9 December 2002 GST/HST Interpretation 37123 - Questions Concerning Joint Venture and Agency

Dear XXXXX:

This is in response to your e-mail XXXXX in which you posed questions concerning joint venture and agency issues in the context of the making of supplies through agency relationships. Your e-mail has been forwarded to the General Operations and Border Issues Division, which is responsible for interpreting the provisions that are the object of your queries. This is also in response to your e-mail XXXXX, on the same subject, to Alyson Trattner, Manager of the Services and Intangibles Unit, General Operations and Border Issues Division, Excise and GST/HST Rulings Directorate.

Your example

You submitted a scenario where tangible personal property produced by participants is to be pooled and sold by an agent on behalf of the participants. Some participants may be required to collect tax, and others not, because they would be under the threshold requirement for collection of tax. The manager would need to know which participants are required to collect tax in order to know how much tax to charge.

Your questions

1. Whether the supply made in the context of the fact pattern described above would be zero-rated under Part IV of Schedule VI to the Excise Tax Act.

2. Whether, as a requirement, for making the joint venture election, the members of the joint venture are required to collect tax. Whether the legal relationship between the parties in the fact pattern described above would be a joint venture.

3. What are the effects of subsection 177(1) of the Excise Tax Act in respect of tax collection obligations where supplies are made through an agency relationship?

4. What is the effect of the election provided for under subsection 177(1.1) of the Excise Tax Act for the supply made through an agent to the recipient and for the supply by the agent to the principal made in respect of the supply to the recipient, the related consideration being generally constituted by a commission or a service fee?

Our answers

Please note that all references to legislative provisions are to the Excise Tax Act (ETA) or its Schedules.

ANSWER TO QUESTION 1

Part IV of Schedule VI zero-rates certain agriculture and fishing property. None of the tangible personal property at issue in your query is listed as zero-rated agricultural products in Part IV of Schedule VI.

ANSWER TO QUESTION 2

To make a joint venture election, the participants must ensure that a joint venture, as it is commonly understood in law, exists. In addition to satisfying the other eligibility criteria, the operator must be a GST/HST registrant (and, thus, required to collect tax), pursuant to section 273. However, the co-venturers need not be registrants unless of course the co-venturers are involved in other commercial activities, requiring them to register.

None of the activities you described are activities for which a joint venture election under section 273 can be made.

ANSWER TO QUESTION 4

By answering question 4 before question 3, we can illustrate more clearly the interaction between the various provisions which are the object of your queries. The answer to question 4 will explain the tax treatment resulting from supplies made through agency where the principal has an obligation to collect tax, as this is a condition for the election under subsection 177(1.1) to apply.

Where the principal has an obligation to collect tax, two tax treatments are possible. The first one flows from the application of the general rules of Part IX of the ETA, the second one results from the joint election of the principal and the agent provided for under subsection 177(1.1).

Subject to any overriding legislative provision, the relationships between the parties to the transactions subject to tax are usually determined under the common law or the Quebec Civil Code, both of which provide for contractual relationships between parties. The effect of these legal systems on the tax treatment of a supply is that the agent is a mere conduit and the principal is the supplier making the supply. As a result, the principal, as the supplier, is responsible for all of the obligations resulting from making the supply to the recipient of the supply.

If the agent provided a service to the principal (such as acting as an agent in making the supply), the consideration for that supply of a service would also be subject to the general rules of Part IX of the ETA. The agent will charge and account for tax on the commission or service fee charged to the principal for acting as an agent. The principal, in turn, is eligible to claim the input tax credits related to the supply made by the agent to the principal.

Where the principal has an obligation to collect tax on a supply, the general rules also apply, unless the principal and the agent make a joint election under subsection 177(1.1). This joint election permits an agent which makes a supply on behalf of a principal to elect jointly with the principal to account for the tax collectible on the supply as if the tax were collectible by the agent. Thus, the agent, and not the principal, is responsible for collecting, reporting and remitting the tax on the supply. However, the agent and the principal are jointly and severally liable for all obligations that arise upon or as a consequence of the tax becoming collectible or any failure to account for or remit the tax. The election has to be made in the prescribed form, i.e., on form GST506 (Election and Revocation of an Election Between Agent and Principal). The election does not have to be filed. CCRA only requires that it be kept in the books and records of the parties.

The supply by the agent to the principal remains subject to the general rules in the same manner as when no election has been made under subsection 177(1.1). The deeming provision that applies upon making this election only affects the tax obligations related to the making of the supply by the principal to the final recipient, and not the supply by the agent to the principal.

It is important to remember that where the principal does not have the obligation to collect tax in respect of a supply, the election under subsection 177(1.1) is not available.

No election can be made under subsection 177(1.1) where an election has been made under paragraph 177(1)(d). We will explain the 177(1)(d) election in answering question 3.

