24 January 2000 GST/HST Interpretation 7934/HQR0001540 - Sale of Joint Venture Interest Between Non-Registrants

Dear XXXXX

Thank you for your facsimile of August 17, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST). You asked how GST/HST would apply to the sale of an undivided interest in a joint venture whose activities involve the use or supply of real property when both the supplier and recipient are non-registrants. Based on our telephone conversation of October 6, 1999, I understand that the sales in question have already occurred, but that you still require an interpretation for the situation outlined.

Our interpretation will be based on the following scenario:

1. A joint venture was formed to build two commercial buildings for the purpose of supply by way of lease.

2. A joint venture election was filed under section 273 of the Excise Tax Act (ETA), designating an operator.

3. The operator is registered for GST/HST purposes.

4. The other participants, some of whom are non-residents, are not registered.

5. Some of the participants plan to sell their undivided interests in the joint venture.

6. The new participants are not registered.

Interpretation Requested

1. Is there GST/HST payable on the sale of an undivided interest in the joint venture?

2. If yes, who is required to report and remit the tax?

Interpretation Given

All references, unless otherwise noted, are to the Excise Tax Act (ETA) and the Regulations made pursuant to that Act.

A joint venture is not considered a separate entity. The participants in a joint venture each account separately for their share of the joint venture activities. When a participant sells an undivided interest in a joint venture, that participant is making one or more supplies. The purchaser of an undivided interest in a joint venture would be the recipient of the supply (or supplies, as the case may be). Tax at the GST rate of 7%, or the HST rate of 15%, as applicable, on the value of the consideration for a taxable supply applies, pursuant to subsections 165(1) and 165(2).

However, there are provisions in the ETA that apply to certain supplies and which have the effect of simplifying the GST/HST reporting and remitting. Other provisions provide that no tax is payable on certain supplies. The two provisions that could have relevance in this instance are discussed below.

Section 167 - Sale of a Business

Policy P-188, "Supply of a Business or Part of a Business for the Purpose of the Election Under Subsection 167(1)", (copy attached), provides guidelines on whether, in a particular situation, there is in fact a supply of a business for purposes of this election.

The sale of a business or part of a business can occur without tax being payable on all or a portion of the properties and services supplied under the agreement for the sale if the supplier and recipient jointly elect under section 167. Please note that if an interest in real property is the only asset being supplied, the election under section 167 would not be available, as this would not be considered the sale of a business or part of a business. To be eligible to make this election, the conditions outlined in subsection 167(1) must be met. These conditions include:

•   the supplier must supply a business or part of a business that is established or carried on; and

•   under the agreement for the supply, the recipient is acquiring ownership, possession or use of all or substantially all of the property that can be reasonably regarded as necessary for the recipient to be capable of carrying on the business or part as a business.

Policy P-103R, "Transfer of an Undivided Interest in a Joint Venture" (copy attached) outlines when a sale of an undivided interest in a joint venture would meet the above two conditions. The joint venture must be a business that is established or carried on, and has the following characteristics:

•   it is a group of persons engaged in a specific business for a limited period;

•   the business is not structured as a corporation, a partnership or a trust;

•   each participant has a direct undivided interest in the joint venture property and in the commodity produced by the joint venture;

•   each participant is a party to all the joint venture agreements such as the operating agreement and the ownership agreement;

•   each participant has a right of mutual control and management of the business; and

•   the participants make a contribution of money, property, effort, knowledge, skill or other assets to the joint venture.

As well, the recipient of the undivided interest in the joint venture must acquire that interest with all its rights and obligations.

Where these conditions are met, the supplier and recipient can make an election pursuant to section 167. Under the election, the supplier is deemed to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to a portion of the total consideration that can reasonably be attributed to that property or service.

Pursuant to subsection 167(1.1), even if an election is in effect, tax continues to be payable on the following taxable supplies made under the agreement:

•   supply of a service that is to be rendered by the supplier;

•   supply of property by way of lease, licence or similar arrangement; and

•   supply by way of sale of real property when the recipient is not a registrant.

Therefore, each component of the transaction must be examined to determine if tax continues to apply to that component, even after a section 167 election is made.

In this instance, each joint venture participant has an undivided interest in real property (i[.]e. the commercial buildings). When the supplier sells an undivided interest in the joint venture, it would include an interest in the commercial buildings. If the election under section 167 is made, the supply of this interest in the buildings is deemed to be a separate supply, and would be a supply of real property by way of sale.

In the scenario provided, neither the supplier nor the recipient is a registrant. Therefore, where an election under section 167 is made, subparagraph 167(1.1)(a)(iii) would apply, and tax would be payable on the portion of the consideration for an undivided interest in the joint venture that is deemed to be consideration for the taxable supply of real property.

Section 273 - Joint Venture Election

Under section 273, where a registrant and another person are participants in a qualified joint venture, they may jointly make an election that allows the registrant, referred to as the operator, to be responsible for the GST/HST accounting of the joint venture. Essentially, while this election is in effect, all property and services that are acquired, imported, or brought into a participating province, ("purchases"), and supplies made by the operator under the agreement on behalf of the co-venturers, when those "purchases" and supplies are in the course of the activities for which the agreement was entered into, are deemed to be made by the operator. As well, all supplies of property and services made by the operator to the co-venturers, when those supplies are acquired by the co-venturer for consumption, use or supply in the course of commercial activities for which the agreement was entered into, are deemed not to be supplies.

To be eligible for the election, the joint venture activities must be for the exploration or exploitation of mineral deposits or for a prescribed activity. Pursuant to the Joint Venture (GST) Regulations, the prescribed activities are:

•   the construction of real property, including feasibility studies, design work, development activities and the tendering of bids, where undertaken in furtherance of a joint venture for the construction of real property; and

•   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.

(Note that the election may not be available when a participant or a person related to, or associated with, a participant uses all or a portion of a property that is not a residential complex otherwise than exclusively in commercial activities.)

While it would depend on the actual joint venture agreement in each case, the sale of an undivided interest in a joint venture would not generally be an activity of the joint venture. Thus even when a joint venture election is in effect, the operator could not sell an undivided interest on behalf of the supplier and report the GST/HST in its capacity as operator of the joint venture.

Collection and Remittance of GST/HST

Generally, the person making a taxable supply is required to collect, account for, and remit net tax, if any, pursuant to sections 221, 225, 228 and 238 of the ETA. One exception is made when the supply is real property by way of sale and the supplier is a non-resident person or a person who is resident in Canada only because of a permanent establishment in Canada. In that circumstance, subsection 228(4) requires the recipient to file a return and pay the tax directly to the Receiver General.

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 supplies are made in a participating province, to the extent that they are taxable supplies (which are not zero-rated), 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/HST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8814.

Yours truly,

Jacqueline Russell
Technical Officer
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate