A January 5, 2026 Court of Quebec case considered whether a corporation’s sale of a cottage to the shareholder’s sons resulted in a denied capital loss to the corporation and a taxable shareholder benefit.

In 2015, the corporation sold a cottage that it had constructed for $1,248,821 to the shareholder’s sons for $700,000. Following an audit, Revenu Québec (RQ) denied the corporation’s capital loss of $406,934 on the basis that the cottage was personal-use property. RQ also assessed a shareholder benefit of $536,759, representing the difference between cost and sale price plus a minor adjustment. The case did not specify why the denied loss and the shareholder benefit were not the same.

In conducting its analysis, the court referred extensively to Tax Court of Canada cases, noting that the relevant federal and provincial provisions were similar, requiring the same type of analysis.

Corporation loses – capital loss
Losses realized on the disposition of personal-use properties are specifically denied. An asset can be a personal-use property even if it is owned by a corporation. Whether a property is a personal-use property depends on whether it is held for personal use by the taxpayer or persons related to the taxpayer (such as a shareholder).

The court emphasized that the actual, predominant use of the property was the determining factor, as opposed to merely the stated investment intention. The court noted that the documentary evidence suggested a personal purpose:

• utilities and cable bills were placed in the spouses’ names;
• insurance coverage was changed from corporate to personal names (the property was described as a secondary residence);
• reports referred to the property as a future residence for the family; and
• there was very limited support that the property was being used for its stated investment purpose as a rental property.

The court concluded that the cottage was used primarily for the personal enjoyment of the shareholder and his family and thus was personal-use property. As such, the capital loss was denied.

Shareholder loses – shareholder benefit
The corporation fully financed and constructed the cottage, then sold it to related parties at a price significantly below cost. The court found that such a transaction would not have occurred between arm’s-length parties and that RQ reasonably quantified the benefit as the difference between cost and sale price. As such, a taxable shareholder benefit was applicable.

In assessing the quantum of the benefit, the shareholder argued that construction deficiencies reduced the value of the property and relied on a 2015 appraisal to support a fair market value (FMV) of $700,000 at the time of transfer (in 2015). The court was not persuaded, noting that the valuation was prepared in contemplation of a related-party transaction and a quick sale. Further, the appraiser did not testify. The court then noted that the property was listed earlier for $1,175,000 and was later sold by the sons in 2022 for $1,775,000, which further undermined the credibility of the low appraisal.

The court noted that the FMV of an asset is not automatically used when determining the value of a taxable benefit. Having rejected the reliability of the shareholder’s FMV evidence, the court accepted RQ’s calculation of the shareholder benefit as the difference between the construction cost (approximately $1.25 million) and the sale price.

The court also noted that, in a previous audit, the cottage was determined by RQ to be used personally and a taxable benefit was added to the shareholder’s income for 2012 and 2013. The resulting additional assessments were upheld after objection. No gross negligence penalties were assessed. The reassessments were issued within the normal reassessment period.

ACTION: When transferring assets from a corporation to a shareholder or relative, ensure that the transfer is made at fair market value and that proper evidence supports this assertion.