ANSWER TO QUESTION 3

The answer to this question will explain the tax treatment of supplies made through agency where the principal does not have an obligation to collect tax, as this is a condition for subsection 177(1) to apply. Your question is in respect of that subsection.

Subsection 177(1) applies where a supply of tangible personal property is made by an agent, in the course of a commercial activity of the agent, acting as agent in making the supply on behalf a principal. For the provision to apply, the principal must not have an obligation to collect tax in respect of the supply (except as provided in paragraph 177(1)(d)) and the agent must be a registrant. Subsection 177(1) does not apply to the making of zero-rated or exempt supplies.

Where the above conditions have been met, paragraph 177(1)(e) applies, unless the agent and the principal make a joint election under paragraph 177(1)(d). Paragraph 177(1)(e) provides that the supply is deemed to be a taxable supply made by the agent and not by the principal. Furthermore, the agent is deemed not to have made a supply to the principal of services relating to the supply of the property to the recipient *. The effect is that the agent must account for the tax collectible on the consideration for the supply of the property to the recipient in its GST/HST return, and remit any positive amount of net tax but will not collect the tax from the principal for its services relating to the supply of the property.

* There is a limited exception to this deeming provision with respect to a specific ITC or rebate entitlement for a resident for tax paid on importation by a non-resident who is not a registrant in certain circumstances.

The joint election in paragraph 177(1)(d) would apply where the supply by the principal would not be taxable, nor would it be exempt. However, a condition for making the election is that the principal be a registrant.

As you noted, paragraph 177(1)(a) provides that, for the subsection to apply, a supply does not have to be taxable. In respect of the tax status of a supply, paragraph 177(1)(a) only requires that the supply be neither zero-rated nor exempt. A supply would be neither taxable nor exempt where, for example, prior to its supply, it was capital personal property not used primarily in the course of commercial activities by the principal. In that scenario, for many registrants, the supply would be deemed to be made otherwise than in the course of a commercial activity pursuant to subsection 200(3). This would be the case where, for example, a dentist, who is a registrant, primarily used a computer as capital property in the course of making exempt supplies of dental services and then sells the computer through an agent. The activity of making exempt supplies is excluded from the definition of commercial activities in subsection 123(1). The paragraph (d) joint election would permit the dentist to claim input tax credits in respect of the tax payable for the agent's services to the principal, and would deem the sale of the computer to be taxable. The various deeming provisions in respect of input tax credit entitlement limit such entitlement to the supplies acquired for making the supply. In our example, even though the dentist could claim the input tax credit in respect of the tax payable for the agent's services of selling the computer, the dentist could not claim the input tax credits for the tax payable on purchasing the computer, as this acquisition was not for use primarily in commercial activities.

Where the paragraph (d) election has been made, there is no deeming rule, comparable to that of paragraph 177(1)(e), which deems the agent to be the supplier. Consequently, where the paragraph 177(1)(d) election has been made, the principal is the supplier. The paragraph 177(1)(d) election is not of much interest in the fact pattern described in your e-mail, as the supplies therein described are taxable supplies.

ADDITIONAL COMMENTS IN RESPECT OF QUESTIONS 3 AND 4

It is important to note that the rules mentioned in our answers with respect to subsections 177(1) and (1.1) do not apply to supplies made by auction, which are subject to distinct rules.

It seems that you are exploring the possibility that, for the scenario you submitted, the supplies made through an agent would be taxable and the agent would assume the liability for all supplies made through the agent, regardless of whether the principal was a registrant or not. If that were possible, no apportionment of the sales from the various principals would be necessary in order to determine the tax liability of the parties involved **. The following comments address this concern, assuming that no joint venture election is available or, if such an election is available, that participants who are registrants have chosen not to make election.

** I assume, in the fact pattern that you submitted, that the fact that a principal has the obligation to collect tax or not depends upon whether the volume of sales of the principal in a determined period is sufficient to require the principal to register for tax purposes. Of course, under our legislation, there is always the possibility that a principal which does not have the obligation to register does so voluntarily.

In our legislative scheme, the only way to avoid the necessity of apportionment between sales by the agent on behalf of principals who are registrants and those on behalf of principals who are not registrants, would be for all the principals which are registrants to make the joint election under subsection 177(1.1). In that case, the agent would assume the obligation to charge and account for the tax on the supplies while for those principals which are not registrants, the agent is required to charge and account for the tax on the supplies pursuant to subsection 177(1). In such a scenario, all supplies would be subject to tax at 7% (unless the 15% HST rate applies), and the agent would charge and account for the tax.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me by telephone at (613) 952-8815 or by e-mail at Raymond.Labelle@ccra-adrc.gc.ca. For more information regarding agricultural products or joint ventures, please contact Donna Harding, Manager, Goods Unit, by telephone at (613) 954-4397 or by e-mail at Donna.Harding@ccra-adrc.gc.ca.

Yours truly,

Raymond Labelle
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate