6 January 2005 GST/HST Interpretation 50183 - The Transfer of Units in Gross Royalty Trusts

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.

XXXXX XXXXX XXXXX XXXXX	Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5
	Case Number: 50183
XXXXX	January 6, 2005

Subject:

GST/HST INTERPRETATION Application of GST/HST to Operation of Recreation Centre

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the scenario described below.

Scenario

1. Condominium Corporation No. 1 ("CC1") was created pursuant to the XXXXX and is a non-profit organization as defined in subsection 123(1) of the Excise Tax Act (the "ETA") ^[xl]1.

2. Condominium Corporation No. 2 ("CC2") was created pursuant to the XXXXX and is a non-profit organization as defined in subsection 123(1) of the ETA.

3. Condominium Corporation No. 3 ("CC3") was created pursuant to the XXXXX and is a non-profit organization as defined in subsection 123(1) of the ETA.

4. CC1, CC2, and CC3 (hereinafter collectively referred to as the "Corporations") deal at arm's length with each other.

5. The Corporations manage and maintain certain lands and premises in the XXXXX wherein certain residential condominium units are situated and privately owned.

6. In XXXXX, a recreational, athletic and social facility (hereinafter referred to as the "Recreation Centre") was constructed by an arm's length corporation on lands situated in XXXXX (hereinafter referred to as the "Recreation Centre Lands").

7. Subsequent to its construction, title to the Recreation Centre Lands was transferred to the Corporations on the following basis:

(i) to CC1, an undivided XXXXX% interest;

(ii) to CC2, an undivided XXXXX% interest; and

(iii) to CC3, an undivided XXXXX% interest.

8. The corporations operate and manage the Recreation Centre for the common use and benefit of all the unit owners and occupants of the condominium units comprising or contained in the Corporations (hereinafter collectively referred to as the "Condominium Residents") and for the common use and benefit of paying members of the public (hereinafter collectively referred to as the "Public Members").

9. The Condominium Residents are entitled to use the Recreation Centre without charge. However, the Condominium Residents are charged a fee to participate in various Recreation Centre programmes, such as yoga, karate, etc.

10. It is not known whether any Condominium Residents are GST/HST registrants. However, it is assumed none of the Condominium Residents use the Recreation Centre in the course of a commercial activity.

11. Approximately XXXXX% of the users of the Recreation Centre are Public Members.

12. The maximum fee charged to Public Members for one-day access to the Recreation Centre is $XXXXX. Monthly and annual memberships are also available.

13. The costs for maintenance, repair, services and operations, and the sharing of other responsibilities with respect to the Recreation Centre (hereinafter referred to as the "Recreation Centre Costs") are borne and paid as follows:

(i) by CC1, XXXXX%;

(ii) by CC2, XXXXX%; and

(iii) by CC3, XXXXX%.

14. The source of the Corporations' funds to provide their proportionate share of the Recreation Centre Costs is from monthly maintenance fees charged to the unit owners.

15. The monthly maintenance fee charged to each unit owner by a Corporation is a single amount that does not distinguish between amounts attributable to the Recreation Centre Costs and amounts attributable to common area costs within the condominium building. All unit owners must pay the full monthly maintenance fee without regard to whether a particular owner makes any use of the Recreation Centre.

16. The Corporations have formed a management committee (hereinafter referred to as the "Management Committee") to operate and manage the Recreation Centre. Without restricting the generality of the foregoing, the Management Committee is responsible for:

(i) ensuring proper maintenance, repair and operation of the lands, buildings, and other improvements making up the Recreation Centre;

(ii) enacting and publishing rules and regulations from time to time governing the use of the Recreation Centre (including rules and regulations for the hours of operation of the facilities, implementation and collection of user fees, and the enforcement of such rules and regulations);

(iii) keeping the Recreation Centre well painted and decorated and at all times in a clean and wholesome condition and in good repair;

(iv) keeping financial records and preparing an annual budget for the Recreation Centre;

(v) ensuring each Corporation pays its proportionate share of the Recreation Centre Costs;

(vi) obtaining and maintaining insurance on the Recreation Centre;

(vii) reporting to the Corporations as to all matters relating to the Recreation Centre;

(viii) establishing programmes offered at the Recreation Centre;

(ix) negotiating contracts for employment services and the supply of goods and services, and signing such contracts on behalf of the Corporations, and

(x) preparing an annual capital expenditures budget and arranging for a reserve fund study to be completed from time to time by an independent person. The reserve fund study will be used to determine whether the amount of funds the Management Committee is collecting from the Corporations with respect to major repairs and replacement of the Recreation Centre are adequate to provide for any expected major repair and replacement costs of the Recreation Centre. After a reserve fund study is completed, each Corporation is obliged to contribute funds, if necessary, toward their proportionate share of any such expected major repairs and replacement costs. The funds contributed into the reserve fund are held in an interest-bearing trust account at a major bank, and designated as "Recreation Centre Reserve Account" in the name of all three Corporations.

