26 May 2006 GST/HST Interpretation 51850 - Tax Residency

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 with attachments to XXXXX our XXXXX office concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to purchases made pursuant to XXXXX Contracts where a joint venture election has been made. Your letter was referred to us for reply.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

The Minister of Finance announced in the Federal Budget of May 2, 2006, a proposal to reduce the rate of the GST and the federal portion of the HST by 1%, effective July 1, 2006. The general rule is that the rate of GST will be reduced from 7% to 6% and the rate of the HST from 15% to 14% on supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date. Specific transitional rules apply to certain supplies. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to Reduction in the Rate of the GST/HST - Questions and Answers (http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html) on the CRA Web site.

Statement of Facts

We understand the facts to be as follows.

1. XXXXX entered into a Joint Venture Agreement effective XXXXX. A copy of the Joint Venture Agreement with Appendices was submitted with your letter.

2. The operator and co-venturers have made a joint venture election pursuant to subsection 273(1).

3. Purchases of goods and services for purposes of carrying on the joint venture may be made using "XXXXX Contracts".

4. For the purposes of facilitating contracts administration, XXXXX Contracts might be signed only by the operator (or their agent). Under such circumstances, the operator would be authorized by the co-venturers to sign on their behalf.

5. An example of XXXXX Contracts provisions relating to acquisition, liability, ownership and title for goods and services contracts was included with your submission.

6. Payments for goods and services purchased under XXXXX Contracts may be made by XXXXX as agent for the joint venture participants. Such XXXXX would be provided funds by the joint venture participants from bank accounts (the "XXXXX accounts") held by a XXXXX, which company would hold such bank accounts as agent for the joint venture participants. The bank would draw funds proportionately and directly from XXXXX (the "XXXXX accounts") to cover the funds provided to XXXXX accounts. A diagram that illustrates such cash funding process was included with your letter.

7. Alternatively, payments for goods and services purchased under XXXXX Contracts could be made by one joint venture participant as agent for the other joint venture participant, who would then be reimbursed proportionately by the other joint venture participant.

Rulings Requested

You would like to know whether goods or services acquired under "XXXXX Contracts" in respect of a joint venture where the operator and co-venturers have elected under subsection 273(1) are:

•   goods or services acquired by the co-venturers that will be deemed, pursuant to paragraph 273(1)(a), to be acquired by the operator and not by the co-venturers, or

•   goods or services acquired by the operator and supplied by the operator to the co-venturers that will be deemed, pursuant to paragraph 273(1)(c), not to be a supply, that but for section 273 would be acquired by the co-venturers.

Rulings Given

Based on the facts set out above, and subject to our comments below, we rule that goods or services acquired under "XXXXX Contracts" in respect of a joint venture where the operator and co-venturers have elected under subsection 273(1):

•   are goods or services that will be deemed, pursuant to paragraph 273(1)(a), to be acquired by the operator and not by the co-venturers, and

•   any goods or services subsequently re-supplied by the operator to the co-venturers will be deemed, pursuant to paragraph 273(1)(c), not to be a supply, that but for section 273 would be acquired by the co-venturers.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

Paragraph 273(1)(a)

With respect to purchases where an election has been made, paragraph 273(1)(a) applies when an operator acquires goods or services on behalf of co-venturers in the course of a joint venture. The purchases are deemed to be acquired by the operator and not the co-venturers. The purpose of the election is to allow the operator to claim a full input tax credit where, absent the election, the operator could not and each co-venturer would have to claim their proportionate share of the input tax credit. Thus, the election is meant to allow an operator to claim an input tax credit where, strictly speaking, the operator cannot be said to have acquired the goods or services. The wording of the provision is such that it deems supplies acquired by the operator on behalf of the co-venturers to be acquired by the operator and not acquired by the co-venturers. The implication of this deeming provision is that, absent the election, supplies acquired by one person on behalf of another are acquired by the person on whose behalf they are acquired, and that person is the one who would claim an eligible input tax credit.

It follows from this that the reference to an operator acquiring goods or services must be read in the context of section 273. Therefore, an operator can be said to be acquiring goods or services on behalf of co-venturers when the operator undertakes responsibility for the acquisition of goods or services. This would usually mean the operator entering into contracts or agreements for the acquisition of goods or services within its duties as operator or the operator being responsible for the payment for the goods or services from joint venture funds.

