27 May 1994 GST/HST Interpretation 11660-1[3] - Joint Ownership

                                                                        Telephone: (613) 954-8585
Facsimile: (613) 990-1233
XXXXX                                                                                 File 11660-1, 11660-9

Dear Mr. XXXXX

Thank you for your letter received at our office on December 7, 1992, concerning the occupation of space in a building by joint venture participants who are financial institutions. We apologize for the delay in responding to your enquiry.

We understand the particular facts in your situation to be the following:

Statement of Facts:

1. Three financial institutions are participants in a real estate joint venture.

2. The joint venture owns a rental property which is occupied by the participants.

3. The percentage of ownership in the joint venture and occupancy of the property is as follows:

4. Each financial institution pays rent to the joint venture property manager for the use of the real property based on the fair market value rent.

5. A joint venture election, pursuant to section 273 of the Excise Tax Act has not been completed by the participants of this joint venture.

Further, we will assume that Financial Institutions A, B and C are registrants for the purposes of the GST and that they are not involved exclusively in commercial activities.

Interpretation Requested:

1. You have requested an interpretation on whether the activity described in your letter is eligible to make a joint venture election, pursuant to section 273 of the Excise Tax Act.

2. You have also requested an interpretation on how each financial institution determines their tax payable.

Interpretation Given:

1. Section 273 of the Excise Tax Act allows a joint venture election to be made 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.

Subject to subsection 3(2) of the Joint Venture (GST) Regulations the following activity is one of the prescribed activities for the purposes of subsection 273(1) of the Act:

"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."

This activity will, however, not be prescribed where it is undertaken in the course of carrying out a joint venture in respect of real property that is not a residential complex and a participant in the joint venture, or a person associated with or related to a participant in the joint venture, uses all or a portion of the property otherwise than exclusively in the course of a commercial activity and

(a) is not the recipient of a taxable supply of a right that entitles the person to so use the property or to occupy or possess the property; or

(b) is the recipient of a supply referred to in paragraph (a) and does not pay tax in respect of that supply or pays tax in respect of that supply calculated on consideration that is less than the fair market value of the use, occupation or possession.

Based on the facts provided, the activities of the joint venture appear to satisfy the provisions in the Regulations and would qualify as a prescribed activity, provided none of the financial institutions are the operator of the joint venture.

2. Provided that the joint venture participants have an undivided ownership interest in the real property each participant would be considered to be receiving a supply from each of the other participants equal to their ownership interest in the building.

Therefore, in this particular joint venture, Financial Institution A with a 25% ownership interest in the particular real property, will be considered to have ownership of 25% of any space it occupies in the real property, regardless of the amount of space occupied. Financial Institution B and C will each be considered to be supplying 37.5% of the space occupied by Financial Institution A. This 37.5% represents the ownership interest of Financial Institutions B and C in the particular real property.

Financial Institution A will, therefore, pay tax based on 75% of the fair market value of the rental of the space it occupies. Financial Institution A "owns" the remaining 25% and is not required to pay tax on this portion.

Financial Institution B must pay tax based on 62.5% of the fair market value of the rental of the space it occupies. Financial Institution A and C will be considered to be supplying 62.5% of the space Financial Institution B occupies; this reflects their ownership interests in the real property.

Financial Institution C must pay tax based on 62.5% of the fair market value of the rental payment for the space it occupies in the particular real property.

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 any further information is required please contact your local District Office if you have any further questions.

Sincerely,

H.L. Jones
Director
General Tax Policy
Policy and Legislation

c.c.:      P. Banham
            W. Houston

GTP: XXXXX