17. The Management Committee consists of a total of XXXXX individual members. XXXXX members are appointed from the Board of Directors of each Corporation.

18. Total annual taxable supplies made by each Corporation are less than $50,000, and the Corporations are not registered for the GST/HST.

Proposed Transaction

The primary source of outside funding for the Recreation Centre is from membership and programme fees charged to Public Members and programme fees charged to Condominium Residents. The annual amount of taxable supplies of membership and programme fees made by the Recreation Centre is approaching an amount that may cause at least one and perhaps all the Corporations to exceed their $50,000 small supplier threshold. The Corporations have determined it is not practical to disclose up to three separate GST/HST numbers on invoices issued for membership and programme fees, collect three separate GST amounts on each fee, apportion input tax credits ("ITCs") to each Corporation, etc.

In order to better coordinate the activities and responsibilities of the Management Committee, and alleviate each Corporation from the need to collect prorata amounts of GST and calculate an apportionment to each Corporation of its proportionate amount of ITCs, the Corporations propose centralizing the Recreation Centre activities, responsibilities, revenues, and costs in a newly-formed corporation ("the Management Company"). The Management Company will enter into a written management services contract with the Corporations under which the Management Company will be designated as the operator of the Recreation Centre and will operate and manage the Recreation Centre in accordance with the Management Committee's mandate. The Management Company will be a non-profit organization as defined in the subsection 123(1) of the ETA, and its shares will be owned as follows:

(i) by CC1, XXXXX%;

(ii) by CC2, XXXXX%; and

(iii) by CC3, XXXXX%.

The Management Company's only activity will be to manage and operate the Recreation Centre under the management services contract with the Corporations. The Management Company will register for the GST/HST and collect the GST on all taxable supplies.

Interpretation Requested

Please confirm whether:

(i) the Corporations are joint venturers vis a vis the Recreation Centre;

(ii) the Management Company is a participant in the joint venture;

(iii) the Corporations and the Management Company are eligible to make a joint venture election;

(iv) payments by the Corporations to the Management Company representing their proportionate share of the Recreation Centre Costs will be exempt from GST;

(v) payments by the Corporations to the Management Company representing their proportionate share of the reserve fund will be exempt from GST;

(vi) the annual taxable supplies made by the Management Company will not be included in the calculation of each Corporation's threshold amount for purposes of determining each Corporation's small supplier status;

(vii) the monthly maintenance fees charged to unit holders by the Corporations remain fully GST-exempt;

(viii) the Management Company is entitled to claim full ITCs for GST paid in respect of the management and operation of the Recreation Centre; and

(ix) if the joint venture election is not available and assuming the Corporations have exceeded their small supplier threshold, the Corporations are nonetheless not required to collect GST on any portion of the monthly maintenance fees charged to unit owners.

Interpretation Given

Are the Corporations joint venturers vis à vis the Recreation Centre and is the Management Company a participant in the joint venture?

The term "joint venture" is not defined in the ETA. The Canada Revenue Agency's administrative definition of a joint venture is an arrangement in which two or more persons work together in a limited and defined business undertaking, which does not constitute a partnership, a trust or a corporation, the expenses and revenues of which will be distributed in mutually agreed portions.

Generally, each participant in a joint venture has to account separately for the tax paid or payable on its share of the joint venture purchases, and for tax collected or collectible on its share of joint venture supplies, whether the participant makes or receives the supplies directly or through another participant of the joint venture. However, section 273 of the ETA allows the operator of a qualifying joint venture and a participant in the joint venture to make an election to have the operator account for the tax on joint venture supplies made and received by the operator on behalf of the participant. Furthermore, any supplies made by the operator to the participant under the joint venture agreement are deemed not to be supplies to the extent that the supplies are for use, consumption or supply in the course of commercial activities for which the agreement was entered into. The election is available where the joint venture agreement is evidenced in writing and the activity of the joint venture is the exploration or exploitation of mineral deposits or a prescribed activity.

Whether an arrangement between two or more parties is a joint venture or not is a question of fact. Policy Statement P-171R, Distinguishing Between a Joint Venture and a Partnership for the Purposes of the Section 273 Joint Venture Election, provides some guidelines that may be used in making this determination, such as the intention of the parties, a right of mutual control or management, contribution by each participant, and joint ownership in the venture subject matter.

