Patrice Dupuis is the sole shareholder of Dupuis Distributors Ltd., a successful Canadian-controlled private corporation that wholesales automobile parts. The corporation’s profits are in excess of $550,000.
Inventory for the corporation’s business is stored in a warehouse owned by Dupuis. He acquired the building five years ago and began charging his corporation an annual rent of $20,000. At the time the building was acquired, the annual rent of $20,000 was considered realistic in terms of the real estate market at the time.
The lease is renewed annually on an informal basis, but the rental amount has never been adjusted, even though rental rates for similar properties have increased substantially. Dupuis has never considered a rental adjustment important because “it would just be transferring money from one pocket to the other.”
Both Dupuis and the corporation are located in Winnipeg, where there is little available warehouse space. A leasing agent recently informed Dupuis that the building could be rented to a third party under a five-year lease for $38,000 per year.
Required:
Should Dupuis enter into a five-year lease with Dupuis Distributors, charging an annual rent of $38,000? What tax savings could Dupuis and the company achieve as a result of this adjustment?