Telephone: (613) 954-8585
Facsimile: (613) 990-1233
18/02/94
XXXXX File: 11660-1
XXXXX 11750-5-1
XXXXX S. 169, 177, 273
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Subject:
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GST INTERPRETATION
Bare Trusts and Joint Ventures
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Dear Mr. XXXXX
This is in reply to your letter of July 24, 1992, concerning the application of the Goods and Services Tax (GST) to various scenarios involving bare trusts and joint ventures. We regret the unavoidable delay in responding to your submission.
Bare Trusts:
Real property is often held in a bare trust or nominee corporation, the purpose of which is to only hold legal title to the property for one or more beneficial owners (also called beneficiaries). In general the only duty of a bare trustee or nominee corporation is to convey the property to third parties on demand and according to specific instructions from the beneficiaries.
The Department of National Revenue, last year, reviewed its policy with respect to bare trusts and nominee corporations for the purposes of the GST. The revised policy provides that it is the trust instrument that is used to determine whether the trust or the beneficial owners will be required to register for the GST, collect and remit the tax and claim the Input Tax Credits (ITCs). This determination will, therefore, vary on a case by case basis according to the trust instrument.
Where the trust instrument provides that the trustee only holds legal title and conveys such title on demand according to the instructions of the beneficial owner(s) and where the obligations and responsibilities are reserved to the beneficial owner(s), the Department takes the view that the trustee is not engaged in any activity in respect of the property held in trust. Each beneficial owner would be liable to collect and account for the GST on supplies of property made through the property in question.
Where the trustee's duties in relation to the property held in trust include discretionary powers and decision-making responsibilities, the trust principles will apply and, as a person under subsection 123(1) of the Excise Tax Act (the Act), the trust will be accountable for the GST with respect to the trust's commercial activities, if any. Pursuant to section 169 of the Act, the trust would also be the person to claim ITCs for the GST paid in the course of the trust's activities.
In your letter you provided three scenarios. Indicated below are the scenarios and our opinion as to whether the bare trustee or the beneficial owner(s) should register, given that the consideration for taxable supplies would have exceeded $30,000 in the prior four consecutive calendar quarters.
1. A bare trustee has legal title to real property that is beneficially owned by another corporation. The bare trustee conducts no other activities other than to hold legal title to the property.
Response:
The bare trustee would not be required to register. Assuming there is only one beneficial owner, it is the beneficial owner that would be required to register.
2. A bare trustee has legal title to the property and has authority to negotiate leases or other contracts for third parties subject to the approval of the beneficial owners. The bare trustee earns no income; it is primarily for convenience purposes allowing one party to sign on behalf of the owners as opposed to requiring each beneficial owner to sign.
Response:
It would appear that, since the beneficial owner(s) retain the discretionary powers and the decision making responsibilities, it would be the beneficial owner(s) and not the trustee that would be required to be registered.
3. A bare trustee is a participant in a joint venture on behalf of the beneficial owner. A section 273 election was not made. The bare trustee has its own bank account on which it earns interest income. The interest income is the only revenue it earns.
Response:
There is not enough information provided to be able to respond to this question. It is not who collects revenue that determines who should register. Rather, as indicated above, it is the person that is engaged in commercial activity with respect to the property that is required to register.
Joint Ventures:
Provided below are the four questions submitted concerning joint ventures with our responses to them.
1. Will participants in a joint venture involved in the operation of a residential building be entitled to make the election under section 273 of the Act if all of the other requirements under section 273 and Regulation SOR/90-937-01 for making the election are met?
Response:
The Joint Venture Regulations issued pursuant to subsection 273(1) of the Act indicate which activities are prescribed activities for the purposes of that section. Specifically, subsection 3(1)(b) of the regulations provides that the following activities are prescribed:
"... 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 ..."
Therefore, the participants involved in the operation of a residential building will be eligible to make a joint venture election as long as they meet all of the other conditions set out in section 273 of the Act. Please note that it is no longer necessary to have a written joint venture agreement before the election can be made, it only has to be evidenced in writing.
2. Will the registration status of the participants have any impact on the eligibility to make the election?
Response:
No, section 273 of the Act indicates that the operator, who is a participant in the joint venture must be a registrant. There is no requirement that the other participants be registered before the election can be made.
3. If the participants and operator are allowed to make a section 273 election, would the operator be required to collect GST on management fees or any other fees charged for services rendered to the participants pursuant to the joint venture agreement?
Response:
Pursuant to Bill C-112, which received royal assent June 10, 1993, for supplies made:
• prior to September 15, 1992, paragraph 273(1)(c) of the Act should be read as follows:
"all supplies of property or services made to the co-venturer by the operator under the agreement and in the course of the activities for which the agreement was entered into shall, for purposes of this Part, be deemed not to be supplies."
• however, for supplies made after September 14, 1992, paragraph 273(1)(c) should be read as follows:
"all supplies of property and services made, during the period the election is in effect, under the agreement by the operator to the co-venturer shall, for the purposes of this Part, be deemed not to be supplies to the extent that the property or services are, but for this section, acquired by the co-venturer for consumption, use or supply in the course of commercial activities for which the agreement was entered into."
Therefore, prior to September 15, 1992, the operator would not charge the GST on management fees, but the operator would charge GST on those fees after September 14, 1992, as the services of the operator are acquired by the participants for use otherwise than in commercial activities.
4. If the operator is not required to charge GST, will it prejudice the operator's entitlement to ITCs for the tax paid on the expenses incurred to provide the services?
Response:
This question is relevant only for the period prior to September 15, 1992. During that time, the operator, being a registrant, would still have been able to claim ITCs to the extent that those expenses were for property or services that were for use, consumption, or supply in the course of the operator's commercial activity. The operator continues to be engaged in commercial activity notwithstanding that the supplies made to the co-venturers are deemed not to be supplies.
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.
Yours truly,
H.L. Jones
Director
General Tax Policy
Goods and Services Tax
| c.c.: |
David C. Moore
Patrick Banham
Wendy Houston
Rob Wong |
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