28 April 1994 External T.I. 9335915 - INCOME TAX TREATMENT - JOINT VENTURE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be
correct at the time of issue, may not represent the current

Position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Tax treatment for joint venture - general
comments

Position TAKEN:

Joint venture might have a taxation year-end different

than the taxation year-ends of the joint venturers. The

joint venture is not a legal entity. Joint venturers own

undivided interest in the asset used in the joint

venture's business. Capital cost allowance claimed at

the joint venturers level.

Reasons FOR POSITION TAKEN:

1989 CR (CTF) Q#40; 1989 CTM (CTF) Q#15; 1991
CR (CTF) Q#37; our file #920523; jurisprudence
see below

XXXXXXXXXX 5-933591

Attention: XXXXXXXXXX

April 28, 1994

Dear Sirs:

Re: Income Tax Treatment of Joint Ventures

This is in reply to your letter dated December 8, 1993 wherein you requested an interpretation regarding the income tax treatment of joint ventures. We apologize for the delay in responding to your request.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation district office for their views. We are therefore not in a Position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

You requested our opinion on six specific questions to which we will respond in the order presented.

1. On an administrative basis, where the participants have different taxation year ends, the joint venture will normally be allowed to establish its own fiscal period provided all participants agree. Where the participants have the same taxation year end the joint venture would be expected to have the same fiscal period as that of the participants. However, where it can be shown that valid business reasons exist the Department may permit the joint venture to have a fiscal period different from the taxation year of its participants. When the joint venture has its own fiscal year end, each participant would include in its income for a given taxation year its share of the income of the joint venture for the fiscal period of the joint venture
ending in or coincident with the participant's taxation year.

2. The Department considers that a joint venture, not being a legal entity, does not itself own any property. Accordingly, in our view, each of the joint venturers shall calculate and claim the capital cost allowance pursuant to their interest in the asset.

3. As mentioned above, a joint venture is not a legal entity.

Consequently, only income and expenditure related to the joint venture's business activities would be recorded at the joint venture level. However, depending on the character of the income or deduction incurred, it might be computed at the joint venturers level: as an example, the depreciation on assets is calculated and claimed at the joint venturers level.

4. Your question was partly answered in the 1989 Conference Report of the Canadian Tax Foundation, question #40 of Revenue Canada Round Table.

®Where members of a joint venture own undivided interests in two or more assets used in the joint venture, the reporting
of the proceeds of disposition of any of those assets should be based on the fiscal year-end permitted for the joint venture.¯

However, in our opinion, the above comment is only applicable where joint venturers own undivided interest in an asset. With respect to property owned by a joint venturer, the reporting of the proceeds of disposition of that property would be based on the taxation year of the joint venturer notwithstanding that income or loss from the joint venture's operations will be reported on the basis of the fiscal period of the joint venture.

Also, to complete this answer, we refer you to the 1989 Corporate Management Tax Conference, Revenue Canada Panel (question #15), where the Department brought the following precision regarding the timing inclusion of a proceeds of disposition involving a joint venture.

®Where, however, all the property of a joint venture is disposed of by the joint venture in a fiscal period, it is the department's view that the fiscal period of the joint venture will end at the time of such disposition and cannot be extended to the time when it otherwise would have ended.¯

5. In order to be able to answer to this question, we would need more details regarding the transaction under consideration.

6. We are of the opinion that investment income incidental to the joint venture's business activities would be recorded by
the joint venture as realized and be reported by the joint venturers in their taxation years during which the joint venture fiscal year ended.

Unless as otherwise stated all references to statute are to the Income Tax Act (S.C. 1970-71-72,c.63 as amended) consolidated to June 10, 1993.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust that these comments will be of assistance to you.

Yours truly,

for Acting Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch