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.
DATE
October 14, 2016
TO
[Addressee]
FROM
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 170549
Dear [Client]
SUBJECT : GST/HST INTERPRETATION
Joint Venture Election Where Supplies Made by Non-Operator Nominee
This is in response to your request of [mm/dd/yyyy], in respect of […] the GST/HST treatment of a situation where a GST/HST registered agent acts on behalf of two participants in a joint venture where one of the participants is designated the operator under an election under section 273 of the Excise Tax Act (ETA).
We understand:
1. […][In Year X], an agreement (“the co-tenancy agreement”) was entered into by […] (ACo) and […] (BCo). ACo and BCo consider this agreement to be a joint venture and made a joint venture election designating ACo as the operator. As per provision […] of the agreement, the co-tenancy agreement was to be effective retroactive to […][the previous Year].
2. ACo holds a […][greater than 50]% undivided interest in the co-ownership arrangement and BCo holds a […][less than 50]% undivided interest as per provision […] of the co-ownership agreement.
3. ACo is owned by […] (Individual 1), […] (Individual 2) and […] (Individual 3).
4. BCo is owned by […] (Individual 4).
5. ACo and BCo entered into a Nominee Agreement with […] (the Nominee) […][in year X + 1].
6. Individual 1 is the President of the Nominee.
7. The Nominee Agreement provides that:
* ACo is the beneficial owner of an undivided […][greater than 50%] interest and BCo is the beneficial owner of an undivided […][less than 50%] interest […][in the] real property (Agreement preamble - provision […]).
* The Nominee has no beneficial interest in the Property: it is appointed to hold bare legal title to the Property as a bare nominee (Paragraph […] of the Agreement).
* At the direction of ACo and BCo, the Nominee is empowered to borrow money, enter into financial arrangements and to mortgage, charge, grant security or otherwise encumber all or part of the Property (Paragraph […] of the Agreement).
* The Nominee agrees that at all times it will do no act relating to the Property without the express written authorization of ACo and BCo (Section […] of the Agreement).
* The Nominee shall enter into and execute instruments including, in part, deeds, leases and management contracts, as may be directed by the ACo and BCo in writing in connection with the Property (Section […] of the Agreement).
* The Nominee agrees that all revenues of any kind arising from the property or its use all belong to the beneficial owners only (Section […] of the Agreement).
* ACo and BCo are responsible for all encumbrances, charges, costs, expenses (section […] of the Agreement).
* The parties agree that the relationship between them is that of principal and bare nominee only. There is no intention to create a partnership between the Owners and the Nominee (Section […] of the Agreement).
8. […][In year X + 2], ACo and BCo made an election under section 273 of the ETA under which ACo was designated the operator of the joint venture.
9. The activities in which ACo and BCo are involved are described in the joint venture election as […][development and construction of real property].
10. On […][the same day ACo and BCo made the election referred to in Fact 8], the Nominee, ACo and BCo also signed an agency agreement. In that agency agreement, the Nominee is designated the agent of ACo and BCo. The agency agreement states that the title to the real property at issue is held by the Nominee as bare trustee of the beneficial owners, ACo and BCo.
11. The agency agreement also provides that the Nominee is […][the authorized agent and representative] of ACo and BCo […][including] the claiming of input tax credits […]
12. […] prior to the end of the administrative tolerance expressed in GST/HST Notice 284 Bare Trusts, Nominee Corporations and Joint Ventures inputs were acquired and ITCs claimed by the Nominee in respect of the activity of ACo and BCo for developing and constructing […][real property].
13. […][The project is not] complete and […][no sale of real property has been made]. The parties intend to have the resulting constructed property sold by the Nominee as nominee under the nominee agreement.
[…][INTERPRETATION REQUESTED]
You would like to confirm the following:
1. Whether the Nominee can be named vendor on the […][Offer of Purchase and Sale] of the […][supply of real property] constructed pursuant to the co-ownership arrangement.
2. Whether the GST/HST collectible [on a sale of the real property] can be accounted for […] by ACo who is the designated operator under the section 273 election.
[…][INTERPRETATION GIVEN]
Where an agreement is a joint venture at law it is a joint venture for purposes of the section 273 election notwithstanding any provision in the particular agreements which may state the contrary. The CRA will generally apply the criteria expressed in the decision in Westcan Malting Ltd. v HMQ, [1998] case which provided several indicia for joint ventures.
