GST/HST Rulings and
Interpretations Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX K1A 0L5
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Subject:
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GST/HST INTERPRETATION
SS 273(1) Joint Venture Election and Acquisition of Real Property
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Dear XXXXX
Thank you for your letter of July 29, 1996, concerning the application of section 273 of the Excise Tax Act (the "Act") to two situations involving the formation of a joint venture and the acquisition of real property.
Interpretation Requested
You stated the following in your letter:
Situation 1
1. Several individuals (the "Individuals"), each of whom is a resident of Canada within the meaning of the Act, wish to acquire real property situated in Canada as tenants in common.
2. Prior to the transactions described herein, none of the Individuals will be a registrant within the meaning of the Act.
3. The Individuals will acquire the real property for the purpose of developing and constructing an income producing property, or, alternatively, the Individuals will acquire an existing income producing property.
4. The Individuals will enter into a written Co-Tenancy/Joint Venture Agreement (the "Agreement"). The Agreement will govern the acquisition of the real property as well as ongoing activities in respect of the real property by the Individuals.
5. Pursuant to the Agreement, one of the Individuals will be appointed as the operator (the "Operator") of the joint venture within the meaning of section 273 of the Act.
6. The Operator will register pursuant to section 240 of the Act prior to the acquisition of the real property by the Individuals.
Situation 2
1. The Individuals are partners in an existing partnership (the "Partnership").
2. The Partnership is a registrant for GST purposes. The Individuals are not registrants for GST purposes.
3. The Partnership owns real property from which it earns rental income.
4. The Partnership files GST returns, collects GST and remits net tax as required by the Act.
5. The Individuals agree to dissolve the Partnership such that each of the Individuals will own an undivided interest as co-tenants in the assets formerly owned by the Partnership.
6. The Individuals will enter into a dissolution/co-tenancy/joint venture agreement (the "Dissolution Agreement") relating to the dissolution of the Partnership, the acquisition of the Partnership assets by the Individuals as co-tenants and the ongoing activities with respect to the former Partnership assets.
7. In the Dissolution Agreement, one of the Individuals will be appointed as the Operator within the meaning of section 273 of the Act.
8. Prior to the dissolution of the Partnership, the Operator will become registered under section 240 of the Act.
You request confirmation that with respect to Situation 1:
1. The individuals can validly make a joint venture election under section 273 of the Act.
2. The Operator will be deemed to have acquired the real property for the purposes of the Act and will be required to account for the GST consequences of the acquisition of the real property including the filing of the Form GST 60, if required.
3. Provided that they have no other commercial activities, the Individuals, other than the Operator, will not be required to register for GST purposes or to file GST returns in respect of their co-ownership of the real property.
You request confirmation that with respect to Situation 2:
1. The Individuals are entitled to enter into a joint venture election under section 273 of the Act in respect of the activities formerly carried on by the Partnership.
2. Provided that the Operator is registered prior to the dissolution of the Partnership, he or she will be entitled to account for the GST consequences of the acquisition of the co-tenancy interest in the Partnership assets by each of the Individuals.
3. The Individual who is the Operator will be entitled to claim input tax credits in respect of the acquisition of Partnership assets and will be entitled to utilize the provisions of subsections 221(2) and 228(4) of the Act so that no GST will be payable on the acquisition of the real property formerly owned by the Partnership.
4. Assuming that they have no other commercial activities, the Individuals, other than the Operator, will not be required to register for GST purposes.
5. Provided that the GST is properly paid by the Operator on behalf of the Individuals, the Individuals, other than the Operator, will not be liable to pay GST in respect of the acquisition by them of the co-tenancy interest in the Partnership assets.
Interpretation Given
Pursuant to subsection 273(1) of the Act the joint venture election is available to the operator of a joint venture (other than a partnership) and a participant (co-venturer) where the joint venture agreement is evidenced in writing and is in respect of the exploration or exploitation of mineral deposits or a prescribed activity. Generally, a joint venture for the construction of real property, and a joint venture involved in the ownership of real property from which the joint venture will derive revenue from the property by way of sale, lease, licence or similar arrangement are prescribed activities for purposes of subsection 273(1) of the Act. The latter joint venture, if in respect of real property that is not a residential complex, will not be a prescribed activity, however, where a participant, or a person associated with or related to a participant, uses all or a portion of the property otherwise than exclusively in the course of commercial activities and is not a recipient of a taxable supply of a right to use, occupy or possess the property.
During the period the election is in effect, all property and services supplied, acquired, imported or brought into a participating province under the agreement, by the operator on behalf of the co-venturers, are deemed to be supplied, acquired, imported or brought into the province by the operator, provided they are for use in the joint venture activity. In addition, any supplies of property or services by the operator to the co-venturer for use in the commercial activities of the joint venture are deemed not to be supplies. Therefore, the operator will be required to register for GST/HST purposes, collect and account for GST/HST, and file the appropriate returns in respect of the joint venture activity. Unless the co-venturers are involved in other commercial activities, they will not be required to register for GST/HST purposes. However, a co-venturer who would be engaged in a commercial activity and entitled to register if the election was not made will still be entitled to register. If registered, a co-venturer will be entitled to claim input tax credits for property or services the co-venturer acquired or imported, not through the operator, for consumption, use or supply in the course of its commercial activities.
Further to the above information, it should be noted that the election under subsection 273(1) of the Act is not applicable to transactions that are outside the joint venture activities such as for example, transactions in respect of partnership activities. Generally, where a partnership holding real property is dissolved and the partners form a joint venture that will use the property, subsection 273(1) of the Act is not applicable to the distribution of the partnership property. Upon dissolution of the partnership, the distribution of partnership property is in respect of the partnership interests, and pertains to the relationship between the partnership and the partners. The transactions are in respect of an activity outside the joint venture activity, and, therefore, the operator of the joint venture cannot under subsection 273(1) of the Act account for any tax consequences in respect of the dissolution of the partnership.
Please note that on April 1, 1997, the Harmonized Sales Tax (HST) replaced the Goods and Services Tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. If a person supplies goods that are delivered or made available in a participating province, services to be performed in a participating province or intangible personal property that may be used in a participating province, to the extent that they are taxable supplies, tax must be collected at the harmonized rate.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9213.
Yours truly,
Susan Kissner
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Legislative References: sections 273, 240, 221
NCS Subject Code(s): I11660-2
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