Q: I have a property that is owned with a JV partner. She put in the 20% down payment and qualified for the mortgage, and I run the investment. We then split everything 50/50 moving forwards. My partner holds her side of the partnership in a corporation, and I have my own corporation holding my interests. I need help understanding how the bookkeeping works in this case. On her side, she is putting down the whole mortgage and all relevant expenses, and she’s saying that I should only be reporting my income from cash flow on my corporation.
I had thought that all expenses and income would be split 50/50, but she’s saying that because she’s on title for the mortgage, that all goes to her side.
Can you explain how the books should work when doing a JV with this structure? As far as I’m aware, this is a fairly common arrangement to have a money partner and an operating partner.
A: First of all, you need to take some care in your use of terminology. At one point you make reference to “the partnership” and call yourself “partners”. There is a significant difference between a partnership and a joint venture for income tax purposes. In most cases, you do not want the tax authorities to ever think that this is a partnership. While the joint venture agreement you have makes it clear that this is not a partnership, you should avoid describing it that way as the JV agreement is only one form of evidence the Canada Revenue Agency can reference in an audit. Your lawyer could describe differences from a legal perspective, particularly related to liability issues.
Under the terms of the JV Agreement, you own a 50% beneficial interest in the property, regardless of the fact that your co-venturer is on title and funded the down payment. (Similarly you have a 50% responsibility for the mortgage even if your co-venturer is the only named party on the mortgage.) You are essentially 50/50 on everything. The only significance of her having provided the funds for the down payment is that any proceeds on a sale of the property go first to repay the funds she has advanced, with the remainder being shared 50/50. Usually JV agreements provide for her repayment first as well as on refinance, usually if there has not been a second mortgage (at times through RRSP) used.
That is the way I read the agreement and you are right to say this is a fairly common arrangement. If your co-venturer disagrees with the above interpretation then you should consult your lawyer for a more definitive answer.
While the agreement talks about how cash flow will be dealt with it is incorrect that all your company has to report is its share of the cash flow. In fact your company has to report 50% of all income and expenses from the property. Essentially a standard income statement will be drawn up annually for the property and 50% of the net income from that statement will be included in the taxable income of your company.
Being a joint venture though creates two complications:
- First, no capital cost allowance (depreciation) should be deducted on the income statement. That is because each co-venturer will set up their own CCA schedule for 50% of the total cost of the property (building not land) and each of you will independently decide how much CCA you wish to deduct each year. This deduction will be taken in your company`s books and not in the joint venture. This provides each co-venturer with the flexibility of not being tied to the same amount of CCA as the other co-venturer.
- Second, if the two companies that are the co-venturers have different taxation year ends, then a 12 month statement will have to be done at each taxation year-end. Each company would only use the statement that coincides with its year-end. (That is because each company must report the income and expenses only for the period that is in its taxation year.) This is typically easy with most computerized bookkeeping systems.