Telephone: (613) 954-8585
Fax: (613) 990-1233
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XXXXX
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11660-1,
XXXXX 11840-3,
11950-1,
11950-2/XXXXX (wh)
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Thank you for your memorandum received at Policy and Legislation on July 14, 1993, requesting a GST interpretation of the applicability of section 273 of the Excise Tax Act to the acquisition and construction of condominium units.
Statement of Facts
Based on the information provided in your memorandum and during telephone conversations between XXXXX and Wendy Houston, of my staff, we understand that:
1. Twenty-two individuals decided to acquire some land at the XXXXX and to build a development with 50 strata-titled units. To accomplish this they entered into a Joint Venture Agreement in June 1992, which was amended in August 1992, to make the following changes:
(a) to increase the number of participants to 33 individuals and a corporation;
(b) to change the purpose of the joint venture from "... acquiring, subdividing, completing, renting, maintaining, managing and selling the Development" to "... acquiring and subdividing the development";
(c) to register the land in the names of the participants as tenants-in-common, with designated undivided interests; instead of in the name of a Nominee Corporation, as trustee;
(d) to specify that, upon completion of the building contract, and upon payment of the outstanding amounts, the title to each of the strata-titled units would be transferred to the person identified in the agreement, but that the transfer would not be from the Nominee Corporation; and
(e) to attach the building contract the participants entered into in August 1992, to the Joint Venture Agreement
2. The funds the participants were required to pay under the agreement were deposited into an operating account, along with the money obtained through financing. From this fund the appropriate amounts were paid to the vendor of the land and to the construction company.
3. In August 1992, one of the participants (XXXXX) was elected as the operator of the joint venture and a joint venture election was made pursuant to section 273.
4. On September 2, 1992, title to the land was transferred into the participants' names for the specified undivided fractional interests and construction started on the development.
5. During January and February 1993, the units were completed, strata-titled and each participant received strata-titled units in proportion to his/her/its interest in the land.
6. According to the terms of the agreement the joint venture terminated when each participant received his/her/its strata-titled units.
7. Some of the individuals intend to put their strata-titled units into a short-term accommodation rental pool, while others intend to use the unit for their own personal use. The corporate joint venture participant intends to either resell or rent out the units it owns.
8. The operator of the joint venture has claimed input tax credits for the GST paid on the acquisition of the land and on the construction of the units, which are being held pending resolution of these issues.
Interpretations Requested
We have been asked to determine:
1. if the operator of the joint venture is engaged in a commercial activity;
2. whether a joint venture election can be made pursuant to subsection 273(1);
3. if the operator acquired the land "on behalf of" the other joint venture participants and can, therefore, claim an input tax credit for the GST paid on the acquisition;
4. whether each of the participants of the joint venture would be considered to be a "builder", pursuant to the definition of builder in subsection 123(1); and
5. the tax status of the supply of each strata-titled unit when the complex is completed.
Interpretations Given
I. COMMERCIAL ACTIVITY
Since a joint venture is not a person for the purposes of the GST we must look at the activities of each joint venture participant to determine if that participant is engaged in a commercial activity. The deeming provisions of section 273 are not, however, broad enough to assign the activities or intentions of the other joint venture participants to the operator when determining if the operator is engaged in a commercial activity.
According to subsection 123(1), a person will be engaged in a commercial activity where the person:
(a) is carrying on a business, and where the person is an individual or a partnership, whose members are all individuals, there is a reasonable expectation of profit, except to the extent to which the business is involved in making exempt supplies,
(b) is involved in an adventure or concern in the nature of trade, and where the person is an individual or a partnership, whose members are all individuals, there is a reasonable expectation of profit, except to the extent to which the adventure or concern is involved in making exempt supplies, or
(c) is making a supply (other than an exempt supply) of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.
In addition, paragraph 141.1(3)(a) will deem anything done in the connection with the acquisition, establishment, disposition or termination of a commercial activity to be done in the course of the commercial activity.
Based on the information provided, the operator, in this case, will be considered to be engaged in a commercial activity since the operator will be making supplies of real property (e.g. supplying the undivided interests in the Development in exchange for a divided interest). Pursuant to paragraph 141.1(3)(a) anything the operator does in connection with the establishment (e.g. construction) of the unit will be deemed to be done in the course of the commercial activity.
The operator may also be engaged in a commercial activity pursuant to paragraph (a) or (b) of the definition. We do not, however, have sufficient information to determine if the operator is involved in a business or an adventure or concern in the nature of trade or if there is a reasonable expectation of profit.
II. ABILITY TO ELECT
According to subsection 273(1) a registrant (referred to as the "operator") and another person (referred to as the "co-venturer") can jointly make an election under this subsection when the operator is a participant in the joint venture (which is not a partnership) and they have entered into a joint venture agreement, which is evidenced in writing, for the exploration or exploitation of mineral deposits or for a prescribed activity.
The Joint Venture (GST) Regulations prescribe the following two additional activities for purposes of a joint venture election under section 273:
"(a) the construction of real property, including feasibility studies, design work, development activities and the tendering of bids, where undertaken in furtherance of a joint venture for the construction of real property; and
(b) 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."
The purpose of the joint venture in this situation, according to the amended joint venture agreement, is to acquire and subdivide the development. The amended joint venture agreement, by incorporating the building contract into the agreement as an attachment, also clearly indicates that the activities of the joint venture include the acquisition of the land and the construction of the 50 strata-titled units.
The construction of the development will, therefore, be a prescribed activity pursuant to (a) above and the operator and the co-venturers can make a joint venture election which will apply to the purchase of the land and the construction activities.
III. ACQUISITION OF LAND
Paragraph 273(1)(a) says, in part, that when an operator and a co-venturer make a valid joint venture election all properties and services acquired under the agreement by the operator on behalf of the co-venturer, while the election is in effect and in the course of the activities for which the agreement was entered into, shall be deemed to be acquired by the operator and not by the co-venturer.
Based on the information provided, all the joint venture participants contributed funds, which were deposited in an operating fund. In addition, the participants obtained interim financing, which was also deposited into the operating account. The operator then utilized the funds in this account, pursuant to the joint venture agreement, to buy the land which was registered in the names of all the joint venture participants.
Therefore, if the land was acquired while the joint venture election was in effect, the operator would be deemed to have acquired the land, not the co-venturers, and the operator would be eligible to claim an input tax credit equal to the GST paid on the purchase of the land, to the extent the land was being used in the operator's commercial activities.
IV. BUILDER OF A RESIDENTIAL COMPLEX
This question has been referred to the Special Sectors, Real Property section at Policy and Legislation.
V. TRANSFER OF STRATA-TITLED UNITS
Clause 16 of the amended joint venture agreement specifies that upon completion of the Building Contract, and the payment of the amount due by each participant, each participant will be entitled to a transfer of a specified strata-titled unit. The joint venture will, however, end when these transfers occur. It is the Department's position that the joint venture election will be in effect when the titles to the strata-titled units are transferred to the participants.
Assuming that the operator of the joint venture transferred the titles to the strata-titled units to each participant, on behalf of the other participants, the operator will be deemed to be making the supplies, pursuant to paragraph 273(1)(a).
Since, pursuant to the terms of the agreement, the joint venture is dissolved upon the transfer of the units the participants will not be using, consuming or supplying the units in the course of the commercial activities for which the joint venture agreement was entered into. Therefore, the supplies of the strata-titled units by the operator will not be deemed not to be supplies, pursuant to paragraph 273(1)(c).
Therefore the operator will, except for the supply of the undivided interests to the corporate participant, have to account for the tax on the supplies made on behalf of the venturers. For example, when the operator supplies a strata-titled unit to an individual who owns 2% of the Development:
(a) the operator will account for 98% of the tax on the supply; and
(b) the individual will account for (self-assess) 2% of the tax on the supply if he/she occupies the unit as a place of residence (assuming each participant is a builder).
The corporate participant will, pursuant to subsections 221(2) and 228(4), account for GST on the supplies made by the operator of the other participants' undivided interests in the units XXXXX.
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
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