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.
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[Addressee]
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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
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Case Number: 141341
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March 28, 2013
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Dear [Client]:
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Subject:
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GST/HST INTERPRETATION
Joint Ventures and RITCs
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Thank you for your letter of [mm/dd/yyyy], concerning the calculation of recaptured input tax credits (RITCs) for joint ventures.
The Harmonized Sales Tax (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 Goods and Services Tax (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.
Statement of Facts
Our understanding of the facts is as follows:
1. You have presented three scenarios and are requesting advice on how the RITC is to be calculated in each.
2. Under all three scenarios presented in your submission, the following assumptions are made:
(a) The entity is a joint venture (JV) operating in Ontario consisting of 3 equal-interest participants (33 1/3 %) plus an operator with no financial interest.
(b) The operator is a participant as defined under paragraph (b) of the definition of "participant" in GST/HST Policy Statement P-106, Administrative Definition of a ‘Participant' in a Joint Venture, that is: a person, without a financial interest, who is designated as the operator of the JV under an agreement in writing and is responsible for the managerial or operational control of the JV.
(c) For GST/HST purposes, the operator is not related to, or associated with, any of the 3 JV participants, nor are the participants associated with one another.
(d) An election under section 273 has been made by the participants and the operator to have the operator account for the GST/HST on behalf of the JV.
(e) The operator acquires electricity in Ontario on behalf of all 3 participants paying $100,000 + $13,000 HST (which includes a $5,000 federal component and an $8,000 provincial component).
(f) The electricity is acquired for consumption or use exclusively in the commercial activities of the JV in Ontario.
3. The scenarios presented in your request are as follows:
Scenario 1
• 1 participant is a large business; the other 2 participants are small/medium-sized businesses.
• The operator is a large business.
Question: Is the input tax credit (ITC) recaptured:
(a) only to the extent of the large business participant's interest ($8,000 X 33 1/3% = $2,666.64)?
or
(b) entirely ($8,000) because the operator is a large business, regardless of the fact that 2 of the joint venture participants are not large businesses?
Scenario 2
- 1 participant is a large business; the other 2 participants are small/medium-sized businesses.
- The operator is not a large business.
Question: Is the ITC recaptured only to the extent of the large business participant's interest ($8,000 X 33 1/3% = $2,666.64)?
Scenario 3
- All 3 participants are small/medium-sized businesses (none is a large business).
- The operator is a large business.
Question: Is the ITC recaptured:
(a) entirely ($8,000) because the operator is a large business, regardless of the fact that none of the joint venture participants on whose behalf the electricity was acquired is a large business?
or
(b) none ($0) even though the operator is a large business, because none of the joint venture participants on whose behalf the electricity was acquired is a large business?
Interpretation Requested
You have expressed concern regarding how the requirement to recapture the provincial component of the ITC on specified property (electricity) applies to joint ventures that involve a combination of large and small/medium sized businesses as participants/operators.
Interpretation Given
Subsection 273(1) provides specific conditions a person must meet to be considered as the "operator" for the purposes of the election. An "operator" must be a GST/HST registrant, must be a "participant" in the joint venture (as that term is used in subsection 273(1)) and must be designated as the operator of the joint venture in the election made by the participant and the operator. GST/HST Policy Statement P-106, Administrative Definition of a ‘Participant' in a Joint Venture, defines the term "participant" to mean:
a. a person who, under a joint venture agreement evidenced in writing, makes an investment by contributing resources and takes a proportionate share of any revenue or incurs a proportionate share of the losses from the joint venture activities; or
b. a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture.
Where the operator and a joint venture participant make the joint venture election, paragraph 273(1)(a) deems supplies and purchases made by the operator on behalf of the electing participant to have been made by the operator for GST/HST purposes and not the participant. As a result, the operator must account for any GST/HST collected or collectible for these supplies and can claim any available ITCs related to these purchases.
In the absence of the election, each participant would be entitled to a proportion of any ITCs and have to account for a proportion of the GST/HST collected or collectible.
Paragraph 273(1)(c) deems the supplies made by the operator to the joint venture participant under the joint venture agreement and acquired by the participant for exclusive use in commercial activities not to be supplies.
Joint Ventures and RITCs
There are two joint venture election situations where the recapture of ITCs would occur. The first is where a participant other than the operator of the joint venture is a large business and the second is where the operator itself is a large business.
Under subsection 27(6) of the New Harmonized Value-Added Tax System Regulations, No. 2 (the Regulations), where the operator has made a joint venture election with a participant that is a large business, the operator of the joint venture is considered to be a large business in respect of an acquisition or bringing in of specified property or service in Ontario or British Columbia made on behalf of the participant.
Where the operator is a large business and a joint venture election has been made with one or more participants, the purchases are deemed under paragraph 273(1)(a) to be acquired by the operator and not the participants. This applies regardless of whether a given participant is a large business or not. Therefore, the recapture of ITCs for the provincial component of the HST would be required under subsection 236.01(2) for all purchases of specified property or services made by the operator, irrespective of whether the participants are large businesses or not.
We will now address the specific scenarios presented in your request:
Scenario 1
• 1 participant is a large business; the other 2 participants are small/medium-sized businesses.
• The operator is a large business.
Answer
Under this scenario, as the joint venture election is in effect, the purchase of electricity would be deemed to be acquired by the operator and not the participants pursuant to paragraph 273(1)(a). As the operator is itself a large business for RITC purposes, the ITC for the provincial component of the HST, or $8,000, would be recaptured.
Scenario 2
• 1 participant is a large business; the other 2 participants are small/medium-sized businesses.
• The operator is not a large business.
Answer
Under this scenario, as one of the participants is a large business and the joint venture election is in effect, the operator would be deemed to be a large business in respect of purchases made on behalf of the large business participant pursuant to subsection 27(6) of the Regulations. Therefore, the amount of ITC to be recaptured would be limited to the large business participant's interest, or $2,666.64 ($8,000 [HST Provincial Component] X 33 1/3 %).
Scenario 3
• All 3 participants are small/medium-sized businesses (none is a large business).
• The operator is a large business.
Answer
Under this scenario, as the joint venture election is in effect, under paragraph 273(1)(a), the purchase of electricity would be deemed to be acquired by the operator and not the participants. As the operator is itself a large business, the full amount of ITC for the provincial component of the HST, or $8,000, would be recaptured, irrespective of the fact that none of the participants are large businesses.
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 905-721-5220. 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,
Zubair Patel, CGA
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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