Besides the requirement that a joint venture must have a contractual basis, the courts have laid down certain additional requisites deemed essential for the existence of a joint venture. Although its existence depends on the facts and circumstances of each particular case, and while no definite rules have been promulgated which will apply generally to all situations, the decisions are in substantial agreement that the following factors must be present:
(a) A contribution by the parties of money, property, effort, knowledge, skill or other asset to a common undertaking;
(b) A joint property interest in the subject matter of the venture;
(c) A right of mutual control or management of the enterprise;
(d) An expectation of profit, or the presence of “adventure”,
(e) A right to participate in the profits;
(f) Most usually, limitation of the objective to a single undertaking or ad hoc enterprise.
For the purposes of this discussion we are considering this co-tenancy agreement to be a joint venture at law.
For the purposes of section 273 of the ETA, in order to be eligible to make the section 273 election, a joint venture must be engaged in one or more prescribed activities. Many of these activities are listed under the Joint Venture (GST/HST) Regulations. Paragraph 3(1)(a) of the Regulations provides that “the construction of real property, including feasibility studies, design work, development activities and the tendering of bids, where undertaken in furtherance of a joint venture for the construction of real property” is a prescribed activity. Paragraph 3(1)(b) of the Regulations provides that “the exercise of the rights or privileges, or the performance of the duties or obligations, of ownership of an interest in real property, including related construction or development activities, the purpose of which is to derive revenue from the property by way of sale, lease, licence or similar arrangement” is a prescribed activity. The activities of the co-tenancy agreement are considered to be within the scope of these paragraphs. The co-tenancy arrangement was, therefore, eligible to make the section 273 election.
Pursuant to paragraph 273(1)(a) when a valid election is in place, all properties, services, that are during the period the election is in effect, supplied, acquired, imported or brought into a participating province under the agreement by the operator on behalf of a participant or participants in the course of the activities for which the agreement was entered into are deemed to be supplied, acquired, imported or brought into the province, as the case may be, by the operator and not the participant.
As noted under facts 10 and 11 above, an agency agreement was entered into under which the Nominee is the designated agent of ACo and BCo. The Nominee is registered for the GST/HST. […][These comments] are based on the understanding that the Nominee is engaged in commercial activities as a result of its agency activities on behalf of ACo and BCo and therefore is correctly registered for the GST/HST.
In response to your first question, the Nominee can be named the Vendor on the […][Offer of Purchase and Sale] relating to […][the supply of real property] constructed pursuant to the co-ownership arrangement. However, the naming of the Nominee as the Vendor has implications.
Generally, an agent is considered to be an extension of the principal and makes or acquires supplies on behalf of the principal […], [and the principal,] for GST/HST purposes, is considered to have made or acquired the supplies. Therefore, it is the principal that is generally required to account for the tax on the supplies made by the agent. In addition, it is the principal who is entitled to claim any input tax credits on the supplies acquired by the agent on behalf of the principal. No subsection 177(1.1) election to allow the agent to account for the GST/HST collected or collectible is in place in this case. In addition, it is the principal who would be entitled to claim any input tax credits on the supplies acquired by the agent on behalf of the principal in its capacity as agent. The statement in the agency agreement stating that the Nominee will claim ITCs on inputs purchased in its capacity as agent does not extinguish ACo and BCo’s potential right to claim the ITCs under the ETA, nor does it result in the Nominee being entitled to claim ITCs.
The agency relationship between the Nominee and the principals, ACo and BCo, is an agreement with the principals as persons and not as participants in a joint venture. The agent will be making supplies (as no supplies have as yet been made) on behalf of both ACo and BCo. Both ACo and BCo must account for any GST/HST collectible and/or claim ITCs (where the documentary requirements under the Input Tax Credit Information (GST/HST) Regulations are met) on their own GST/HST returns at a percentage equal to their own level of participation in the co-tenancy agreement: ACo at [greater than 50]% and BCo at [less than 50]% for supplies made or acquired by the Nominee as agent on their behalf.
In summary, the Nominee can be named as vendor of the […][real property]. However, specific consequences ensue from this organizational structure. In respect of the […][sale of the real property] by the Nominee, ACo can only report [greater than 50]% of any GST/HST collected or collectible on the sale of the [real property] on its return for the particular reporting period. BCo is required to report their portion of [less than 50]% of any GST/HST collected or collectible on their return for the reporting period in question.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the interpretation (s) given in this letter provided that: none of the issues discussed in the interpretation(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-9894.
Yours truly,
Ken Syer
Manager
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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