Save Taxes! Operate in a Joint Venture

10 mars 2009 | Vol.5 No.9.2
par: L'équipe

In entering into a domiciliary construction project with several partners, who are not related according to the tax acts, one should examine the possibility of entering into a very unique and unknown contractual arrangement defined as a “joint venture” agreement.

Version en françaisVersione in italianoA “joint venture” agreement is a common law vehicle that is not accounted for in the Quebec Civil Code. Its principal objective is to enable flexibility and provide significant tax savings. It is a structure that must be carefully set up for it is not easily accepted by either Revenue Canada or Revenue Quebec given the tax savings that it can generate. In many ways the “joint venture” agreement is similar to a commonly known structure called “the partnership “while encasing important differences.

Like a partnership it involves an agreement by all the members expressing their intent to commit their knowledge, expertise and resources for the benefit of the project. It also defines the roles that each will execute in the project. However, unlike the partnership, the “joint venture” allows for a non exclusive commitment by the members to the project. That is, each member retains the right to enter into other ventures with other people at the same time as they are providing their services and resources to the initial project. In a partnership, the participants must commit exclusively to the partnership and its end. In addition, and more importantly, the “joint venture” agreement allows the participants to fractionalize the small business deduction and benefit from serious tax savings.

If a group of developers are in a partnership, the low corporate taxation level afforded by the small business deduction must be split between the partners. If, for example, three individuals agreed to form a partnership and became shareholders of a company which undertook a domiciliary project, the first $400,000.00 of income benefitting from a taxation level of 21% would be absorbed by the company. That is, if in the first year of the project the company netted $1,200,000 .00, only the first $400,000.00 would be taxed at 21% and the balance of $800,000.00 should be taxed at the maximum corporate rate of 38% before being distributed to the partners.

If on the other hand these same three entrepreneurs formed a “joint venture” agreement and a management company to represent them through separate companies the tax implications for the earned revenue would be totally different. The management company would attribute the income to the 3 companies independently and file an income tax form for $0.00. The companies would then each declare revenues of $400,000.00. Each company would receive $400,000.00 to report as income and each would be able to apply the small business deduction for the $400,000.00 so as to pay only 21% on the revenue. In more concrete terms, Company A would have income of $400,000.00 taxed at 21%, Company B would have income of $400,000.00 taxed at 21% and Company C would have income of $400,000.00 taxed at 21%. In other words, on that same revenue of $1,200,000.00 the full $1,200,000.00 would be taxed at the lower corporate rate of 21%.

The end result is that in the first scenario the parties would end up paying $388,000.00 in taxes before distributing the profits of $812,000.00 while in the second scenario the companies would each pay $84,000.00 in taxes or a total of $252,000.00 thereby collectively netting $948,000.00 versus $812,000.00. Collectively, the tax savings could amount to $136,000.00 or $45,333.33 for each company.

The tax savings that emanate from a “joint venture” agreement are thereby quite significant. This result makes the “joint venture” an indispensable vehicle for any group of entrepreneurs to consider when entering into any form of venture with other prospective entrepreneurs. After all, who would not want to pay fewer taxes?

AVIS Important

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