Hi
I am probably overthinking this and need some help. I have a 50-50 partnership reported on a t2125. The partner left and received 15k in cash during the tax year in consideration for their interest. Does the 15K need to be reported on a tslip? If not, how does the leaving partner report the income?
Thank you!!
Interest in a partnership is typically a capital investment. They need to figure out the ACB of their partnership interest and report the capital gain or loss, considering they received proceeds of $15,000.
In addition, if the partnership is required to file a partnership return, he/she may still need a T5013 slip (for the partnership income attributable prior to divesting)
Depending on the quality of your client this could be fairly straight forward or a big mess. Like Nezzer says it is treated as a capital sale the fun part is determining the ACB of the partnership interest. Basic formula is the partners share of profit/loss plus partners investments less partners draws over the period they were a partner. If you have an accurate set of double entry books this is pretty easy, however if the clients arrive with a single entry spreadsheet or numbers on a napkin, not so much fun.
Hi! Gosh I was tired when I wrote that and should add a bit more info. The partner that left took their share of the equity and the remaining partner paid them an additional 15k above that. It is a tiny business that broke even in its last year with a new piece of equipment that was financed. But yes, double entry books and all the info if there.
Depends what the 15k actually IS. If it was paid from the partnership, it could be proceeds on disposal of the partnership interest (as noted earlier), or considered “drawings” by that partner (i.e. on account of income, not capital). If it was paid directly from partner A to partner B, it might be a “gift” - non-taxable.
Best to ask for the legal documentation which supports that payment.
Ah ok! I believe it was paid personally and not out of the partnership. If I remember correctly ( and will double check now), the business operations ceased as a partnership and the business number was closed. Operations resumed under a new cra business account but the same name as a sole proprietorship. The payments were paid personally throughout the year out of a personal account.
My suggestion is to retain an accountant to advise on the specifics. It sounds like you’re not familiar with this kind of transaction so it seems unadvisable for you to complete the return without receiving some guidance, and not in a general sense but on the specifics of the case.
It can not be considered as drawings, since he had already received his share of the equity. For the payor, it was in the nature of goodwill, or an additional investment in his business. For the payee, it would seem to be additional income from his share of the partnership and therefore taxable. He can hire an accountant and pay a third of the money out in fees, or he can declare it as income from the partnership dissolution.
Thank you! So based on your comment above, I wouldn’t need to issue a T slip then?
We don’t have enough information to know whether it could be classified as drawings. You’re providing advice on a matter you don’t have complete information on. That’s irresponsible. Not to mention the idea that it would cost one-third to hire an accountant is also irresponsible. Don’t hire a national firm if you’re concerned about fees. There are plenty of accountants who understand these matters whose fees are much more reasonable.
Again I advise you not to take anyone’s specific advice on this matter here. No one here has enough information to advise you on what to do.
As noted by others here, it is risky to proceed based only on what you “believe”. If you don’t have proof, and your “belief” turns out to be incorrect, the client could face consequences from CRA (penalties, audits, etc). They may then blame you for it. Be careful. Get all the details and documentation. And if you aren’t well versed in this type of scenario, be honest - tell the client you don’t have experience with this, and you could refer them to someone with more expertise. After that, if they choose to continue with you, knowing the risks, they must shoulder some of the responsibility.
Based on this, I would record the $15,000 as additional income from the other partner - it is business income arising from the dissolution of the partnership. There is no T slip to issue. That is what I would do, but just so I don’t go against what @iain.fyffe and @Nezzer are saying, that is only what I would do. Their arguments apply to all questions of this nature that are asked on this forum.