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.
DATE November 26, 2012
TO
[Addressee]
FROM
Ken Syer
Manager
Goods Unit
Excise and GST/HST Rulings Directorate
FILE 148931
SUBJECT : GST/HST INTERPRETATION
Section 273(1) Joint Venture Election - Whether bare trusts and nominee corporations can be operators of joint ventures for purposes of Section 273(1)
This is in response to our recent […] [correspondence] on whether a bare trust or nominee corporation can be an operator of a joint venture for purposes of section 273 of the Excise Tax Act.
A person must first be considered a participant in a particular joint venture in order to be designated as its operator. Policy P-106, Administrative Definition of a Participant in a Joint Venture explains the CRA policy regarding when a person who does not invest in a joint venture can be considered a participant in the joint venture for purposes of the section 273 election. As stated in that policy, for purposes of the election, a person who does not invest in the joint venture may be considered to be a participant in the joint venture if that person is designated as the operator of the joint venture under an agreement in writing and has the managerial or operational control of the joint venture. The agreement in writing merely has to identify the person as the operator of the joint venture. Although the agreement may or may not include information with respect to the person’s duties as operator of the joint venture, whether the person has managerial or operational control is a question of fact which is determined via a full examination of the person’s duties.
For a person to have managerial or operational control of a joint venture the person must have authority to manage the joint venture’s daily activities without needing the input or approval of any financial participant. This may include the management of the accounts, the filing of the GST/HST returns and the daily administration of the joint venture’s activities. Evidence of a person having the necessary managerial or operational control may also include having the authority to engage personnel or contractors on behalf of the joint venture. Where the person has engaged no staff to perform any of the operator’s duties it is doubtful whether they have managerial or operational control.
However, managerial or operational control does not necessarily include any authority to initiate significant business decisions such as the acquisition of or selling of certain core business assets. It can be limited to the daily functions necessary to run a business but must include all or at least most of the significant duties required to maintain managerial or operational control of the joint venture.
It is common practice in some industries to designate as operator of a joint venture for purposes of the section 273 joint venture election, a “bare trust” or a nominee corporation.
Where a “bare trust” is in fact a bare trust at law, it cannot be the operator of a joint venture for the purposes of the election. At law, a bare trust is a trust which merely retains legal title to assets with no other functions, while the beneficial owner(s) retain beneficial ownership (see P-015 Treatment of Bare Trusts under the Excise Tax Act). However, industry often uses the term “bare trust” to describe a trust which has been given further responsibilities. These other responsibilities preclude the trust from being considered a bare trust for purposes of the Excise Tax Act. Where such a trust is identified as a bare trust under an agreement in writing, and is identified as the operator of the joint venture, the facts must be examined to determine whether the trustee has the managerial or operational control of the joint venture. If that trustee does not have such control, that trust does not qualify as a participant and thus cannot be the operator of the joint venture for purposes of the election. If that trustee does have such control then that trust qualifies as a participant, however, the trust would not be considered to be a bare trust for purposes of the ETA.
The same conditions also apply to a nominee corporation. Industry may characterize the operator of a joint venture as a nominee corporation. A nominee corporation can be a trust or an incorporated entity. Generally, a nominee corporation essentially provides the use of its name to participants in a particular joint venture. Where the only function of a nominee corporation is to have its name used instead of the names of the participants in the joint venture’s dealings with third parties, the nominee corporation does not qualify as a participant for purposes of the joint venture election because it does not have managerial or operational control of the joint venture.
A common scenario is one where an entity, which is referred to as a nominee corporation by the participants, holds title to the assets of the joint venture on behalf of the participants, manages the collection and remittance of the GST/HST, maintains the bank accounts in the nominee’s name, and receives all payments and pays all operational expenses on behalf of the joint venture. These responsibilities alone do not convey the nominee corporation the managerial or operational control of a joint venture. As a result, such a corporation would not be considered as a participant and thus, an operator, of the joint venture for purposes of the section 273 election.
For the same reasons, a trust referred to as a bare trust by the participants, who merely holds title to the assets, receives payments, and administers the GST/HST on behalf of the participants (the beneficial owners of the trust) does not qualify as a participant of the joint venture and thus, could not be considered as the joint venture’s operator for purposes of the election under section 273.
An example of a nominee corporation which does have the managerial or operational control of a joint venture would be that of a management company hired by the participants in the joint venture to manage the joint venture’s activities (such as operating a hotel) and provide its name to the joint venture. For example, the management company would make and receive payments in its own name on behalf of the joint venture and maintain operational control of the daily activities of the hotel. However, the participants in the joint venture would keep the power to make significant decisions (such as selling the hotel) and the management company would report to the participants on a regular basis. Since the management company has operational control, the management company would be considered to be a participant and operator of the joint venture for purposes of the section 273 election provided that there is a written agreement between the management company and the joint venture that identifies the management company as the operator of the joint venture.
Each case will be looked at on a case by case basis to determine whether the duties vested in a particular nominee corporation or a trust referred to as a bare trust are sufficient to be considered managerial or operational control.
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