Yes, charge rent, and set it at fair market value
The operating business should pay rent to the related owner of its building, whether that owner is you personally, a holding company or a dedicated property company, and the defensible number is market rent. The tax logic is symmetrical and unforgiving in both directions. Rent the operating company pays is deductible only to the extent it is reasonable in amount; charge above market and the excess deduction can be denied while the landlord is still taxed on every dollar received, which is tax on income the group only pretended to earn. Charge below market, or nothing, and the property side may not cover its own carrying costs, losses there can be challenged as having no reasonable prospect of profit, and the arrangement quietly moves value between entities, and sometimes between family members, in ways that surface later at a sale, a reorganization or a review.
Charging real rent is not just defence, it is the point of the structure. Rent moves profit out of the entity that carries business risk and into the entity that holds the building, funds the property company's mortgage without taxable dividends or payroll, and prices the operating business honestly, which matters the day you sell it or ask a lender to finance it. If you are still deciding whether the group should own its premises at all, that prior question is covered in should my corporation buy commercial property; this page assumes the building is owned and asks only what flows between the two sides.
How to land on the number, and why the mortgage payment is the wrong one
Market rent is found outside your group, never inside it. The strongest support is a rental appraisal or a market rent letter from a commercial appraiser or broker; the practical everyday support is a small file of comparable listings and completed leases for similar space in your area, reduced to a rate per square foot, with the lease terms noted. Commercial rents are quoted net or gross, and the difference is who pays realty taxes, insurance, maintenance and utilities, so your comparison must match structures: a net rate plus additional costs is not comparable to a gross rate until you convert one into the other. Set the number, note the date and the evidence, and revisit it at each renewal the way an arm's-length landlord would.
The mortgage payment is the number owners reach for, and it is wrong in both directions. The mortgage reflects what was borrowed and when, not what the space is worth: a building bought decades ago can carry payments far below market rent, and a highly leveraged recent purchase can carry payments above it. Backing the rent out of the debt service also decays over time, because the payment is fixed while the market moves. The mortgage matters to a different question, whether market rent is enough to carry the property, and if it is not, the answer is to fund the shortfall deliberately, through capital or documented intercompany loans, not to inflate the rent and call it a day.
Put the result in a written lease. Not because the CRA requires a particular document, but because everyone else does: the lease is what a lender underwrites, what a buyer of the business reads, what an insurer looks for, and what makes the arrangement look like what it claims to be. Term, rate, escalations, who pays which operating costs, and renewal rights, the same clauses an unrelated tenant would sign.
What the rent does across the group depends on who the landlord is
The same rent cheque behaves differently depending on which pocket receives it, and the differences drive how hard you should think about the number:
| Question | You own the building personally | A holdco or property company owns it |
|---|---|---|
| How the rent is taxed | Rental income on your personal return, at your marginal rate, after interest, taxes, insurance and repairs | Corporate income; where the companies are associated, rent from the active business is generally treated as active income rather than investment income |
| What the rent accomplishes | Moves cash to you without payroll; the net rent is personal income for mortgage and living costs | Funds the property company's debt service and builds equity inside the group at corporate rates |
| Creditor separation | Building sits outside the operating company's risk entirely | Building sits outside the opco but inside the corporate group; guarantees can partially reconnect it |
| Paperwork burden | Lease, HST registration if you charge taxable rent, rental schedule on your return | Lease, HST registration and returns, intercompany accounts, a second corporate year-end |
The associated-company point in that table is worth a sentence, because it surprises people in a good way: rent that would normally be passive property income can, where the tenant is an associated corporation using the space in its active business, be treated as active business income in the landlord company, which changes the rate that applies to it. The conditions matter and the structure has to actually qualify, so this is a check we run, not an assumption we make. The wider question of which entity should hold the building in the first place, including the personal option, has its own page: who should own the building, personally, opco or holdco.
The bank reads the lease before it reads anything else
A lender financing the building underwrites the lease, because the lease is the property company's income. The rent must cover the mortgage payments with a margin, the debt service coverage every commercial lender tests, and the lease term should run at least as long as the mortgage term, because a landlord whose only tenant can leave mid-loan is a landlord whose refinancing gets harder. Expect the bank to want the lease in writing, the operating company's financial statements as the tenant whose covenant stands behind the rent, financial projections where anything material is changing, and ongoing lender reporting from both sides of the arrangement after funding.
This is where an artificially low rent quietly costs real money: it suppresses the property company's income, weakens its coverage ratio, and shrinks what the building can refinance for, which matters exactly when the group wants to pull equity out for the next project. Building the lease, the coverage math and the projections into one file the credit committee can approve is the ordinary work of a business financing and projections CPA in Ontario, and how the lender's requirements feed back into the whole ownership structure is covered in how financing affects commercial property ownership structure.
HST, the paperwork and the year-end mechanics
Commercial rent is a taxable supply even between related parties, so the landlord, personal or corporate, generally must register for HST once over the small-supplier threshold, charge HST on the rent, and file returns; the operating company recovers the tax as an input tax credit, so across the group the cash usually nets to zero, but only if both sides actually do the paperwork. Skipping it because the money is all yours anyway is one of the most common findings in an HST review, and the assessment lands with interest even though no net tax was ever at stake. A joint election exists that can relieve certain closely related, fully commercial corporations from charging HST on some supplies between them; whether your rent qualifies depends on the structure, so it is a question to ask, not a form to assume.
At year-end, the discipline is consistency. The rent in the lease should be the rent actually paid, the rent deducted by the tenant, and the rent reported by the landlord, with the intercompany account reconciled rather than used as a dumping ground for whatever did not fit elsewhere. Where the operating company also covers costs the lease assigns to the landlord, repairs, realty taxes, insurance, those flows need to be either corrected or priced into the rent, because a net lease on paper and a gross lease in practice is exactly the inconsistency a reviewer pulls on. This is routine inside an Ongoing Financial Partnership, where the leases, the HST filings and both year-ends are handled by one team that sees the whole group, with the tax side coordinated through our corporate tax work.
What changes the answer
Five facts move the rent number and the way we set it up:
- Who owns the building. Personal ownership makes the rent personal income and part of your own compensation picture; corporate ownership makes it group cash flow and changes how it is taxed.
- Whether the companies are associated. Association can turn the landlord's rent into active business income, which changes the rate and the planning around it.
- The mortgage on the property. Market rent that cannot cover the debt service means the shortfall must be funded deliberately, not papered over with an inflated rent.
- The lease structure. Net versus gross changes the headline number, who books which costs, and what the comparables must be converted to.
- What is coming next. A sale of the business, a refinancing of the building or a family transition each reward a clean, documented, market-tested lease, and punish an improvised one.
If the rent in your group was last set by guesswork, the fix is inexpensive: evidence the market rate, paper the lease, register and file the HST, and align the year-ends. A free 15-minute discovery call is enough to tell you whether your current number would survive a review, and what it would take to make it solid.
