18 August 1998 GST/HST Interpretation HQR0000064 - Segregated Fund

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your clients' operations.

Facts

The facts as set out in your letter are as follows:

1. Certain real property is held jointly by an insurance company and by a segregated fund created by the insurance company. The property is primarily commercial real estate and is not occupied by the insurance company or the segregated fund.

2. The insurance company and the segregated fund propose to appoint an operator to manage the real property. The parties would file a joint venture election pursuant to subsection 273(1) of the Excise Tax Act (ETA) in order to simplify the accounting for GST.

Interpretation Requested

You have asked us to confirm that:

1. the insurance company and the segregated fund are separate entities for GST purposes; and

2. as co-tenants of the property, the insurer and the segregated fund would be entitled to appoint an operator pursuant to section 273 of the ETA.

Interpretation Given

Based on the information provided we conclude that:

1. the insurance company and the segregated fund are separate entities for GST purposes only; and

2. The segregated fund does not have the capacity, at common law, to enter into a contract because it is not a person at common law and without a contract there can be no joint venture to which section 273 may be applied.

Explanation

Status of a Segregated Fund

A "segregated fund" of an insurer is defined in subsection 123(1) of the ETA as:

a specified group of properties that is held in respect of insurance policies all or part of the reserves for which vary in amount depending on the fair market value of the properties;

The status of a segregated fund is set out in section 131 of the ETA which states that:

For the purposes of this Part, a segregated fund of an insurer shall be deemed to be a trust that is a separate person from the insurer and that does not deal at arm's length with the insurer and

(a) the insurer shall be deemed to be a trustee of that trust; and

(b) the activities of the segregated fund shall be deemed to be activities of the trust and not activities of the insurer.

A trust is included in the definition of a "person" in subsection 123(1) of the Act.

Based on the foregoing, a segregated fund is a group of properties which is deemed to be a trust, and hence a person, whose activities are deemed not to be activities of the insurance company. Thus, a segregated fund is a separate person from the insurance company for the purposes of the joint venture election provisions in section 273 of the ETA. However, this does not make a segregated fund a person for purposes of the common law.

Availability of a section 273 election

A joint venture is a common law concept. As such, a section 273 election is only available where an undertaking can be said to constitute a joint venture at common law. In order for an undertaking to constitute a joint venture there must be, among other things, a contractual arrangement between the parties that establishes the joint venture. However, at common law, a segregated fund is not a person and does not have the capacity to enter into the requisite joint venture contract. Since no joint venture is established at common law in this case, and since the ETA does not provide any statutory mechanism for the creation of a joint venture, the section 273 election is not available.

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/HST 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 (613) 954-4393.

Yours truly,

Michael Ezri
A/Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate