reasonable" .. so 12% on a 1st mortgage @ 40% loan-to-value may be too high but OK @ 80% loan-to-value !

Get a lawyer to draw up a real mortgage for $800 .. and you`re good to go !!