Telephone: (613) 954-8585
Fax: (613) 990-1233
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XXXXX
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11660-1, 11660-9, 11950-1/0384(wh)
XXXXX
XXXXX
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Attention: XXXXX
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May 27, 1994
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Subject:
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GST INTERPRETATION
Joint Venture
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Thank you for your memo dated August 17, 1992, concerning the application of GST to a joint venture agreement involving XXXXX. We apologize for the delay in responding.
Based on the information provided in the letter and during a telephone conversation between XXXXX, of your staff and Wendy Houston, of my staff, we understand that:
Statement of Facts:
1. XXXXX, a participant in a joint venture, has been designated as the operator of the joint venture and the joint venture has made an election pursuant to section 273 of the Excise Tax Act.
2. The joint venture is involved in an activity which is prescribed activity for the purposes of section 273, since it is involved exclusively in leasing commercial real property.
3. XXXXX is occupying space in the commercial real property which it uses to operate a restaurant. Therefore, the space it occupies is used exclusively in the course of commercial activities engaged in by XXXXX[.]
4. According to XXXXX there is no written joint venture agreement between the parties and the parties ave not been able to locate any written documentation that evidences the joint venture agreement.
Further, we will assume that the participants in this situation have an undivided ownership interest in the building (i.e. it is not a condominium).
Interpretation Requested:
1. You have requested an interpretation as to whether XXXXX as the operator of the joint venture, must pay tax based on the fair market value of the space it occupies to carrying out its commercial activities.
2. You have also requested clarification as to whether XXXXX as the operator of the joint venture, is making a supply of real property to XXXXX as a participant renting space in the real property.
Interpretation Given:
1. According to subsection 273(1) of the Act a joint venture election can only be made if the parties formed a joint venture (which is not a partnership) that is involved in the exploration for or exploitation of a mineral deposit or a prescribed activity and the joint venture agreement is evidenced in writing. Therefore, if the joint venture agreement entered into by XXXXX is not evidenced in writing the joint venture election is not valid and all the other participants would be considered to be making a supply of space to XXXXX equal to their ownership interest in the building. Since none of the exempting provisions in Schedule V to the Act apply to these supplies the lease of the commercial real property by XXXXX will be taxable to the extent that XXXXX is the recipient of a supply from the other participants. Consequently, if the other participants are registrants, XXXXX must pay tax on the consideration for the supplies of space made by the other participants.
Assuming that XXXXX has a 50% ownership interest in the building and occupies 25% of the building, XXXXX would be considered to be receiving 50% of the space it occupies from the other participants.
Moreover, provided there is written evidence of the joint venture agreement, the election made by the joint venture would be valid and XXXXX, as the operator, would be deemed to be making any supplies it makes in the course of the agreement on behalf of the co-venturers. Therefore, if XXXXX is making the supply of the space to itself on behalf of the co-venturers XXXXX would be deemed to be making the supply that is made to itself and there would not be a supply for GST purposes.
Where, however, there is a valid joint venture election and XXXXX is not making the supply on behalf of the co-venturers, XXXXX would be considered to be receiving a supply from each of the other participants equal to their ownership interest in the building. Therefore, where XXXXX has a 75% ownership interest in the building and occupies 75% of the space in the building, the other joint venture participants would be making a supply to XXXXX of 25% of the space it occupies.
2. XXXXX, as the operator of the joint venture, may be making a supply of real property equal to the co-venturers' interest in the premises to XXXXX in certain circumstances. This will only occur where there is a valid joint venture agreement and XXXXX can substantiate that it is making the supply on behalf of the other participants (e.g. lease specifically states that XXXXX, as operator is making the supply and the rent is recorded in the joint venture books before the revenue is distributed to the participants).
XXXXX will not, however, be receiving a "supply" of the space to the extent of XXXXX' ownership interest in the building.
This interpretation is based upon our current understanding of the Excise Tax Act and regulations thereunder in their present form and do not take into account the effects of any proposed or future amendments thereto or future changes in interpretation.
