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Partnership investment

Hi,

Have a client who do investment in development of real property, down in the state in Arizona. Before he invest, he drove down to Arizona to inspect, make sure it is legit. He spent money on gas, maintenance, meal, and hotel stay. Is he allow to claim these expenses? Doesn’t this kind of investment get a T5013 slip?

Thanks,

If he has not kept proper business records of activities, revenues etc and sent them to you, if it were me I would not do anything at all about his attempts the following year to disguise his previous holidays to look tax deductible.

@kytax2015
A T5013 slip is for partnership income. A T5013 would have nothing to do with his business expenses, or employment expenses if he incurred them on behalf of his employer.

If it was incurred as an employment expense, and he was reimbursed by his employer, the employer may include it on his T4 (in box 14). Regardless, to claim the expenses he would need his employer to fill out and sign a T2200, and then he could report the expenses on a T777.

If it is his own business - not incorporated - he can claim the expenses on a T2125 in his own personal tax return (T1). There is also a provision for “investment expenses”, which can be claimed on Schedule 4, but if he is actively involved in property development I don’t think it would be appropriate to call these “investment expenses”.

Yes it is a partnership, it is not his business. He has nothing to do with the project. Someone, assuming is someone he knows, but not close, approach him and ask him if he wants invest in this land where they will build on. Currently it is still a vacant land, due to covid 19, things been delay. And I don’t see there will be any income until it is complete.

For sure nothing to do with his employment. However I don’t see it as his business either, because construction not his field, and he just put money in in hope of sharing some profit in the future.

He did give me a records for the days that he drove down to Arizona, and all the expenses he incurred. But I don’t see it as his business.

Could I say this to be the cost paid for the investment, like adding to his initial investment? Eg. He invest 10,000 and have 1,000 in expenses, then the initial investment is $11,000?

You should do what the Income Tax Act requires, which does not appear to be that.
The documentation would establish and prove what his investment cost may or may not be.

Who has examined and drafted the partnership agreement?
Has the Accountant for the partnership produced any partnership accounts?
Have the expenses you refer to been recorded and reported in the partnership’s business records?
What is the tax jurisdiction of the partnership?
Who or what entity is the General Partner?

First default position is that if the taxpayer wants to take a vacation, that’s up to him, on his own time and dime, no matter how many receipts he has…

Alternatively, if he thinks that his vacation is tax deductible, ask him to show you where in the income tax act he found that it says that, as a “look-see” as described in any case sounds like it runs foul of S67…

@kytax2015
Ok, thanks for clarifying. It doesn’t sound like a “partnership” by any definition:

https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/setting-your-business/partnership.html

Rather, it sounds more like a real-estate investment. If that’s the way he is looking at it, then yes - he might consider his expenditure as “investment expenses” or alternatively part of the capital cost (as you have suggested). But CRA might disagree. As such, I would ensure he is willing to explain/argue HIS point of view with CRA, and not rely on YOUR advice, or expect you to go to bat for him with CRA.

Yes, that why I’m not too comfortable about claiming the expenses for him.

Of course, he said it was not a vacation, but it may sound like one. Only he himself know, nobody know.

Yes, we can say it is a real estate investment.

Thanks.

The property is in the US. How is the title to the property held? Sometimes in the US an LLC holds the title to the property and the investors are not registered anywhere. The US LLC functions like a partnership when there are 2 or more partners and functions like a corporation when there is only 1 owner.

In Canada the US LLC functions like a corporation.

Is there a way for your client to be reimbursed for his travel expenses?

Property in the USA could be one several types of investments. Ask for the investment document which identifies and describes the item. Often it is a prospectus. Sometimes their is title. Recently I had a client with a share in USA rental property organized as a US business. The only way to be sure is to follow the document trail.

I don’t think he can get a reimbursement, because it his choice to make the trip to check it out in person. If I were him, I will probably back out of the investment given the out front money I need to spend… afterall there so many investment out there.

But I will double check with him on this :). Thanks.

That a good point. Thanks.