28 March 2013 GST/HST Interpretation 151697 - Joint venture election and bare trusts and nominee corporations

Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.

Dear [Client]:

Thank you for your letter of March 8, 2013, regarding whether a bare trust of a nominee corporation can be the operator of a joint venture for purposes of the joint venture election under section 273 of the Excise Tax Act.

The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia. The GST applies in the rest of Canada at the rate of 5%.

Effective April 1, 2013, the 12% HST in British Columbia will be replaced by the 5% GST and a provincial sales tax. It is also proposed that, effective April 1, 2013, the provincial sales tax and the 5% GST currently in effect in Prince Edward Island will be replaced by a 14% HST.

All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.

Interpretation Given

A person must first be considered a participant in a particular joint venture in order to be designated as its operator. Policy P-106, Administrative Definition of a Participant in a Joint Venture explains the CRA's policy regarding when a person who does not invest in a joint venture can be considered a participant in the joint venture for purposes of the section 273 election. As stated in that policy, for purposes of the election, a person who does not invest in the joint venture may be considered to be a participant in the joint venture if that person is designated as the operator of the joint venture under an agreement in writing and has managerial or operational control of the joint venture. The agreement in writing merely has to identify the person as the operator of the joint venture. Although the agreement may or may not include information with respect to the person's duties as operator of the joint venture, whether the person has managerial or operational control is a question of fact which is determined via a full examination of the person's duties.

For a person to have managerial or operational control of a joint venture the person must have authority to manage the joint venture's daily activities without needing the input or approval of any financial participant. This may include the management of the accounts, the filing of the GST/HST returns and the daily administration of the joint venture's activities. Evidence of a person having the necessary managerial or operational control may also include having the authority to engage personnel or contractors on behalf of the joint venture. Where the person has engaged no staff to perform any of the operator's duties it is doubtful whether they have managerial or operational control.

However, managerial or operational control does not necessarily include any authority to initiate significant business decisions such as the acquisition of or selling of certain core business assets. It can be limited to the daily functions necessary to run a business but must include all or at least most of the significant duties required to maintain managerial or operational control of the joint venture.

It is common practice in some industries to designate as operator of a joint venture for purposes of the section 273 joint venture election, a "bare trust" or a nominee corporation.

A nominee corporation can be a trust or an incorporated entity. Generally, a nominee corporation essentially provides the use of its name to participants in a particular joint venture. Where the only function of a nominee corporation is to have its name used instead of the names of the participants in the joint venture's dealings with third parties, the nominee corporation does not qualify as a participant for purposes of the joint venture election because it does not have managerial or operational control of the joint venture.

A common scenario is one where an entity, which is referred to as a nominee corporation by the participants, holds title to the assets of the joint venture on behalf of the participants, manages the collection and remittance of the GST/HST, maintains the bank accounts in the nominee's name, and receives all payments and pays all operational expenses on behalf of the joint venture. These responsibilities alone do not convey the nominee corporation the managerial or operational control of a joint venture. As a result, such a corporation would not be considered as a participant and thus, an operator, of the joint venture for purposes of the section 273 election.

An example of a nominee corporation which does have the managerial or operational control of a joint venture would be that of a management company hired by the participants in the joint venture to manage the joint venture's activities and provide its name to the joint venture. For example, the management company would make and receive payments in its own name on behalf of the joint venture and maintain operational control of the daily activities of the hotel. However, the participants in the joint venture would keep the power to make significant decisions (such as selling the hotel) and the management company would report to the participants on a regular basis. Since the management company has operational control, the management company would be considered to be a participant and operator of the joint venture for purposes of the section 273 election provided that there is a written agreement between the management company and the joint venture that identifies the management company as the operator of the joint venture.

For the same reasons described above, a trust referred to as a bare trust by the participants, who merely holds title to the assets, receives payments, and administers the GST/HST on behalf of the participants (the beneficial owners of the trust) does not qualify as a participant of the joint venture and thus, could not be considered as the joint venture's operator for purposes of the election under section 273.

CRA policy regarding bare trusts is set out in GST/HST Policy Statement P-015, Treatment of Bare Trusts under the Excise Tax Act, and GST/HST Technical Information Bulletin B-068, Bare Trusts.

A trust is a "person" for GST/HST purposes. Where a person is a trustee of a trust, anything done by the person in its capacity as trustee of the trust will generally be deemed to have been done by the trust and not by the person.

Since the trustee of a bare trust is subject to the control and direction of the beneficial owners of the trust property in all matters relating to the trust property, the CRA considers any activities engaged in by the trustee in relation to the trust property, including commercial activities, to have been engaged in by the beneficial owners and not the trustee or the bare trust.

The trustee of a bare trust may engage in activities otherwise than in its capacity as trustee of the bare trust. To the extent that these activities constitute commercial activities, the trustee may be eligible to register for the GST/HST.

Each case will be looked at on a case by case basis to determine whether the duties vested in a particular nominee corporation or a trust referred to as a bare trust are sufficient to be considered managerial or operational control.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-5124. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.

Yours truly,

Angela Stachowski
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate