14 February 2001 GST/HST Interpretation 15317 - Whether Two or More Operators May Make an Election Under Section 273 of the ETA

This is in response to a request from your office dated December 6, 1999, asking if multiple operators may make an election under section 273 of the Excise Tax Act (ETA) in respect of a single joint venture. XXXXX ("Company A") has requested an interpretation on the possibility of the joint venture election being used by two or more operators. Company A and XXXXX ("Company B") planned to form a joint venture in which more than one operator would be appointed. A copy of the draft Joint Operating Agreement (the "Agreement") was provided to us for review.

The joint venture was formed to explore for petroleum XXXXX. Company A and Company B hold the petroleum rights for this area under separate permits. Company A and Company B plan to conduct exploration, appraisal, development, production, and abandonment operations under the joint venture. The Agreement outlines how Company A and Company B plan to conduct these operations. The Agreement does not apply to financing, transporting of petroleum beyond the offshore area, or marketing activities. As such, the proposed joint venture would be eligible to make a section 273 election under the ETA, since its activities are the exploration or exploitation of mineral deposits.

Under XXXXX of the Agreement, two Operators are appointed to manage the joint venture. Company A is appointed the Operator for the XXXXX, and Company B is appointed the Operator for the XXXXX. XXXXX The duties of the Operators are outlined in XXXXX of the Agreement and include the following:

XXXXX

XXXXX of the Agreement defines XXXXX This would include the GST/HST.

The Agreement outlines provisions allowing each Operator to use the election under section 273 of the ETA for GST/HST accounting:

XXXXX[.] Each Operator is responsible for acquiring the supplies necessary for a discrete portion of the activities of the joint venture. The Operator is permitted to use any elections available in administering the GST/HST for that portion of the joint venture.

Section 273 of the ETA provides a simplified method of accounting for the GST/HST to joint ventures formed for the exploration or exploitation of mineral deposits or for a prescribed activity. Instead of each participant in the joint venture being required to account for the GST/HST on its share of the supplies made by and to the joint venture, the election allows the participants in the joint venture to elect an operator who will account for all the GST/HST on the joint venture's activities. Pursuant to subsection 273(1), the operator must be a registrant and a participant in the joint venture. The election is jointly made by the operator and a co-venturer in the joint venture. Section 273 does not state that only one operator may be elected for a joint venture at any given time.

Over the term of the joint venture, it is possible that the parties will be simultaneously conducting activities under the management of the different Operators. When this occurs, and both Operators have made the election under section 273 of the ETA, two elections will be in effect, and will be used at the same time, for the joint venture.

We are of the opinion that the joint venture election may be made by more than one operator in a joint venture, even where the elections are in effect at the same time.

However, the requirements of subsection 273(1) would still have to be met for each election:

"Where a registrant (in this section referred to as the "operator") is a participant in a joint venture (other than a partnership) under an agreement, evidenced in writing, with another person (in this section referred to as the "co-venturer") for the exploration or exploitation of mineral deposits or for a prescribed activity, and the operator and the co-venturer jointly make an election under this subsection,

(a) all properties and services that are, during the period the election is in effect, supplied, acquired, imported or brought into a participating province under the agreement by the operator on behalf of the co-venturer in the course of the activities for which the agreement was entered into shall, for the purposes of this Part, be deemed to be supplied, acquired, imported or brought into the province, as the case may be, by the operator and not by the co-venturer;

(b) section 177 does not apply in respect of a supply referred to in paragraph (a); and

(c) all supplies of property or services made, during the period the election is in effect, under the agreement by the operator to the co-venturer shall, for the purposes of this Part, be deemed not to be supplies to the extent that the property or services are, but for this section, acquired by the co-venturer for consumption, use or supply in the course of commercial activities for which the agreement was entered into."

The Operators appointed under the Agreement would meet the requirements necessary to make the election. Company A and Company B are both registrants for GST/HST purposes. There is a joint venture agreement evidenced in writing. Both Company A and Company B are designated as the operator in the Agreement, and each is responsible for the joint venture accounting and the daily operations for a discrete part of the joint venture. Company A and Company B are participants in the joint venture, since each meets the definition of a participant as outlined in Policy Statement P-106 (Administrative Definition of a "Participant" in a Joint Venture). Therefore each may be an operator for purposes of the election under section 273 of the ETA.

The Agreement also includes provisions for the appointment of Task Operators and Sole Risk Project Operators, who would have differing levels of responsibility within the overall venture. XXXXX allows responsibility for the Operator's duties outlined in XXXXX to be assumed by Task Operators or Sole Risk Project Operators:

XXXXX[.] No person has been designated as either a Task Operator or Sole Risk Operator in the Agreement. However, a Task Operator or Sole Risk Operator appointed at a later date might not meet the definition of a participant. Currently the only persons who meet the definition by contributing resources to the joint venture are Company A and Company B. Both are also the only parties who meet the definition by being designated as operators in the Agreement. A third party appointed as a Task Operator or Sole Risk Operator would not be a participant based on the current version of the Agreement. When the Task Operator or Sole Risk Operator is not a participant in the joint venture, it would not meet the requirements to be an operator for purposes of the section 273 election.

It should be noted that the deeming provisions of the joint venture election only apply to properties and services supplied, acquired, imported or brought into a participating province, under the agreement, by the operator on behalf of the co-venturer, in the course of the activities for which the agreement was entered into, and to supplies of property or services made, under the agreement, by the operator to the co-venturer, to the extent that the property or services are acquired by the co-venturer for consumption, use or supply in the course of commercial activities for which the agreement was entered into.

Therefore, the election only applies to the supplies of the joint venture when the operator is making or receiving supplies on behalf of the participants, or making supplies to the participants. Company A's interpretation request requested guidance on how the GST/HST should be reported when a task operator is responsible for the financial obligations under the joint venture, but is not performing the supply. If an Operator (or Task Operator or Sole Risk Operator) is not making and receiving the supplies, the joint venture election would not deem those supplies to be made by the Operator (or Task Operator or Sole Risk Operator). In such circumstances, the GST/HST could not be reported by the Operator (or Task Operator or Sole Risk Operator) under the provisions of subsection 273(1). For a joint venture where multiple operators are permitted to elect under section 273 of the ETA, only the operator that is actually making or receiving a supply could account for the GST/HST on that supply.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8253.