Buying your building: operating company, holding company, or personally?

Summary

If you’re buying the premises your business works out of, there are three realistic owners for it: the corporation that runs the business (your operating company), a second corporation that owns nothing but the building, or you personally. That choice drives nearly everything else, and reversing it is expensive. Where your province charges land transfer tax, moving the building can trigger that tax again, even when you still control its owner.

We’d usually put the building in a second corporation you own directly. It then sits beside your operating company (a sister company) rather than on top of it (a holding company, meaning a corporation that owns your operating company’s shares). Your operating company pays it a market rent under a written lease. Four things make that our default:

1. The down payment gets funded with corporate money taxed at the small business rate, the reduced rate on a corporation’s first $500,000 of business income each year. Add the 9% federal rate to your province’s small business rate and that’s roughly 9% to 12.2% in total for 2026.¹
2. You control both corporations, so they count as associated, a tax term meaning the same person controls both. Rent between associated corporations counts as business income rather than investment income, so it’s taxed at that low rate instead of close to 50%.
3. When you sell the business the building isn’t part of the deal, which matters because a buyer pricing a business and a buyer pricing commercial real estate usually aren’t the same person.
4. If the business fails instead, the building isn’t inside the company that failed, so its creditors have no claim on it. A bank with a mortgage on the building still has its claim.

The cost on the other side is permanent: a second set of accounting records, a second corporate tax return and a second annual close. Budget another few thousand dollars of accounting fees a year.² Three situations flip our answer, and they’re at the end.

Rent between your own corporations

Once a second corporation owns the building, your operating company pays it rent, and the tax rate on that rent is the biggest single figure in this decision. A corporation whose main activity is collecting rent doesn’t get the small business rate at all, unless it employs more than five full-time people year round.³ One exception, below, is the whole reason this structure works. Without it the rental profit is taxed as investment income at close to 50%, and higher than that in several provinces.⁴ The 50% falls on the profit (rent minus mortgage interest, property tax, insurance and repairs) rather than on the gross rent. Roughly 30 of those 50 cents come back when the corporation later pays you a dividend, which you then pay personal tax on.

One rule in the Income Tax Act rescues the rent from that rate. Where a corporation pays rent to another corporation it’s associated with, the tax rules treat the money as ordinary business income for the company receiving it, which here is your property company.⁵ The treatment reaches only the rent the payer can deduct against its own business income. Corporations are associated when the same person controls both, so a holding company and a sister company both qualify. The rent lands at 9% to 12.2% either way, and it stays out of the passive income grind, a rule that shrinks the small business limit when a group earns too much investment income.

Two conditions come attached, both worth settling before the first rent invoice. Only the rent the CRA accepts as reasonable qualifies, so setting it high to move cash out of the operating company backfires.⁶ The operating company loses its deduction for the excess, and the property company is taxed on that same excess at close to 50%. The two corporations also don’t each get $500,000 of income at the low rate, because associated corporations share a single limit and file an agreement splitting it.⁷ So sign a written lease at a rent per square foot you can back up, and keep two or three comparable listings on file (e.g. from a local commercial broker) in case the CRA asks years later.

Sales tax on the rent

Leasing commercial premises is a taxable activity, so a registered property company charges GST/HST on its rent invoices. The $30,000 small-supplier cut-off counts taxable sales across associated companies, including rent, but leaves exempt medical and dental services out.⁸ A property company below that limit can remain unregistered or register voluntarily, so an associated clinic doesn’t automatically force registration. An ordinary commercial tenant recovers the tax on rent through its GST/HST return, while an exempt tenant cannot (e.g. a medical clinic). For an exempt tenant, tax charged on rent is a permanent extra cost, equal to the sales tax rate where the building sits: 5% in Alberta, 13% in Ontario, up to 15% in the Atlantic provinces.⁹

Moving the building later

Where land goes into a corporation in exchange for shares, or comes back out to a shareholder (e.g. when you close the company down), Ontario charges land transfer tax on what the land is actually worth rather than on the price the parties write down. That’s about $16,500 in cash on a $1,000,000 building, and Toronto charges a municipal land transfer tax of its own on top that we haven’t priced here.¹⁰ The move also counts as a sale at market value for income tax. Depreciation the company deducted in earlier years then gets added back to its taxable income, to the extent market value exceeds the building’s remaining undepreciated cost.¹¹

Owning the building personally

Personal ownership buys two things no corporation can. The appreciation belongs to you rather than to a company you might one day sell, or close down and dissolve. The rent also counts as earned income for RRSP purposes, so it adds to the figure the CRA uses to set how much you can put into an RRSP next year, exactly as salary does and dividends don’t.¹²

What personal ownership costs you is the deferral. The down payment and every dollar of equity come out of income you’ve already paid full personal tax on, rather than corporate money taxed at 9% to 12.2%. The rent itself is roughly a wash, because your tenant is your own operating company: it deducts the rent, and you pay tax on it at your full marginal rate, which is the treatment salary gets.

Which corporation to use, and when we’d change our answer

Sales tax is where the two corporate options first separate. Two corporations can file a form with the CRA, a tax election, that treats rent between them as though no GST/HST applied. Set up the usual way, a holding company owns 90% or more of your operating company, and that ownership level is the test the election turns on. It isn’t automatic even then, because both companies have to be registered, both have to use substantially all their property in commercial activities, and the form has to be filed on time.¹³ A sister company owned directly by you fails the 90% test outright, so a registered sister company charges sales tax on the rent every month, which costs an ordinary tenant nothing in the end but is paperwork and a small cash gap.

What a sister company buys instead is a cleaner exit. You still hold the operating company’s shares yourself, so selling the business stays a straightforward share sale. Where a holding company owns those shares, the proceeds land inside that company rather than in your hands, and getting them out to you is a further taxable step.

In our view the sister company wins for most owners, so long as the operating business is an ordinary commercial one that claims back the sales tax on its rent. Three situations flip that:

1. Where the operating business has exempt services of its own, we’d look hard at keeping the building inside the operating company itself, which for a doctor or dentist is the professional corporation. A permanent sales tax leak on rent can outweigh everything else, though you should check what your regulator lets that corporation own.
2. Where you have savings outside the company for the down payment, and want the building to stay yours after the business is gone, own it personally.
3. Where you expect to close the business down rather than sell it, operating company ownership is defensible and saves a corporation’s worth of annual cost. That case is strongest in a province with no land transfer tax, where moving the building out later costs a registration fee an order of magnitude smaller (roughly $1,050 on a $1,000,000 building in Alberta, against about $16,500 in Ontario).¹⁴

How often to revisit this decision

The rules underneath all of this move slowly, but your own facts don’t. We’d revisit the arrangement once a year at year-end, and sooner if somebody approaches you about buying the business, you start letting space to unrelated tenants, or market rents move far enough that the figure in your lease stops looking defensible.

Closing thoughts

Buying your premises is usually a decision about the business rather than about tax. Owning the space removes renewal risk, and for a clinic with a patient catchment or a restaurant whose address is half its value, that risk is worth paying to remove. The structure question only gets expensive once you’ve decided to buy, which is why it deserves an hour before you sign rather than a rescue four years later.

How we handle it

We settle the structure before an offer goes firm rather than after closing. The work is naming the company that will own the property, registering it for GST/HST in time for the sales tax on the purchase to be recoverable,¹⁵ drafting the lease your operating company will sign, and setting up the second corporation’s books and year-end. Where a building is moving into or out of a corporation you already own, we price both bills first, the land transfer tax and the tax on the depreciation added back to income.