21 January 2013 GST/HST Interpretation 146302 - Whether a Nominee Corporation Can Be Considered the Operator of a Joint Venture

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 [mm/dd/yyyy], regarding whether a nominee corporation could be considered as a "participant" in a joint venture as that term is used in subsection 273(1) of the Excise Tax Act ("section 273") and pursuant to CRA's interpretation of that term in Policy Statement P-106 Administrative Definition of a "Participant" in a Joint Venture.

Interpretation Requested

You have asked us to consider a particular scenario involving a nominee corporation to determine whether the nominee corporation is a participant and operator of a joint venture for purposes of the joint venture election under section 273. The scenario is as follows:

1. A number of parties ("the parties") and their nominee corporation enter into a joint venture agreement. The parties are participants in the joint venture under the terms of paragraph (a) of the definition of "participant" in Policy Statement P106, Administrative Definition of a "Participant" in a Joint Venture. The parties are corporations.

2. The activity of the joint venture is an activity eligible for the joint venture election pursuant to section 273 and the Joint Venture (GST/HST) Regulations.

3. In the nominee agreement between the parties and the nominee corporation, the nominee corporation has the following functions:

* to hold title to the property in the nominee corporation's name on behalf of the parties;

* to remit all moneys received by the nominee in respect of the property to the parties;

* to transmit promptly to the parties all communications related to the property;

* to manage all matters related to compliance with GST/HST rules and regulations, including the remittance of any positive amounts of net tax.

4. The nominee corporation operates under the direction of the parties. Some routine functions do not need approval each time they are performed (e.g., signing leases, engaging suppliers, making and receiving routine payments) as they are carried out under a set of "blanket" procedures established by the parties. The nominee corporation cannot do these things at its sole discretion. All major transactions that are not in the normal course of these routine functions would require specific approval by the parties for each transaction.

5. The nominee corporation does not have staff, it has only directors. Amongst the directors, each of the parties is represented by either an employee or a director of each particular party. These directors perform the duties of the nominee corporation.

6. There is no consideration payable by the parties to the nominee corporation.

7. The nominee corporation maintains bank accounts for the parties in the name of the nominee corporation, under the direction of the parties.

8. In the course of the joint venture activities, […] are payable by the […] of the joint venture. The payments by […] are made to the account of the nominee corporation.

9. The nominee corporation pays all the operational expenses of the joint venture in the name of the nominee corporation, under the direction of the parties.

10. The nominee corporation is designated in the nominee agreement as a bare nominee (or trust) by the parties.

It is the view of […] that the nominee corporation is a participant in the joint venture and that the nominee can be the operator for purposes of section 273, and that policy statement P106, Administrative Definition of a "Participant" in a Joint Venture should be expanded to include such scenarios. You also contend that the nominee corporation is engaged in commercial activities and could register for GST/HST purposes.

Interpretation Given

CRA Policy Statement P-106, Administrative Definition of a "Participant" in a Joint Venture states the CRA's administrative definition of participant for purposes of section 273. As stated in the policy statement a "participant" means:

"(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."

As per the Policy Statement, for purposes of paragraph (b) of the definition a person must have "managerial or operational control" of the joint venture to be considered a "participant" in that joint venture. As a result, any person who is a GST/HST registrant that does not have managerial or operational control of the joint venture including a person referred to as a nominee corporation or bare trust will not be considered a participant for purposes of section 273 and, therefore, cannot be considered an operator of the joint venture.

At issue is whether the nominee corporation in the above scenario has "managerial or operational control" of the joint venture as these terms are used in the Policy Statement.

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 the parties. Evidence of a person having the necessary managerial or operational control may 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.

In the scenario, the nominee corporation's functions are not significant enough to be considered as having the managerial or operational control of the joint venture. The nominee corporation has no independent powers, discretions or responsibilities. Its primary responsibility is to hold title to the property for the benefit of the parties and carry out limited functions all at the direction of the parties. Therefore, the nominee corporation is not considered to have the managerial or operational control of the joint venture and thus cannot be considered a participant in the joint venture.

In addition, there is no indication in the scenario presented that the nominee corporation is designated as the operator of a joint venture. Furthermore, the nominee agreement provides that the nominee corporation is released from any and all liability that it may incur under the nominee agreement or pursuant to the instructions of the parties. Generally, a person who has managerial or operation control also bears some liability for the actions that it undertakes.

With respect to your view that the nominee corporation (or bare trust) is engaged in commercial activities and that it could therefore register for GST/HST purposes, we suggest that you provide further details, including a joint venture agreement together with the relevant nominee (bare trust) agreement for the nominee corporation that would form part of the joint venture and a clear indication of the activities carried on by the nominee corporation to the Special Provisions – General Unit in the Financial Institutions and Real Property Division for their consideration. To discuss this matter further, please contact the Manager of that Unit, John Smith, at 9057215062.

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 at 613-954-4397.

Yours truly,

Ken Syer
Manager
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate