Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Attention: XXXXX
Case Number 106868
Business Number: XXXXX
December 19, 2008
Dear Sir/Madam:
Subject:
GST/HST RULING
XXXXX
Thank you for your XXXXX of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to sales of undivided interests in real property by XXXXX to various other parties.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand the facts to be as follows:
1. XXXXX is offering to sell to participants XXXXX undivided interests ("UDIs") in land it owns in XXXXX.
2. The purpose of the sale is to raise funds for the development of the property.
3. The property, currently vacant land, is to be developed into commercial use lots and resold at the completion of the development (the "Development").
4. A copy of the proposed offering memorandum was submitted, including XXXXX, Offer to Purchase and Contractual Joint Venture Agreement.
5. Each participant will purchase a minimum of XXXXX UDI from XXXXX.
6. The subscriptions are held in trust until the closing date.
7. The Offer to Purchase ("Offer") contains the Contractual Joint Venture Agreement ("JV Agreement") on XXXXX of the Offer. By signing the Offer, the participants accede to both the JV Agreement and the joint venture election under subsection 273(1), as set out in XXXXX of the Offer.
8. XXXXX will prepare the election forms for each participant, dated at the closing date.
Ruling Requested
You would like to know whether the election applies to the sale of the UDIs by XXXXX to the participants.
Ruling Given
Based on the facts set out above, we rule that the election does not apply to the sale of the UDIs by XXXXX to the participants.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Subsection 273(1) allows an operator (in this case XXXXX) and a participant (in this case the purchasers of the undivided interests) to make an election where an eligible activity is undertaken as a joint venture. Where the election is made, paragraph 273(1)(a) deems all the properties and services that are acquired and supplied by the operator under the joint venture agreement on behalf of the participants to be acquired and supplied only by the operator. The operator accounts for the tax collected on taxable supplies and claims input tax credits for the tax paid on purchases. Paragraph 273(1)(c) deems any supplies of property or services made under the agreement by the operator to the participants not to be supplies. The election is available for the exploration or exploitation of mineral deposits or for a prescribed activity. The activities prescribed by regulation are activities relating to the construction of real property and the earning of income from the supply of real property by way of sale, lease, licence or similar arrangement (with certain exceptions).
The development of the lots and their subsequent sale would likely be a prescribed activity under paragraph 3(1)(b) of the Joint Venture (GST/HST) Regulations, which reads as follows:
"(b) the exercise of the rights or privileges, or the performance of the duties or obligations, of ownership of an interest in real property, including related construction or development activities, the purpose of which is to derive revenue from the property by way of sale, lease, licence or similar arrangement."
You believe that the sale of an UDI by XXXXX to a participant in the Development would be deemed not to be a supply pursuant to paragraph 273(1)(c). However, it is our view that the election does not apply to that transaction.
When XXXXX first acquired the land, there would have been no joint venture agreement in effect since the JV Agreement is only entered into when a participant purchases their interest. The land would not have been acquired by XXXXX as operator of the joint venture. Where XXXXX supplies interests in the land to each of the participants, the supplies are made by XXXXX on XXXXX own account and XXXXX is required to collect and account for tax on these supplies except where the participants would be allowed to self-assess the tax pursuant to subsections 221(2) and 228(4). Based on our review of the JV Agreement and principles governing joint ventures, the initial supply by XXXXX to the participants of an interest in the land is made outside of the joint venture activity.
A purchaser of an UDI is not a participant in the Development until they make a contribution of assets towards the activity of the Development. The participant cannot make a contribution until he/she is the owner of an interest in the land that becomes his/her contribution. The supply by XXXXX of the interest in the land to the participant occurs, by definition, before the participant can contribute their interest to the Development. Therefore, the supply is not covered by the election.
Our position is supported by the wording of XXXXX of the JV Agreement, which states:
XXXXX
The contributions by the participants to the Development are the UDIs. The purpose of the Development is generally to develop the land to the point where it can be subdivided and sold. The purchase of an UDI is a preliminary step to the participation by the participant in the Development. It is after the acquisition of an UDI that the purchasers are truly participants in the Development. The sale by XXXXX of an UDI is the means by which the participants can acquire their interest and thereby make their contribution to the Development.
The money paid to purchase the UDI is not the contribution to the Development. The participants are paying money in order to acquire legal title to the land, albeit in the form of a tenancy in common along with the other participants. As noted above, the land is the subject matter of the Development, and it is the participants' agreement to make their interests subject to the JV Agreement that is their contribution to the Development.
Subsection 273(1)(c) was not meant to address the situation where an operator supplies property it already owns to participants coming into a joint venture which then becomes the subject matter of the joint venture. Such a supply should be more correctly seen as a supply made on the operator's own account and not as part of the activities for which the joint venture was formed.
You referred to our response to a question posed by XXXXX in a meeting in XXXXX as supporting the position that the election will deem the sale of an UDI not to be a supply. Our response should not read as implying that paragraph 273(1)(c) applies to your situation.
EXISTENCE OF A JOINT VENTURE
There is another matter which we wish to draw to your attention that was not raised in your submission. Upon reviewing the JV Agreement, we have considerable doubt whether the Development is truly a joint venture. There are a number of indicia of a joint venture which usually must be present to characterize an enterprise as a joint venture. One of these is a right of mutual control or management of the enterprise by all the participants. In your case, XXXXX is given absolute control over the Development. XXXXX of the JV Agreement provides that:
XXXXX
The items that follow encompass whatever would be necessary to proceed with the development and sale of the land and include under XXXXX. The document also includes, XXXXX giving it the authority to deal in the land. XXXXX of the Offering Memorandum states that XXXXX. It also states that XXXXX of the Offering Memorandum states that the signing of the agreement will XXXXX.
Should it be determined upon an audit that the Development is not a joint venture, the election would not be a valid election. This would be another reason why the sale of an UDI to a participant would not be covered by subsection 273(1).
The management fee paid to XXXXX pursuant to XXXXX of the JV Agreement is consideration for a taxable supply and absent a valid election, XXXXX would be required to collect and remit tax from each participant, while each participant, if registered, could claim an input tax credit to recover the tax.
Any purchases and sales made by XXXXX on behalf of the participants would not be deemed to have been made by XXXXX. Generally, where a joint venture exists but no election can be or has been made, each participant (including the operator if it is a participant with an interest) must account for the tax on its share of purchases and supplies made on its behalf by the operator, unless there is an agency relationship between the operator and the participants, as explained below. Where no joint venture exists, the relationship of the parties to each other must be determined. To the extent that XXXXX retains an interest in the property, it is a co-owner with the other participants. This does not however, address the question of in what capacity XXXXX is acting when it purchases goods or services or makes supplies as part of the Development. One possibility is that it is acting as agent. XXXXX of the JV Agreement expressly makes XXXXX the irrevocable agent of the participants in carrying out its duties under the agreement. Pursuant to subsection 177(1.1), XXXXX and the participants could, if applicable, elect to have XXXXX account for any tax collectible on supplies made through XXXXX. If the election is not made, or XXXXX is not an agent, each participant would have to account for any tax collectible on supplies made by XXXXX. Depending on the circumstances, it might be the case that when the land is eventually sold, third party purchasers would be in a situation to self-assess, so no tax would be collectible by the participants pursuant to subsection 221(2).
As for purchases made by XXXXX, the agency election does not apply to purchases made by an agent. It would be a question of fact whether a particular purchase was made by XXXXX on its own account for which it would claim an input tax credit, or as agent of the participants, in which case each participant would claim a pro-rata share of the input tax credit.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8253. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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