I have 3 new clients unincorporated businesses and spouses are partners in the businesses. One couple, both have T4 income plus business income, small farm. Another couple has only business income, e-commerce.
Looking for ideas on how to split partnership, income, etc. Does it have to be a 50/50 or can returns be optimized somehow to reduce taxes as one spouse has much higher income?
Thanks for your help & wisdom…
Tom
Usually the split on the partnership is related to something other than taxes. It can be any division, usually based on who brings what to the partnership. they should have a written partnerhsip agreement that spells out how the profits will be divided. It can’t be changed year to year to get the best tax advantage, pretty sure that actions taken only for the purpose of saving tax are contrary to the tax act.
Couple one with small farm… You need to ascertain how they are farming. Do they do their own purchases of seed/chemical etc or sharecrop or rent? They are the determining factors for splitting farm income. As well who is the higher income earner? Spits can be any rate, but remember once declared you cannot change it yearly. Small farms can be subject to restricted losses too based on earned income from employment vs earned income from farm. (I have been involved with farm accounts for 20 yrs).
For the other business as mentioned, again, they can elect the percentages but once done, no changes can be made annually. There is also a partnership type of return which is different than just a business return. You need to identify this before going forward.
Looking for ideas on how to do an end-run, and arbitrarily allocate income for tax authorities, likely contravening the Income tax act (S245 et al), would not be the place to start, IMHO.
The place to start is by examining carefully all the legal originating and transactional documentation each client has produced to the person recording/producing the books of account for tax purposes.
The books for each situation would need to be properly written up on the basis of that fundamental documentation, legal agreements, etc.
If this has not yet been done, (and S230 requires that it does get done) it is way too early to start speculating about potential tax effects.
As told to me by a fiscalist, if the partnership includes a division of profits based on among other things, the work done by each partner, division can vary each year. For example, if the wife has an outside job with outside income, she will not have much time to work on the farm so the husband would be justified in claiming the profits related to the work done. The down side is that if there’s a farming loss, she will not benefit to reduce her outside income.
You would need to look at the initial financial contribution that each spouse brought to the partnership as well as the labour contribution. As far as legal agreements between spouses, the most common is the marriage agreement. In the farm partnerships that I am acquainted with, the spouses are joint owners of everything. None of my farm partnerships (all are spousal partners) use the formal partnership return. The T2042 allows for the partnership split.
The farm business must be able to show potential for profit; it must be more than a hobby farm. A farm business that hires almost all custom operators to do the field work and keeps only riding horses plus a few chickens, goats and hens would almost certainly be a hobby farm and so the question of how to split income/losses is not relevant.
The feedback has been awesome and appreciated.
To clarify, this is a small business that raises and sells wide variety of breeds of hatching eggs and chicks. These are sold & shipped nationally.
I will be speaking with them to create a % split that they are comfortable and in agreement with.
Thank you
With a business like this where a mother’s instincts are very important, a female spouse could easily be seen as the larger partner. I hope I am not stereotyping, but experience shows that quite often females do better with raising young stock on farms.
In this situation is the T2042 used rather than a T2125? This farm/business is not incorporated.
I would use the T2042 - it has the provisions for Livestock Inventory adjustments and Restricted Farm Losses if necessary. It also allows for cash based accounting which can be beneficial.