Corinne is 50 and has finally paid off her mortgage. She and her wife Sandra both work in hospitality, and are looking for a new challenge. Their home’s on the shores of Lake Ontario and they plan to transform it into a bed and breakfast. They decide to buy a bungalow further inland to live in. The B&B property is in Corinne’s name.

The couple wants to transfer the B&B property to a holding company for the tax advantages, such as deducting expenses. They thought about mortgaging the bungalow, and would like to be able to deduct that interest (but can’t, because it would be their primary residence). They’re considering taking out a second mortgage on the B&B property and using those proceeds to pay for the bungalow.

Who you call

Real estate lawyers and tax specialists.

The experts

Carol Bezaire

Carol Bezaire

senior vice-president, Tax, Estate and Strategic Philanthropy, Mackenzie Investments

Dan Palayew

Bruce Ball

national tax partner, BDO Canada

Elmira Chimirova

Elmira Chimirova

associate at Mullun


Keep all property transfer documents to prove the mortgage interest is deductible to CRA.

What they say

Carol Bezaire:

They first have to file a change of use of her property with the city, and make sure their zoning allows a bed and breakfast. Then, they should file a change of use with CRA. Commercial property taxes will be higher, but they’ll be able to deduct expenses and depreciation. They would also need to set up a corporation with Corinne and Sandra as the company shareowners. After that, they could transfer the B&B property into the corporation. Once the corporation becomes an active small business, any revenue on the B&B will only be taxed at 15.5% (in Ontario).

They also need to protect their bungalow in case the B&B bankrupts. The corporation should purchase life insurance on Corrine and Sandra so they can pay off liabilities in case of a death.

Read: Tax tips for cottages

They could also list one spouse as sole shareholder of the B&B, and the other as the sole owner of the bungalow. This makes only one liable if the corporation fails. In case of divorce or disagreement, the couple should draft a buy-sell agreement with a set purchase price.

If they want to take a second mortgage on the B&B property to purchase the bungalow, they should put the loan under the business corporation. They’ll be able to pay it off faster because of the lower corporate tax rate. However, they won’t be able to deduct the interest, since the bungalow is for personal use and not an investment.

Bruce Ball:

The test for interest deductibility is what you use the borrowed money for, and not what you used as a collateral. So, borrowing against the B&B to buy the house won’t allow for a tax deduction, as the money was used to buy a personal property.

Read: Rich see advantages in holding mortgages

Instead, have the corporation borrow money to buy the B&B property from Corinne, and the corporation can claim an interest deduction. She can use the money received personally to buy the bungalow. The gains will be tax-free since she used the B&B previously as a personal residence. But she should get an appraisal to ensure she sells at fair market value.

Elmira Chimirova:

Corinne and Sandra should ask their solicitor to find out if there are any restrictions registered against their property title, such as on building a fence along the rear property line. Some restrictions may be imposed in perpetuity, but you can apply to the land registry office to remove them after 40 years. For non-perpetual restrictions, you can contact the institution that imposed them and ask for removal (but few people resort to this). When they transfer the B&B to the holding company, they’ll have to pay the land transfer tax.

Read: How to invest in real estate

And there are other costs: for example, someone who wants to convert a single-family residence into a multi-family class unit might end up shelling $5,000 to $10,000 in fees and permit costs alone—and that’s just for residential use. Imagine the fees for commercial use.

Key steps

  1. Obtain zoning approval (is the area zoned solely for single residential houses?).
  2. Obtain a building permit for converting the residential unit into a B&B.
  3. Get permits for plumbing and electrical modifications (i.e., multiple electrical services, multiple water service meters) to make the structure compliant with code.
  4. Obtain all final inspections for all permits issued. Correct all discrepancies, if any, and get final approval from the city. Be in compliance with the fire code.
  5. Obtain a Certificate of Occupancy. This would be issued once all inspections have been approved.
  6. Obtain an inspection from the city assessor’s office. This will allow the single-family residence to be replaced on city records by a commercial property such as a B&B. Property taxes will go up substantially.

Evelyn Juan is a Toronto-based financial writer.