Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 164212
Dear [Client]:
Subject: GST/HST INTERPRETATION
Eligibility to make the election under section 273
Thank you for your [correspondence] of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the eligibility of a joint venture (JV) to make the election under section 273.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
You have presented the following proposed JV structure.
1. JVs would be entered into for various kinds of real estate projects, including the development of land, the construction and sale of new homes on subdivided land and the ownership, operation and leasing of commercial properties.
2. For purposes of the proposal, you state that all projects are engaged in prescribed activities for purposes of section 273.
3. The JVs are comprised of two or more corporations or other entities which are the beneficial owners of the lands and other assets of the JV (Co-Owners).
4. Legal title to the JV lands would typically be registered in the name of a nominee corporation (the Nominee) as bare trust for and on behalf of the Co-Owners.
5. The Nominee’s sole function would be to hold legal title to the JV lands and would have no other role in the JV. The Nominee would not be the operator of the JV.
6. The proposed structure would involve the incorporation of a new corporation (the Manager) which would enter into a contract to provide management services to the JV.
7. The Manager would be controlled directly or indirectly by the person or persons who control(s) one of the Co-Owners.
8. Other Co-Owners would have no ownership interest in the Manager.
9. […][The Company] provided an example typical of the proposed JV structure:
a. An individual controls and is the sole director of a Co-Owner and is also the sole shareholder and director of the Manager.
b. There are three Co-Owners with interests of 40%, 30%, and 30%.
c. The individual who controls and is the sole director of the Co-Owner with a 40% interest would own 100% of the shares of the Manager. The other two Co-Owners have no ownership interest in the Manager.
d. The Manager will provide management services required in connection with the JV lands and project.
e. Management services include arranging contracts with and coordinating the work of subcontractors, arranging for and coordinating the work of consultants and legal and other professionals, arranging financing, bookkeeping services and administering payments, supervising and coordinating necessary real property registrations, arranging insurance, and reporting to the JV. Management services supplied to JVs which construct and sell homes will include management and supervision of marketing and sales activities.
f. The Manager has the power and authority to act and take the steps that are necessary in connection with the performance of the services, including entering into contracts and commitments on behalf of the JV, without further approval of the Co-Owners, subject to certain limitations which may include:
i. Certain major decisions, for example, the sale of a substantial part of the JV lands, approval of the subdivision agreement or the plan of the subdivision, major capital expenditures, and approval of the terms of financing for the JV.
ii. The JV budget will be prepared by the Manager subject to approval by the Co-Owners. The Manager is authorized to operate and commit the funds of the JV within the budget.
iii. The management contract will provide for the fees to be paid to the Manager for the management services, and for the reimbursement of the expenses incurred by the Manager in performance of the management services.
iv. The Co-Owners will indemnify the Manager for any liabilities or claims it may incur in connection with the performance of the management services, other than claims resulting from gross negligence or willful misconduct of the Manager or a breach by the Manager of the terms of the management contract.
v. The management contract will provide for termination in certain events, such as the bankruptcy of the Manager or a default or breach by the Manager.
INTERPRETATION REQUESTED
You request confirmation that the Manager and Co-Owners in a joint venture structure as outlined above could make a valid election under section 273 with the Manager qualifying as a participant and operator of the joint venture.
INTERPRETATION GIVEN
For GST/HST purposes, a joint venture is not a “person”. Therefore, a joint venture cannot register and account for the GST/HST in its own right. However, section 273 of the Excise Tax Act provides for an election under which participants in certain joint ventures can elect for one participant that is a GST/HST registrant to be the “operator”. Where a valid election is made, the operator accounts for the GST/HST collectible on taxable supplies made by the operator on behalf of the other participants. The operator also claims any input tax credits in relation to the expenses incurred by the operator on behalf of the other participants in respect of the joint venture activities.
GST/HST Policy Statement P-106, Administrative Definition of a “Participant” in a Joint Venture, states the CRA’s administrative definition of “participant” for purposes of section 273. In order to be an operator of a JV for purposes of the election, a registrant must first be considered a participant in the JV. As stated in the policy statement a “participant” means:
(a) a person who, under a joint venture agreement evidenced in writing, makes an investment by contributing resources and takes a proportionate share of any revenue or incurs a proportionate share of the losses from the joint venture activities; or
(b) a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture.
For a person to be considered to have managerial or operational control of a JV the person must have the authority to manage the JV’s daily activities without requiring the input or approval of the other participants. Evidence of a person having the necessary managerial or operational control may include having the authority to engage personnel or contractors on behalf of the JV. Where the person does not engage staff to perform any of the operator’s duties, it is doubtful that the person would be considered to have the managerial or operational control of the JV. Additionally, the person would not be considered to have the managerial or operational control of a JV merely as a result of completing the GST/HST returns in respect of the JV’s activities.
Whether a registrant that does not have a financial interest in a particular JV has the requisite managerial or operational control to be a participant in a JV and, therefore, qualifies to be the operator of a JV for purposes of the section 273 election is a question of fact. This is determined by reviewing all the relevant facts of the situation including but not limited to the JV agreement.
In the absence of a signed agreement between the Co-Owners and the Manager, we cannot state that the Manager would be considered to have managerial or operational control of the JV. However, it appears from the list of responsibilities above that the Manager could have managerial or operation control. If these responsibilities were clearly outlined in the contract and there were no other provisions or other agreements which narrow the scope of said responsibilities, the Manager and Co-owners could be entitled to make the election under section 273.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-8530. 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,
Ben Boboski
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
Email this Content