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File 11660-1(sm)
Ss. 190(3) & 273, Sch. V/I/6.1 & 7
XXXXX October 3, 1995
Dear XXXXX
Thank you for your letter, dated April 18, 1994, concerning the liability of the participants in a joint venture to collect and remit the GST where an election pursuant to section 273 of the Excise Tax Act has not been made. We apologize for the delay in our response.
Statement of Facts
Based on your letter and documents attached, we understand the facts to be as follows:
1. XXXXX and XXXXX are participants in a joint venture called the XXXXX. The purpose of the joint venture is to develop xx residential lots, in a development called XXXXX[.] Each lot will be sublet on a prepaid basis to another person, who will build a residential complex on the lot. The development of the lots include the provision of servicing such as roads, sewer, water, natural gas and electricity.
2. According to the Joint Venture Agreement, dated October 1, 1989,
• XXXXX leased some land located in the XXXXX on September 6, 1974. The lease for these lands expires September 20, 2049.
• The land that XXXXX leased was to be developed in 3 phases and the joint venture was to pay XXXXX for the land by paying XXXXX per developed lot at the times specified in the agreement.
XXXXX
• Either the joint venture or XXXXX could file a caveat against the land to protect the agreement.
• Expenses of the joint venture were to be paid from the funds loaned by XXXXX If the funds loaned were insufficient to cover all the expenses, each party was required to advance equal amounts which were treated as unsecured loans.
• Once a lot was developed, the leasehold interest was to be put up for "sale" and, when "sold", XXXXX would sublease the lot to the purchaser of the leasehold interest. The Joint Venture or XXXXX was to discharge its caveat (if any) when the money for the "sale" was paid in full.
• XXXXX was appointed the operator of the joint venture.
• A Management Committee was formed to make certain decisions. The Committee included a member and an alternate from each of XXXXX and XXXXX
• Each party was entitled to XXXXX of the joint venture profits after the land was paid for, the loans were repaid and XXXXX was paid a management fee of XXXXX of the gross sales.
• The operator was to pay the following amounts from the money received for the supply of the lots:
XXXXX
• Either party can withdraw from the joint venture by offering its interest to the other party.
3. All of the marketing literature clearly identifies that this is "a joint venture development" between XXXXX and XXXXX
4. XXXXX and XXXXX did not make a joint venture election pursuant to section 273 of the Excise Tax Act.
5. The Department issued an interpretation to XXXXX regarding exempt supplies of real property by way of lease for residential use. The interpretation also informed XXXXX that a self-assessment was to be made in respect of certain real property transactions. Prior to receiving the interpretation, GST was collected from the purchasers of the leasehold interests in the real property, but was not remitted to Revenue Canada. As a result of an audit, XXXXX has been assessed for GST charged in error and for GST due and not paid on the self-assessments.
6. XXXXX objected to this assessment based on its contention that it is merely the "manager" of the project and that XXXXX should be held liable for the payment of the GST. XXXXX and its external GST advisor maintain that all leases and purchases are made in the name of XXXXX
7. Audit has:
• verified that XXXXX enters into the subleasing agreement with the lot purchaser;
• received copies of invoices for joint venture purchase that are addressed to the joint venture or to XXXXX[,]
• seen copies of contracts for contract workers that are in XXXXX name, but signed by XXXXX as XXXXX agent; and
• reviewed the monthly financial statements prepared by XXXXX that indicate both parties have an equal equity interest in XXXXX[.]
Request
You have requested that we comment on your response to Audit, which addresses whether this is a joint venture and who is legally responsible for the GST.
Response
The following are our comments regarding your draft response to audit:
1. SUMMARY OF FACTS
You should include a statement in your facts that makes it clear that the joint venture expenses, other than the management fee, are paid for by the money loaned (contributed) by XXXXX and that where this amount is insufficient to cover all the expenses both parties will loan to the joint venture 50% of the amount necessary to pay the excess expenses.
You should also replace the word "sale" or "sold" with the word "supply" or "supplied" as each lot is subleased to the person rather than sold to the person.
You may wish to include in your facts that XXXXX is a band empowered entity (based on the facts supplied by XXXXX in their letter dated March 18, 1994).
2. JOINT VENTURE OR NOT
According to the issues listed on the second page of your response the first issue is whether this is a joint venture with XXXXX acting as the operator, or an agency with XXXXX acting on behalf of XXXXX[.] Your response, however, did not address this issue.
In order to determine if a joint venture exists, the substance of the contractual relationship must be examined. This means that all of the evidence must be reviewed, not just the agreement between the parties. In this situation, it appears that a joint venture exists for the following reasons:
(a) Most of the clauses in the agreement are consistent with this contractual relationship being a joint venture.
One clause that does not at first appear to be consistent with the existence of a joint venture is clause 6.02 which says that net profits are being distributed. When the agreement is looked at as a whole, however, it becomes apparent that "net profit" is not being used in the normal manner since the money loaned by XXXXX (plus cash calls to both participants if the loan is insufficient) is used to pay the expenses incurred by the joint venture, other than the management fee.
Another unusual clause is that, instead of agreeing to pay each party a specified percentage of the proceeds from the sale of the lots, the proceeds from the sale of the lots will be paid as follows:
• each party gets XXXXX
• plus an additional amount at the discretion of the Management Committee,
• plus XXXXX of the balance after XXXXX is paid a management fee.
This method of distributing the revenue is not, however, inconsistent with this contractual relationship being a joint venture.
(b) Brochures, etc. provided by the parties clearly indicate that the parties represented to the world at large that they had formed a joint venture.
While the agreement names XXXXX as the operator, it is necessary to look at each transaction to determine if XXXXX made the purchase or lease on behalf of XXXXX or if XXXXX made the purchase or lease.
3. LIABILITY TO COLLECT AND REMIT THE GST
In general, the liability to collect and remit the GST rests with the supplier of the property or service. Consequently, it is necessary to determine who is the supplier. To do so, it may be necessary to ascertain what is being supplied and who is in a position to make the supply.
According to case law, one of the requirements for forming a joint venture is that all of the participants contribute goods, services or money to the joint venture.
Under this joint venture, XXXXX has contributed its leasehold interest in the property while XXXXX has contributed its expertise as a property developer. In a joint venture, there is no requirement that each participant sell an interest in the participant's contribution to the other participants and, in fact, usually each participant retains title to the property it contributed for use in the joint venture activities. The joint venture agreement then specifies how this property is to be used in the activities of the joint venture. An issue which arises is whether XXXXX has acquired, through its joint venture activities, any type of interest in the property that XXXXX must supply to either XXXXX prior to the sublease or to the sublessee. Based on the documents we have reviewed, it does not appear that XXXXX supplied any of its leasehold interest to XXXXX Therefore, XXXXX is the supplier of the sublease and responsible for remitting any tax collected in error. XXXXX is required to self-supply under subsection 190(3) which provides that a supplier of residential property by way of lease, licence or similar arrangement is deemed to have paid tax as a recipient and to have collected tax as a supplier based on the fair market value of the land if certain requirements are met. However, XXXXX as a band empowered entity, is relieved of the tax as it is not required, because of the Indian Act, to pay the tax.
The question then arises as to whether XXXXX obtains an equitable interest in XXXXX leasehold interest. It is our opinion that XXXXX does not obtain an equitable interest in the leasehold interest. This opinion is based on the joint venture agreement. There is no indication in the agreement that such an interest is created either because XXXXX is a participant in the joint venture or because XXXXX advances the funds to cover the expenses related to the development of the land. XXXXX has a contractual right to share in the profits of the joint venture but does not have an equitable interest in the leasehold interest itself. Consequently, XXXXX cannot make a supply of the property that is subleased to the third party. Instead, XXXXX is able to share in the joint venture revenue according to the joint venture agreement and because of the expertise it contributes to the joint venture in managing land development. As there would be no supply by XXXXX to XXXXX or to the third party sublessees, there is no GST exigible.
Even if XXXXX obtains an interest in the leasehold interest held by XXXXX the end result is that no GST will have been collectible by XXXXX We have reached this conclusion based on the following analysis. It is important to note that this conclusion would be different if the facts had indicated that XXXXX had been disclosed as being a party to the sublease.
First, XXXXX may act as agent for XXXXX when XXXXX subleases the property to a third party and may supply the interest in the leasehold interest at the same time that XXXXX subleases the property to the third party. In this situation, section 177 would apply as XXXXX is not disclosed in the offer to purchase as required by section 177. There would be a deemed supply of the interest in the leasehold interest in the land from XXXXX to the third party which would be subject to the GST. However, consideration would be nil. There would be a deemed supply of the interest from XXXXX to XXXXX However, as a band-empowered entity, XXXXX would be relieved of the GST as the supply relates to real property on a reserve.
Alternatively, XXXXX may make a supply of its interest in the leasehold interest to XXXXX concurrent to XXXXX subleasing the land to the third party. Again, this would be a supply of an interest in real property by way of sale. It would be a taxable supply but XXXXX would be relieved of tax as it is a band-empowered entity and the sale relates to reserve real property.
4. TRUST DOCUMENT
It is our opinion that the joint venture agreement does not establish a trust with XXXXX as the trustee and XXXXX as beneficiary of the trust.
5. DEVELOPMENT COSTS
When vacant land is developed, the improvements to the land form part of the land. As XXXXX has the only interest in the land between the two parties, the improvements to the land accrue to XXXXX[.] As XXXXX is a band empowered entity, any costs for services incurred by the entity directly will be relieved of tax because the costs relate to reserve land. Property purchased by XXXXX will be subject to tax relief when it is delivered to a reserve. XXXXX must have provided the supplier with the certificate referred to in TIB B-039R, GST Administrative Policy Application of GST to Indians.
The tax status of the development costs, where the invoice is in the name of XXXXX will depend on whether XXXXX is acting as agent for XXXXX when purchasing the supplies. This is a question of fact and must be made on a transaction basis. If XXXXX is acting as an agent, the supplies will be relieved of the GST at the source, as if XXXXX were the purchaser, if XXXXX has provided a certificate for a band-empowered entity to the supplier, as required in TIB B-039R. If the certificate is not provided, then the purchases are not relieved of GST at the source. Nor is XXXXX eligible to claim the ITCs. Instead, the GST is flowed through to XXXXX pursuant to section 178 and XXXXX may be eligible to claim the ITCs if it otherwise qualifies for ITCs.
Where XXXXX is not acting as agent for XXXXX will not be relieved of tax at source. Instead, XXXXX will be obtaining reimbursement for its expenses and section 178 will apply.
As the management fee is relieved of tax, the reimbursement will be relieved of tax.
Since whether or not a contractual relationship is a joint venture can only be determined with any certainty by the courts, you should add a paragraph to the letter addressing how the parties should account for the tax if this is not a joint venture.
If this is the case, the contract is one of XXXXX providing a service of managing a development project for XXXXX[.] The consideration is the fee received by XXXXX plus the share of the profits received by XXXXX[.] The service is a taxable supply. However, as XXXXX is a band empowered entity and the supply is made on reserve land, XXXXX is relieved of the GST.
If you have any questions in respect of the above, please contact Sherry Moran at (613) 952-8807 or Sandy Marr at (613) 957-8253.
Sincerely,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretation Directorate
c.c.: S. Marr GTP : 0028(REG)
S. Moran
A. Venne
E. Vermes
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