The Corporations have joint undivided interests in the Recreation Centre, and expenses are allocated in the same proportion as their interests. Each Corporation has a right of mutual control or management through representation on the Management Committee. It is possible that the arrangement between the Corporations is a joint venture; however, we cannot provide an interpretation regarding the nature of the arrangement because that is a question of fact.

The operator of a joint venture must be a GST/HST registrant and a participant in the joint venture to make an election under section 273 of the ETA. Policy Statement P-106, Administrative Definition of a "Participant" in a Joint Venture, states that, for purposes of the joint venture election under section 273 of the ETA, "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.

Whether or not there is a joint venture, there is no indication if there is a joint venture agreement evidenced in writing. If the arrangement is a joint venture and there is a joint venture agreement evidenced in writing, then the Corporations are participants under the first paragraph of the administrative definition of a participant. Under the proposed management services contract with the Corporations, the Management Company will be designated as the operator of the Recreation Centre and will operate and manage the Recreation Centre. If the arrangement is a joint venture and there is a joint venture agreement evidenced in writing, then the Management Company may be a participant in the joint venture under the second part of the administrative definition of a participant for purposes of the joint venture election.

Are the Corporations and the Management Company eligible to make a joint venture election?

For the operator and a participant of a joint venture to make a joint venture election, the activity of the joint venture must be the exploration or exploitation of mineral deposits or a prescribed activity. The Joint Venture (GST) Regulations lists the prescribed activities that are eligible for the joint venture election:

(a) 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; and

(b) 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.

The arrangement between the Corporations is not for the construction of real property, the first prescribed activity. If there is a joint venture with respect to the management and operation of the Recreation Centre and that joint venture is evidenced in writing, the Corporations and the Management Company may make the election only if the activities of the joint venture fit within the second prescribed activity.

The Corporations each have an undivided interest in the Recreation Centre, which meets the definition of "real property" under subsection 123(1) of the ETA:

"real property" includes

(a) in respect of property in the Province of Quebec, immovable property and every lease thereof,

(b) in respect of property in any other place in Canada, messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, and

(c) a mobile home, a floating home and any leasehold or proprietary interest therein.

The terms "lease" and "licence" are not defined in the ETA; however, Policy Statement P-062, Distinction Between Lease, Licence and Similar Arrangement, outlines how the CRA interprets these terms in reference to supplies of real property made by a public service body. In the common law provinces, a lease normally confers exclusive possession of the real property, while a licence of real property normally would not.

While the Corporations each have an undivided interest in the Recreation Centre, the Corporations are not deriving revenue from the Recreation Centre by way of sale, lease, licence or similar arrangement, but are using the Recreation Centre to provide recreational and athletic programmes and memberships to Condominium Residents and Public Members. Therefore, the activities of the Corporations are not eligible for the joint venture election, even if all the other requirements of section 273 were met.

Are payments by the Corporations to the Management Company representing their proportionate shares of the Recreation Centre Costs exempt from GST?

The Management Company will be a non-profit organization as defined in the subsection 123(1) of the ETA and, under the management services contract with the Corporations, will manage and operate the Recreation Centre. The Management Company will be making a supply of services to the Corporations. The payments made to the Management Company by the Corporations, proportionate to their ownership of the Recreation Centre, will be consideration for that supply of services.

As a non-profit organization registered for the GST/HST, the supplies made by the Management Company will be taxable unless specifically exempted under Schedule V of the ETA. There are no exemptions in Schedule V that apply to the services provided by the Management Company to the Corporations. Therefore, the payments by the Corporations to the Management Company are subject to GST at 7%.

As the joint venture election is not available to the Corporations, the deeming provisions of paragraph 273(1)(c) that allows the operator of a qualifying joint venture to make supplies to the electing participants without collecting GST will not apply.

Are payments by the Corporations to the Management Company representing their proportionate shares of the reserve fund exempt from GST?

The Corporations will also contribute funds for expected major repairs and replacement costs, which will be held in an interest bearing trust account in the name of all three Corporations.

The amounts paid into the trust account in the name of the three corporations are not consideration for a supply, and therefore are not subject to tax.

When an amount is withdrawn from the trust account and paid to the Management Company for repairs and replacement costs, or an amount is due to the Management Company for such costs, the amount will be consideration for a supply of services by the Management Company at that time, and subject to tax.

