Personal Finance

Rental Property with Partner, but Property only under 1 name?

  • Last Updated:
  • Jan 27th, 2021 8:32 am
[OP]
Newbie
Jan 19, 2021
3 posts

Rental Property with Partner, but Property only under 1 name?

Hello All,
I’m trying to help a friend sort out his very messy situation on a rental property with a partner. I’ll start by providing some relevant background info:
- A few years ago my friend’s colleague convinced him to partner up and invest in a property together (50/50), but to purchase it under my friend’s name alone for some reasons. My friend agreed and bought the property under his name alone.
- The partner was fine with my friend living there or renting out the property. He purchased it as a first-time home buyer and since it was a newly constructed condo, there was HST/GST charged and then an off-setting residential rebate for the same amount (so no HST/GST paid).
- There is no contract prepared by a lawyer, only an e-mail drafted up by my friend stating they are 50/50 partners.
- My friend decided not to live there and they rented it out instead.
- The partner didn’t want the rental income declared and threatened to sue my friend if he did declare it. At this point, my friend tried to consult with an accountant, lawyers and CRA, but recommendations varied between every person he spoke with (e.g. he spoke with 5 different CRA agents and got different answers each time).
- My friend reported the rental income and in his tax return included his partner’s name as a Co-Owner (as opposed to partner), but is missing his SIN #, and allocated the split 50/50. CCA was also claimed.
- He also asked CRA to reverse his residential GST/HST rebate and applied for the rental property GST/HST rebate since it was being rented. It was approved and netted out to zero.
- The partner never declared anything and does not know my friend was reporting from the beginning and that he applied for the GST/HST rental rebate.
- My friend has the chance to refinance the mortgage and intends to use the funds to buy out his partner (he is open to it) and disassociate himself from the guy.

Issues/Questions:
My friend has been allocating 50% of the rental income to his partner while the property title is under my friend’s name alone and the partner has not been declaring his income to CRA. Since he’s also buying out his partner, he will have an adjusted cost base on the property. When he sells the property down the road, there will be capital gains. CRA may go after him for taxes on rental income, GST/HST rebate, and capital gains, but it will be at some point after the buyout.

I think he needs more than just a partnership contract because from CRA’s perspective, my friend is the only one on the house deed and may be 100% liable for any taxes and then he’d have to go after his partner in court who will likely fight it/be long gone.

1) What should my friend do at this point to protect himself if/when CRA contacts him?
2) How should he proceed with the buyout process to have evidence for CRA?
3) Has my friend been reporting correctly by listing himself as a Co-owner instead of partner? Does it make a difference, like is there anything else that needs to be done under a partnership? They are not a registered partnership, it is just an agreement between them and my friend can always move into the property as his principle residence.
4) What is likely to happen with CRA?
5) Are there any other legal issues he needs to address?


It’s a really messy situation and he’s trying to figure out how to best protect himself before having hire a lawyer/CPA to help execute on it. His partner is dangerous and unlikely to cooperate in properly fixing this mess and he can also afford better lawyers.

Any help would be greatly appreciated.

Thanks in advance.
8 replies
Deal Addict
Feb 22, 2007
1959 posts
223 upvotes
Mississauga
this is tricky.

Partner could have many meanings.

Let's start simple.
Co-owner or if both names were on the title, would automatically symbolize that they are partners. They would each record the rent&expenses on their tax returns based on the percentage they own (determined by how much money each put down).

Since the condo is only under 1 name.

To me it looks like the person on title and the other person is simply a behind the scenes friend who lent money to help the purchase go through. In this sceanario, the person on title is responsible for 100% of the rent/expenses.
This behind the scenes person is more like a lender, your friend would have agreed to pay him his money back + interest rate.

At the end of the day, from a CRA perspective, it isn't your responsibility to know or even care if the partner reported the income. However, if CRA come's knocking on your door, they will see that the property is only under your name and mortgage only under name which would mean you look like 100% owner.

Do you have any evidence of funds being transferred to your friend (eg. 50% of the rent?)
Deal Addict
Jun 12, 2008
1133 posts
603 upvotes
Ripley
Get a lawyer.
Deal Fanatic
Mar 21, 2010
5474 posts
2281 upvotes
Toronto
What is there to prove that the 'partner' has any stake in any of this? What is there in writing to prove that the 'friend' owes the 'partner' anything? Just an email?
Member
Jan 24, 2004
482 posts
75 upvotes
From what I see, the partner doesn’t own the property. Partner has no legal standing to claim the rental income since the property, mortgage and the rental agreement should be under the friend’s name.

Partner only lent the amount of money to the friend to purchase the property. Partner can fight to get back the money lent but that’s it
[OP]
Newbie
Jan 19, 2021
3 posts
No, my friend received a check from his partner for some capital, but he doesn't have a copy of the check so the statements just show a deposit.

Because they have negative cash flow, no money has been transferred between the two of them since the beginning and they just keep a running total which will be closed out upon a buyout. There have been other expenses such as repairs and new appliances, but it's just e-mails between the two with invoices and receipts.

Upon buyout, there would be evidence of the 50% buyout at fair value, but whether or not he'll agree to sign something with a lawyer is another issue.
pardnme wrote: this is tricky.

Partner could have many meanings.

Let's start simple.
Co-owner or if both names were on the title, would automatically symbolize that they are partners. They would each record the rent&expenses on their tax returns based on the percentage they own (determined by how much money each put down).

Since the condo is only under 1 name.

To me it looks like the person on title and the other person is simply a behind the scenes friend who lent money to help the purchase go through. In this sceanario, the person on title is responsible for 100% of the rent/expenses.
This behind the scenes person is more like a lender, your friend would have agreed to pay him his money back + interest rate.

At the end of the day, from a CRA perspective, it isn't your responsibility to know or even care if the partner reported the income. However, if CRA come's knocking on your door, they will see that the property is only under your name and mortgage only under name which would mean you look like 100% owner.

Do you have any evidence of funds being transferred to your friend (eg. 50% of the rent?)
[OP]
Newbie
Jan 19, 2021
3 posts
They have an e-mail where the partner agreed to being 50/50 partners. The partner is also listed on the lease as a landlord and signed it. There are other e-mails between them about the expenses incurred on things like repairs and buying new items for the unit with invoices and receipts.

The partner will be bought out for his 50% at fair value so there will be some evidence at that point. The problem is whether the partner will agree to signing legal documents and more importantly for my friend whether that legal document will satisfy CRA if they ever look into this.


Manatus wrote: What is there to prove that the 'partner' has any stake in any of this? What is there in writing to prove that the 'friend' owes the 'partner' anything? Just an email?
Member
Jan 3, 2017
369 posts
260 upvotes
A random internet forum is not the place to seek help to questions you are posing. The advice you will receive will most likely be incorrect, misguided and misinformed. Get professional help as repercussions from following wrong advice from "internet forum experts" can cost you dearly.

Top