Hi,
I have a question. My client purchased residential property under personal name but down payment came from business account (set up as buy and renovate and sell houses). He renovated the house from business funds and sold the house after 2 months and returned the money back to business. How can i identify if this house was a business asset or personal asset because this will determine where these expenses and profit goes. 1 thing, title of property shows only client personal name.
If the client didn’t talk with you prior to doing the transaction, personally, I’d fire the client.
Why?
Becauise now you need to “make up a story”, which is either one of these:
Person A created a Bare Trust for Corp X and executed all transactions on behalf of Corp X. Corp X now reports for GST and income/expense (NOT cap gain). However, of course there’s no documentation for this.
Person A borrowed money from Corp X (possibly across a year end?) and executed all transactions on their own account, again, treating the gain as on income account, not capital. Person A possibly owes Corp X interest on loan proceeds or has imputed interest for tax purposes.
Neither is actually true, but one ma y be “more true” than the other.
There are “things” (i.e. bare trust arrangements) that could be said to work around the personal aspect of the sale, but for the sake of this discussion, we’ll attribute it personally.
Few things you’ll need to consider here:
What was the intent of the purchase/sale? As per the new concessions presented by CRA and the federal government, the disposition of the property would be taxed as business income and not subjected to capital gains (assuming a profit was realized)
If the property is “new” or qualifies as a “substantially renovated property”, there are GST considerations on the sale.
Borrowing from the corporation to finance such a venture should accrue interest over the life of that specific loan as to remain in compliance with legislation. Even something as minimal as a GST audit on the sale could result in determination of a prescribed loan under Section 80 and now subsection 248(1) as a result of the business income inclusion.
@SmallBizGuy has a point. I’d give the client a firm talking to. If transactions in this nature persist, you may want to give a stern warning of tax implications and perhaps charge a higher fee for compliance.
I think you’ve already answered your question :
“title of property shows only client personal name”
He used his corp as his bank. This is a S/H loan which bears interest for the time it was outstanding. The purchase, renovation, & sale go on his T1 as business income. Get a copy of the deed to make sure it is, in fact, in his personal name. Doesn’t need to be any more complex than that.
I love this comment from @Deepinthemoneycall…
“@SmallBizGuy has a point. I’d give the client a firm talking to. If transactions in this nature persist, you may want to give a stern warning of tax implications and perhaps charge a higher fee for compliance.”
In my experience clients who take action first and ask for help later often end up being a big problem.
These clients are usually messy, hasty, complaining, nit picking, penny pinching, and impatient. In the end they blame you for their bad decisions and extra costs in unnecessary tax and accounting expense. Just as in therapy, in order to help someone save tax and plan before taking action, they first need to want help and want to learn.
After many years in the school of hard knocks I now frame my new client onboarding process to incentivize an ask first / act later process. I have a PITA uplift pricing. And, I have a disengagement process.
Just for fun, let us illustrate what happened here if this was an ordinary employee of the corporation, and we were reading about it in a newspaper report:
"Today, our reporter spoke with expert accountant Nabeel Nawaz, who has been credited with discovering an embezzlement, which almost went undetected.
An employee had withdrawn and embezzled funds from the corporation on multiple occasions without any authorization to do so, over a 2 month period. The perpetrator almost got away with it, because he paid back the money he had stolen before the books of account had been given to our eagle-eyed expert tax accountant. It was later discovered that the perpetrator had a real-estate gambling addiction, which fueled his offences. There was no evidence of authorization in the minutes, no loan documentation of any kind, the perpetrator had operated solely on a “self-help” basis. The president of the Corporation has been advised to implement at least some business-like controls over the corporation’s business operations, and to check proper documentation is in place. The president has not pressed charges against the employee, and says he will monitor things properly in future, and have everything properly documented and authorized. He is considering hiring a professional to manage the corporation."
Second thoughts:
“Just for fun”
Perhaps, on second thought, if you have to say directly that something is a joke, perhaps it wasn’t a good one after all
@abechew309 While those of us long in practice recognize the sarcasm in your response…there are likely those who don’t…and frankly, in a small corporaton none of this is the least bit surprising. I’ve run across this kind of thing more often than I can count during five decades of tax work. Unfortunately.
Hence my comment: I’d fire my soon-to-be-ex-client.