In Policy Statement P-138R The Effect of Making a Joint Venture Election on a Participant's Eligibility to Register and Claim Input Tax Credits, the CRA has stated that the election does not affect a co-venturer's eligibility to register and claim input tax credits in respect of expenses incurred directly (not through the operator). Therefore, when an election is made pursuant to section 273, the general rules will continue to apply when determining if a co-venturer can register and claim input tax credits in respect of expenses that were not paid through the operator. It also states that "In addition, according to section 169 of the Act, a registered co-venturer may claim an input tax credit, subject to the usual restrictions, for all or part of the tax paid or payable on any property or services the co-venturer directly acquires, imports, or brings into a participating province, to the extent that the property or service is for consumption, use or supply in the course of its commercial activities." The reference here is to property or services the co-venturer "directly acquires". In summary, P-138R provides that a co-venturer may claim input tax credits where the purchase is not paid for through the operator or where the purchase is acquired directly by the co-venturer.

XXXXX Contracts Payment Procedures

Based on the information in your letter, the payment process diagram and the Joint Venture Agreement and Appendices, each co-venturer XXXXX. A XXXXX Account (or XXXXX Account as per XXXXX) is held by a joint venture agency corporation. Payments for purchases are made from the XXXXX Account, which is funded by XXXXX. Actual payments for goods and services provided under XXXXX Contracts may be made, according to your letter and diagram, by XXXXX as agent for the joint venture participants. Under section XXXXX as agent for purposes of expediting contract award and administration. XXXXX.

A review of the documents supplied by you did not disclose any distinction in the payments arrangements between XXXXX Contracts and other contracts.

Based on the above, it appears that, at least where payments are not made directly by one participant, it is the operator who has acquired the goods or services, since payment follows the normal process. Payment is made from the XXXXX Account, which is used to fund joint venture activities. XXXXX make the payments. According to the Joint Venture Agreement, XXXXX.

XXXXX Contracts Practices and Provisions

Your letter states that XXXXX Contracts could still be signed only by the operator or their agent. P-138R states that an electing co-venturer can claim input tax credits on purchases acquired "directly" by the co-venturer. A contract signed by an operator would not seem to be a purchase acquired directly by a co-venturer.

There are XXXXX paragraphs in the sample contract provisions submitted by you, XXXXX. This supports your view that each Participant is the person acquiring the goods and services.

XXXXX. This paragraph supports the idea that the Operator acquired the goods and services as understood for purposes of section 273.

XXXXX.

XXXXX.

Notwithstanding XXXXX, it is apparent that goods or services acquired under a XXXXX Contract would still be acquired by the Operator where the Operator acts on behalf of the other co-venturer, given the meaning of "acquired" for purposes of the joint venture election. XXXXX. These facts support the conclusion that the Operator is the person to claim input tax credits.

Your letter also stated that alternatively, payments for goods and services provided under XXXXX Contracts could be made by one joint venture participant as agent for the other joint venture participant, who would then be reimbursed proportionately by the other joint venture participant. It is not clear whether this applies to cases where the party making the payment would be the party designated as the operator, or includes cases where the non-operator party made the payment. XXXXX the Joint Venture Agreement states that XXXXX. It must be remembered that the election only applies to acquisitions by the operator. Where the participant being reimbursed is not the operator, it is clear the election does not apply.

Paragraph 273(1)(c)

With respect to paragraph 273(1)(c), it provides that where the joint venture election is in place, supplies made by the operator to a co-venturer are deemed not to be supplies where the supplies are for use in the commercial activities of the joint venture. The supplies referred to in paragraph 273(1)(c) are not necessarily the same acquisitions that are referred to in paragraph 273(1)(a). An operator may supply goods or services to co-venturers that are caught be paragraph 273(1)(c) that are not caught by paragraph 273(1)(a) (e.g., a supply of managing the joint venture). At the same time, purchases of goods or services by an operator that are caught by paragraph 273(1)(a) could be re-supplied to the co-venturers, at which time paragraph 273(1)(c) would deem them not to be supplies.

The XXXXX Contracts do not appear to be concerned with supplies by the operator to the co-venturers, so the application of paragraph 273(1)(c) would appear not to be an issue. However, your position seems to be that since you believe paragraph 273(1(a) does not apply to deem purchases made under XXXXX Contracts to be made by the operator, therefore there is no need for paragraph 273(1)(c) to deem these purchases not to be supplied by the operator to the co-venturers. The implication seems to be that there is no supply from the operator to the co-venturers to which paragraph 273(1)(c) would apply.

It is a question of fact whether purchases acquired under XXXXX Contracts are re-supplied to the co-venturers. Based simply on the sample provisions in the XXXXX Contracts, it cannot be said for certain either way. The tax consequences, though, remain the same. If there is no re-supply, there is no supply to which tax would attach. If there is a re-supply, it is deemed not to be a supply and again, no tax would apply.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-7909.

Yours truly,

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

2006/05/29 — RITS 55371R — "Arranging for" a Financial Service