11 February 1994 GST/HST Interpretation 11660-1/0703 - Joint Venture Agreement

Your letter of October 26, 1993, with documents enclosed, addressed to Jim Daman, Director, Financial Institutions has been referred to us for reply.

We understand that a number of people entered into a joint venture agreement to build and operate a commercial building on land they held through a nominee company. At the time of completion of the building there were XXXXX participants in the joint venture, and they each held an interest in the joint venture as tenants in common. Over the past thirteen years a number of the participants have sold their interests in the joint venture to the other participants,reducing the number of participants in the joint venture from XXXXX to XXXXX[.]

According to the terms of the joint venture agreement whenever a participant wants to dispose of his/her interest in the joint venture notice must be given to the other participants. If none of the other participants make a satisfactory offer within 30 days of receiving the notice the participant can then sell his/her interest to a third party.

In addition, the agreement indicates that XXXXX was appointed as the manager under a contract approved by a Management Committee, which was formed in accordance with the terms of the joint venture agreement. As manager XXXXX has been collecting and accounting for all of the GST on the rents and other income from the building.

Ruling Requested

XXXXX has requested that the XXXXX issue a ruling indicating that no reporting will be necessary for GST purposes when one of the participants in the joint venture transfers its joint venture interest in the following circumstances:

1. the purchaser of the joint venture interest would be one of the existing joint venture owners;

2. the GST for rentals and other income would be collected and paid by the property manager, currently XXXXX[.]

3. the purpose of the transaction is to turn the vendor's interest in the joint venture into cash; and 4. all transactions would be in accordance with the joint venture agreement.

According to GST Memorandum 100-3 a GST ruling cannot be issued in this situation, since a specific transaction is not being dealt with. We can, however, issue an interpretation.

GST Interpretation

As indicated in the letter from XXXXX where the recipient of a supply of real property, which is not a residential complex, is registered the recipient will account for the GST on the supply pursuant to subsections 221(2) and 228(4). The registered recipient can offset the tax which is payable on the supply of the real property (the joint venture interest) with any input tax credits which can be claimed on the purchase by filing a GST 60 with its regular return.

In addition, based on the information provided, when a participant in this joint venture sells his/her undivided interest in the joint venture property, and the rights and obligations attached to this interest, the recipient would be considered to have acquired all or substantially all of the assets required to carry on a business.

The vendor and the recipient would, therefore, be able to make an election, pursuant to section 167, to have no tax payable on the supply, unless the recipient is not registered.

Paragraph 167(1.1)(a) indicates that, where an election is made under subsection 167(1), no tax is payable on the supply, unless the supply is a taxable supply by way of sale of real property to a recipient who is not registered. Since the joint venture interest which is being sold (an undivided interest in a commercial building as a tenant in common) is within the definition of real property, only two of the participants in this joint venture would be eligible to make an election pursuant to section 167 (i.e. the remaining 58 participants are not registered).

Since the joint venture is involved in an activity which is prescribed for the purposes of section 273 an election could be made pursuant to section 273 if XXXXX is a "participant". For the purposes of section 273 "participant" has been defined as

"(a) a person who, under a joint venture agreement evidenced in writing, makes an investment by contributing resources and takes a proportionate share of any revenue or incurs a proportionate share of the losses from the joint venture activities; or

(b) a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture."

Where an election has been made pursuant to section 273 the following deeming provisions will apply:

(a) all properties and services that are supplied or acquired under the agreement by the operator on behalf of the participant in the course of the activities for which the agreement was entered into shall be deemed to be supplied or acquired by the operator and not by the participant; and

(b) all supplies of property or services made under the agreement by the operator to the participant shall be deemed not to be supplies to the extent that the supplies are acquired by the participant for consumption, use or supply in the course of commercial activities for which the agreement was entered into.

Therefore, where the operator makes the supply of a participant's interest in the joint venture on behalf of that participant to another participant in the joint venture, and the supply is under the joint venture agreement, the operator would be deemed to be making the supply pursuant to paragraph 273(1)(a) and the supply would be deemed not to be a supply pursuant to paragraph 273(1)(c).

Based on the information provided to us, however, it is the Department's view that the supply of a participant's joint venture interest in this situation would not be under the joint venture agreement. Therefore, the deeming provisions would not apply to the supply of the joint venture interest and the sale would be taxable.

Other than the provisions mentioned above there are no provisions in the Excise Tax Act which would support a finding that no reporting is necessary when a participant in this joint venture transfers its interest to another participant in the joint venture.

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
Policy and Legislation