Further, while we trust that our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.
If you have any further questions please contact Patrick Banham at (613) 952-8807 or Wendy Houston at (613) 952-8812.
Sincerely,
H.L. Jones
Director
General Tax Policy
c.c.: P. Banham
W. Houston
GTP: XXXXX
XXXXX
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Attention: XXXXX
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April 18, 1994
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Thank you for your memorandum, with documents attached, dated February 11, 1994, requesting that we review the reply made by the XXXXX concerning the applicability of section 162 of the Excise Tax Act to the payments they make to XXXXX[.]
Statement of Facts
XXXXX XXXXX and XXXXX shall be entitled to amounts of capacity and energy, referred to as the "Basic Supply", which has been agreed to as being equivalent to the value of the XXXXX output excluding the effects of the XXXXX."
This "Basic Supply" is equal to the amount that XXXXX had historically been able to produce before XXXXX.
6. Subclauses 1.3(a) and (b) say
"(a) If XXXXX and XXXXX receive energy over and above that generated by the XXXXX from XXXXX in order to obtain the Basic Supply, XXXXX and XXXXX shall pay to XXXXX an amount equal to the water rentals or other charges for use of water imposed by any statute or regulation of the XXXXX, based upon the net kilowatt-hours obtained from XXXXX.
(b) If the XXXXX generation exceeds the kilowatt-hours in the Basic Supply, XXXXX shall pay to XXXXX and XXXXX the water rentals or other charges for use of water imposed under any statute or regulation of the XXXXX, based upon the net kilowatt-hours generated above the Basic Supply."
7. When XXXXX bills XXXXX for the energy the bill says "to bill water license fees" and XXXXX has been charging tax on the amount of the bill.
8. XXXXX feels that the amount due to XXXXX should not be taxable since it is deemed not to be a supply pursuant to section 162 of the Excise Tax Act. They have written to the XXXXX about this three times.
9. The XXXXX wrote a letter to XXXXX, dated July 26, 1993, which said "Although the amount XXXXX pays to XXXXX is determined in terms which indicate it is based on a portion of the water fees which XXXXX pays to the XXXXX it cannot be defined as a payment for the right to use water. More properly it can be described as an amount of consideration owed under an agreement between the two power companies which was struck in order to create an equitable situation in the transfer of power from the XXXXX to XXXXX"[.]
Interpretations Requested
Was the reply given by the XXXXX appropriate in this situation?
Interpretations Given
Based on the information provided the reply given by the XXXXX was appropriate in this situation.
Section 162 of the Act deems the following three supplies not to be supplies for the purposes of the GST:
(a) the supply of a right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource
(b) the supply of a right of entry or user relating to a right referred to in paragraph (a), and
(c) the supply of a right to an amount computed by reference to the production (including profit) from, or to the value of production from, any such deposit, bog or resource.
A supply of one of these rights must, therefore, occur before section 162 will apply. When this prerequisite is satisfied any consideration paid or due, or any fee or royalty charged or reserved, in respect of the supply of the right shall be deemed not to be consideration.
While XXXXX is correct that XXXXX has the right to an amount computed by reference to the production (including profit) from, or to the value of production from, a water resource, XXXXX is not making a supply of this right to XXXXX. Instead XXXXX is making a supply of electricity to XXXXX and the payments made by XXXXX are consideration for this supply.
Please note that section 162 would apply if XXXXX supplied its right to receive the payment from XXXXX to another person who was not a consumer.
These interpretations are based upon our current understanding of the Excise Tax Act and regulations thereunder in their present form and do not take into account the effects of any proposed or future amendments thereto or future changes in interpretation.
While we trust that our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.
If you have any questions in respect of the above please contact Patrick Banham at (613) 952-8807 or Wendy Houston at (613) 952-8812.
Sincerely,
H.L. Jones
Director
General Tax Policy
Policy and Legislation
c.c.: P. Banham
W. Houston
GTP XXXXX
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