When Corporations Make Improvements to Farms Owned by Shareholders

October 04, 2018

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It is not uncommon for a farm corporation to construct a new building or invest in capital improvement (i.e. land clearing and drainage) on land that is owned by the shareholders outside of the corporate structure.

The Income Tax Act has rules about using corporate funds for the benefit of shareholders. When corporate funds are being used to make an improvement to property owned by the shareholder, the shareholder or related party could be taxed on the actual cost of the addition or improvement to the property as a shareholder benefit.

This risk can be mitigated if the corporation enters into a formal lease agreement to rent the property from the shareholder. The length of the lease should be negotiated to match the useful life of the building or improvement. For example, if a corporation is building a new dairy barn on a personally owned farm, the length of the lease should approximate the expected life of the barn.

The lease should also include a clause that states if the shareholder sells the land prior to the end of the term of the lease, the shareholder has an obligation to buy the improvement from the corporation for its fair market value at that time. Since the improvements to the property are used during the term of the lease or will be acquired by the shareholder from the corporation for fair market value, it can be argued that there is no taxable benefit.

The complexity of the Income Tax Act rules around shareholder benefits and the dollar value of the capital improvements made to the shareholder property make this a risky area, as the costs of the Canada Revenue Agency assessing a taxable benefit could be substantial.