21 March 2005 GST/HST Interpretation 47101 - Joint Venture Arrangements Between XXXXX and XXXXX

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

Dear XXXXX:

Thank you for your letter XXXXX and subsequent documents concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain payments made pursuant to purported joint venture agreements for the operation of XXXXX. Reference is also made to our previous letters on this subject XXXXX and the documents you submitted therein.

Interpretation Requested

You have asked us to re-consider our position with respect to the payments in question (the "Priority Distribution"), taking into account the amendment you are prepared to make to the agreements.

Interpretation Given

Based on the information provided, it remains our view that the Priority Distribution is consideration for a taxable supply.

We took the position in our previous letters that the arrangement between the parties XXXXX did not constitute a joint venture. Since there was no joint venture, the Priority Distribution was consideration for a supply of services necessary to operate the XXXXX from one party to the other. Our position was that it was doubtful that a joint venture existed, for the following reasons:

•   the membership of the Management Committee consisted of two members from one party and one from the other (i.e., a lack of mutual control),

•   the lack of a joint property interest in the venture XXXXX, and

•   the uncertainty of sharing in the revenues (the Priority Distribution was to be made in the amounts and at the times determined by the Management Committee).

In your last letter, you indicated that your clients would be prepared to amend the agreement to enlarge the Management Committee from three to four persons, with equal representation from both parties. However, the lack of a joint property interest in the venture, and the uncertainty of sharing in the revenues continue to bring into question the existence of a joint venture.

One of the distinguishing characteristics of a joint venture as identified by the courts is that the parties have a joint property interest in the subject matter of the venture. XXXXX does not have an ownership or other property interest in the XXXXX. While the absence of a joint property interest is not necessarily fatal to the existence of a joint venture, it does bring it into question.

Further, the Priority Distribution is not based on the percentage of XXXXX interest in the venture, a point that we will return to later. The agreement does not specifically identify the extent or percentage of either party's share or interest in the XXXXX operation.

However, as noted in our last letter, the existence of a joint venture does not necessarily mean that the Priority Distribution is not subject to tax. The XXXXX revenues are derived from two principal sources; payment from the XXXXX and payment from the XXXXX. These amounts are paid as a result of the fact that XXXXX is the XXXXX and has met the conditions under the XXXXX and under the terms of the agreement with the XXXXX. XXXXX is not a XXXXX nor is it party to the agreement with the XXXXX entitling it to receive provincial funding for the operation of XXXXX. XXXXX is also responsible for the following services: XXXXX. This indicates that XXXXX is providing the XXXXX. In other words, the supplies that generate the revenue are made by XXXXX. Therefore, XXXXX has no claim to the revenues earned from the operation of XXXXX as a joint supplier of the XXXXX. XXXXX is not making any supplies to the XXXXX.

As a requirement for the issuance of XXXXX must meet certain conditions set out in the XXXXX and in the regulations to that Act. XXXXX. It appears that in order to fulfill this condition, XXXXX has entered into agreements with XXXXX for the provision of services that maintain the XXXXX. In return for this service XXXXX receives payment that has been classified as a distribution of the gross revenues.

We noted earlier that the Priority Distribution is not based upon the percentage share of XXXXX interest in the venture. In fact, the agreement does not state what percentage share XXXXX has in the venture. It would thus not appear to be a typical sharing of revenues in a joint venture, where each participant's share of the revenue is based upon its percentage interest in the joint venture. Rather, it is more consistent with ensuring that XXXXX will be compensated for its services, the same as if the agreement had been structured as a usual agreement for the provision of services.

The conclusion from this is that XXXXX has acquired a taxable supply of a maintenance service from XXXXX, which is an input into the operation of XXXXX. The consideration payable to XXXXX for the maintenance services is taxable. This means that XXXXX is required to pay the GST on the amounts (identified in XXXXX the agreement as a distribution of gross revenue) paid to XXXXX in respect of its supply of the maintenance services.

XXXXX is also eligible to claim input tax credits in respect of the inputs it acquires in the course of making its supply of services to XXXXX.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-7909.

Yours truly,

Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2005/03/03 — RITS 49634 — Transfer of an Interest in a Trust Holding a Freehold Mineral Title - XXXXX