Should the annual taxable supplies made by the Management Company be included in the calculation of each Corporation's threshold amount for purposes of determining each Corporation's small supplier status?

The total value of the consideration for world-wide taxable supplies made by the person (or an associate of the person at the beginning of the particular calendar quarter) that became due in the previous four calendar quarters (or was paid in those four calendar quarters without becoming due) is included in calculating the small supplier threshold amount. The calculation excludes consideration attributable to the sale of goodwill of a business, supplies of financial services, and supplies by way of sale of capital property. Subsection 148(4) of the ETA states that an "associate" of a particular person at any time means another person who is associated at that time with the particular person, and under subsection 127(1) of the ETA, a particular corporation is associated with another corporation for GST/HST purposes if they are associated for income tax purposes by reason of subsections 256(1) to (6) of the Income Tax Act (ITA). The essential test in determining whether a corporation is associated with another relies on the control of the corporation. The general rules in subsections 256(1) and 256(2) of the ITA state that two corporations are associated with each other if one of them is controlled, directly or indirectly in any manner whatever, by the other, or if they are both controlled, directly or indirectly in any manner whatever, by the same person or group of persons.

The Management Company's shares will be owned XXXXX% by CC1, XXXXX% by CC2, and XXXXX% by CC3, and its only activity will be to manage and operate the Recreation Centre under the management services contract with the Corporations. The Corporations state that they deal at arm's length with each other; i.e., they are not related or associated. However, this is a question of fact. Based on the information provided, it would appear that none of the Corporations have control of the Management Company. Under such circumstances, the annual taxable supplies of the Management Company would not be included in the calculation of any Corporation's threshold amount for purposes of determining the Corporation's small supplier status.

Will the monthly maintenance fees charged to unit holders by the Corporations remain fully GST-exempt?

Under section 13 of Part I of Schedule V to the ETA, the supply of property or a service made by a corporation or syndicate established upon the registration, under the laws of a province, of a condominium or strata lot plan or description or similar plan or description, to the owner or lessee of a residential condominium unit described by that plan or description, is exempt from tax if the property or service relates to the occupancy or use of the unit.

The monthly maintenance fees do not distinguish between amounts attributable to the Recreation Centre Costs and amounts attributable to common area costs within the condominium building. The monthly maintenance fees charged to the unit holders are consideration for supplies of property or services that relate to the occupancy or use of the condominium units, and as these supplies are exempt, GST will not apply to the monthly maintenance fees.

Is the Management Company entitled to claim full ITCs for GST paid in respect of the management and operation of the Recreation Centre?

The Management Company will manage and operate the Recreation Centre under the management services contract with the Corporations, and the consideration paid for the supply of services to the Corporations will be taxable at 7% as noted above. The Management Company will also be making supplies of memberships to the Public Members and supplies of Recreation Centre programmes to the Condominium Residents and the Public Members.

The term "membership," as defined in subsection 123(1) of the ETA, includes a right granted by a particular person that entitles another person to services that are provided by, or to the use of facilities that are operated by, the particular person and that are not available, or are not available to the same extent or for the same fee or charge, to persons to whom such a right has not been granted, and also includes such a right that is conditional on the acquisition or ownership of a share, bond, debenture or other security.

Certain supplies of memberships made by public sector bodies are exempt from tax ^[xli]2. However, none of these exemptions apply to the memberships supplied by the Corporations, nor are there any exemptions in Schedule V that apply to the programmes supplied by the Management Company. Therefore, the supplies of memberships and programmes will also be subject to GST at 7%.

Registrants are entitled to claim input tax credits for the tax paid or payable on supplies acquired to the extent that those supplies are for consumption, use or supply in the course of a commercial activity. As defined in subsection 123(1) of the ETA, "commercial activity" includes, in part, a business carried on by the person except to the extent to which the business involves the making of exempt supplies by the person, and "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.

The management and operation of the Recreation Centre is a commercial activity of the Management Company, and it will be entitled to claim full ITCs for the GST paid or payable in respect of those activities.

If the joint venture election is not available and assuming the Corporations have exceeded their small supplier threshold, are the Corporations required to collect GST on any portion of the monthly maintenance fees charged to unit owners?

As noted above, as the monthly maintenance fees charged to the unit holders are for property or services that relate to the occupancy or use of the condominium units, they will be exempt under section 13 of Part I of Schedule V to the ETA. The Corporations are not required to collect GST on any portion of the monthly maintenance fees charged to the unit owners.

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) 957-8253.

Yours truly,

Jacqueline Russell
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2005/01/27 — RITS 51529 — Rebates - Emergency Evacuation - XXXXX