Hello Taxmasters!
I have a situation where someone invested in a property with another person (House flipping) and made some money through it. As for the reporting, do I just include the JV income/expenses on S125 like the rest of the revenue/expenses? Or should it be reported separately? Any guidance would be appreciated.
Thank you.
A joint venture can be structured in various ways. One way is to set up a corporation where each co-venturer is a shareholder. Typically the corporation would be dissolved upon completion of the joint project, so IMHO it wouldn’t make sense to set up a corporation for a single residential house, purchased for reno and resale.
You say “…SOMEONE invested in a property…” which sounds like you’re talking about a person (human). But, if the co-venturers were individuals (human), they would report the income on on each of their own T1s. So, are you saying that two corporations jointly purchased and resold a house? And, are you asking how each venturing corporation should report their particular profit or loss in the joint project? (That’s the only way I can imagine a S125 would be applicable.)
I think the tax treatment would depend on the legal agreement that established the joint venture - what did each party contribute? For example, if one party contributed a capital property (and nothing else), then that party’s profit could be considered a capital gain.
However, when you say “house flipping” that usually means the property was purchased and resold in a short period of time. As such, the profit would be considered a sale of inventory, and reported as such on the S125.
In any case, you may want to tick the appropriate box on the S141 as well.
Thank you, Nezzer. You are spot on. In this case, two individuals bought a house together by contributing money through their corporations (Money was funded by the corporations). I do not think any formal agreement was setup for any of this and this happened a few years ago so there is no way to go back and do anything now. However, the intent was for the corporations to make the money and report on their respective corporate tax returns. I would think it goes in as part of regular business income.
Taxtin, I think you’re using the term “joint venture” rather loosely. Two individuals bought a house and flipped it. The money came out of their respective corps. Knowing nothing else, you have a shareholder’s loan and personal business income on the profit. Put it on a T2125 with the other party’s info shown as required, and their respective share of income. How the other party reports it is not your concern.
BUT, whose name was on the deed? If the two individuals, then treat it as above. If the two corps, then I’d enter your client’s % of the income & expenses in the corp records and then on the T2 as business income. If the deed shows only one corp, or one individual, then you’ve got a bucket of shit. Tell the prospective client to go to the lawyer who handled the property transfer, his lawyer, and his buddy’s lawyer and sort out the facts. Don’t come back until you have it all ironed out between the 3 lawyers, and your buddy.
Really, I’d walk away. You can’t make any money on this. You’ll invest time in this that should be spent on existing clients, or updating your QAM, or doing PD, or sitting on the rocks at the wharf looking across the ocean to see if it’s clear enough to see France.
I agree with @jhd.hemeon - best to be sure who was on title for the property - that will determine whether to report the profit in the corporations or on the individual T1s, no matter where the “funding” came from…
So I finally got hold of the JV agreement. This is how it went down. The client owns a renovations company. He got together with one of his friends and bought a house to flip it and sell it to make a profit. His friend supplied $30K downpayment which my client supplied renovations. He paid for the subs and materials from him company’s account. Once they sold the house they split the profit 50/50. I am thinking since company is not named on the JV agreement the company does not get to report any income/expenses. All the supplies/materials/labour from the company becomes a draw to the SH which he can turn around and would report on his personal tax return.