In Canadian tax law, members of a syndicate are generally treated the same when it comes to the tax consequences of their collective activities. The Income Tax Act does not define or explain the treatment of syndicate members. Rather, tax case law has dealt with this issue. The tax courts have consistently looked past the level of participation to determine the true nature of the syndicate's purpose: are they trading for short-term profit, or investing for long-term gain?
The amount included in each member's income is contingent on how much they gained from the syndicate. A syndicate agreement will likely detail the entitlement of each party. In R. v. Anderson [1974] C.T.C. 836, the agreement had each of the four members entitled to a quarter of the total profits.
What are syndicates under Canadian law?
Syndicates are not a form of business organization, such as a sole proprietorship, a partnership, or a corporation. Syndicates are often defined as "a group of people or companies who work together and help each other in order to achieve a particular aim".
Common forms of syndicates are real estate syndicates. Real estate syndicates are formed when a group of individuals pools their money together to buy real property. Syndicates can exist for the purpose of producing investment income or business income.
However, it is often more difficult for a syndicate to prove it was created for the purpose of investing, which leads to members facing unexpected taxation as business income as opposed to capital gains. An experienced Canadian tax lawyer can help you understand the tax consequences of any syndicate that you are part of, so you are not surprised by a higher income tax assessment.
The central tax issue: the syndicate's intention
The primary consideration in determining whether the income generated by a syndicate is classified as business income or capital gain lies in assessing the group's collective intention. Tax courts focus on whether the syndicate intended to trade (i.e., generate profit from buying and selling property in the short term) or invest (i.e., hold property for long-term appreciation or income).
This distinction has significant tax implications: business income is fully taxable, while only 50% of capital gains are included in income.
Individual member intention vs group intention and tax treatment
In Anderson's case, the taxpayer was part of a four-person real estate syndicate. Although the taxpayer claimed their involvement was for the purpose of long-term investment, the court found the syndicate's conduct pointed toward an intention to trade.
The group had agreed in advance to sell the land and recognize any gain as business income. Despite the taxpayer's argument, the tax court held that there was insufficient evidence of an investing motive. This case underscores how the collective actions and purpose of the syndicate prevail over the syndicate member's personal characterization of his or her involvement.
What matters most is ultimately the group's intention. In Quon v. Minister of National Revenue [1962] CTC 343; 62 DTC 1204, a syndicate purchased property they were going to use to build a market. However, they got an offer for the property before they finished their goal.
As the property was purchased for a reason outside of trading, the syndicate's members were found to have realized a capital gain instead of business income.
Tax consequences for passive and active syndicate members
Tax treatment is the same for syndicate members regardless of each member's level of activity. Specifically, passive syndicate members will not have their earnings deemed as capital gains, while the active members have their earnings deemed as business income. The same applies for members having business income or employment income.
The principle of uniform tax treatment among syndicate members was reinforced in Minister of National Revenue v. Lane [1964] C.T.C. 81 (Ex. Ct.). In this case, the court ruled that passive members of a real estate syndicate were subject to the same tax consequences as active members.
The syndicate had engaged in a series of real estate transactions with a clear trading intention. The passive members had delegated authority to the active members and took no part in the day-to-day operations. Nevertheless, the court found all members shared in the syndicate's purpose and therefore could not be treated differently for tax purposes.
The level of participation within a syndicate is not a decisive factor in determining tax treatment. What matters most is the syndicate's overarching intention. If the syndicate is engaged in a business activity, such as flipping real estate or short-term trading, then the income will be treated as business income for all members. On the other hand, if the group clearly demonstrates an intention to invest, then capital gains treatment may apply.
Taxpayers involved in syndicate structures should be mindful that their individual roles will not insulate them from the collective tax consequences of the group's actions. As Canadian jurisprudence shows, tax courts will look beyond form to substance, emphasizing intention and actual conduct above all else.
Pro Tax Tip – have proof and evidence showing your intention
Given the nature of syndicates and the potential assumption for syndicates partaking in trading as opposed to investing, it is highly valuable to have evidence ready to show what your syndicate's true intention is.
A syndicate may want to purchase property solely for the intention of investing, but may be perceived as purchasing the property to trade it. To avoid this issue, have evidence ready to show the contrary. For example, if a syndicate purchased property together, the members should have documents and proof that they were using the property as capital property.
A Canadian tax lawyer can help you better understand what evidence is necessary to avoid having your investment deemed a business. A seasoned Canadian tax lawyer has a great deal of experience with characterizing income and can help you avoid any potential issues.
FAQ
Will I face tax consequences if I sell my share in a syndicate?
Yes. In Doyle v. Minister of National Revenue 70 DTC 6251; [1970] CTC 365 (Ex. Ct.), the taxpayer was deemed to be taxable on the sale of his interest in a syndicate.
Can I inherit an interest in a syndicate?
Yes. You can also be found to be taxable on it, too. In Nozick v. Minister of National Revenue 39 Tax ABC 361: 65 DTC 687, a wife inherited her husband's interest in a syndicate. She was deemed to be taxable on that interest when she sold it.