11635-8; 11660-9(sm)
Section 273
Telephone No. (613) 954-8585
Fax No. (613) 990-1233
XXXXX
Thank you for your memorandum dated October 25, 1994, with documents attached and addressed to Robert Wong. The letter requests information concerning the interpretation of section 273 of the Excise Tax Act in respect to the assignment of a joint venture interest from XXXXX to XXXXX We apologize for the delay in our response.
Statement of Facts
Based on your memorandum and documents attached, we understand the facts to be as follows:
1. XXXXX and XXXXX signed a joint venture proposal agreement ("the Agreement") on August 10, 1988, for the purpose of bidding on a project in XXXXX proposed by the XXXXX . The joint venture was named the XXXXX
2. The joint venture was awarded the project, the main objective of which was to improve agriculture in the low lying (haor) areas of the XXXXX
3. The principal components of the project were:
• the study of the haor areas in the district for the purpose of defining a regional development strategy as well as design criteria for the execution of flood control, drainage and irrigation development;
• an agriculture assistance program to provide technical assistance to the organization responsible for the delivery of agricultural extension services;
• a human resource development program which will offer instruction to farmers on how to form cooperatives and provide them with the opportunity to acquire farm and water management knowledge;
• a training program to enhance the technical, managerial and administrative skills of the organizations involved in the project; and
• design, procurement and construction services of civil works.
4. In a letter dated December 30, 1990, SLI, as the management leader informed XXXXX that it would act as representative for the joint venture with respect to the GST.
5. In a modification to the Agreement dated October 1, 1991, XXXXX was replaced by XXXXX
6. In an assignment agreement dated October 1, 1992, XXXXX transferred certain contracts to XXXXX including the XXXXX joint venture described above. XXXXX is a subsidiary of XXXXX
7. XXXXX is not registered for purposes of the GST. Prior to the assignment, the net tax had been remitted by the parent company, XXXXX
8. No documentation has been submitted that authorizes XXXXX to act on behalf of XXXXX It is assumed for the purposes of this response that such documentation does in fact exist.
The first item to consider is whether a joint venture exists. Whether a contractual arrangement is a joint venture is a question of fact. According to clause 26.1 of the Agreement, the Agreement is subject to the laws of the Province of Quebec. Pursuant to the legislation outlined in the Civil Code of Lower Canada (effective until January 1, 1994), and the Civil Code of Quebec which replaced it, a joint venture is not recognized in that province. However, there is nothing in the Civil Codes which precludes its formation. A joint venture has been recognized in court cases but in most situations it is recognized as a partnership rather than a joint venture. There may be arrangements, however, where a joint venture rather than a partnership will exist. A joint venture will exist where the parties intended to form a joint venture which is not a partnership, and:
• they did not form a new entity or person;
• the joint venture has no legal status and is not autonomous;
• the joint venture does not have a separate name which is registered under the Civil Code;
• the joint venture does not have its own funds, its own bank account, its own management committee and its own accounting system;
• the joint venture has no estate and cannot transact (e.g., cannot purchase and dispose of property);
• the participants individually or jointly carry out the transactions necessary to realize the joint venture's objectives; and
• the joint venture contract, like a contract for a partnership, requires the contribution of property, credit, skill or industry, as well as the sharing of profits and losses.
According to the contract which formed the XXXXX XXXXX intended to form a joint venture. Their contractual relationship does not, however, appear to qualify as a joint venture under the laws of the province of XXXXX for the following reasons:
1. According to Article 13 of the Agreement, the participants are billing the joint venture for reimbursable and non-reimbursable personnel time and costs. The joint venture is entitled to hold back a percentage of the billings as working capital. The joint venture, in turn, is billing the client for the reimbursable time and costs. This indicates that the joint venture is an autonomous entity.
2. The joint venture is carrying on business under a separate name, XXXXX It is unknown whether this name is registered.
3. According to clause 10.1 of the Agreement, the joint venture has a separate bank account, the funds being held in trust on behalf of the participants.
4. According to clause 11.1 of the Agreement, the joint venture has its own set of accounting records.
5. Article 5 of the Agreement discusses the management committee which is set up to make decisions for the joint venture.
6. Clause 2.2 indicates that the joint venture may purchase property but on behalf of the participants of the venture.
7. The joint venture is acquiring services from the participants in order to carry out the transactions necessary to realize the joint venture's objectives. The participants do not appear to be carrying out the transactions; they appear to be making supplies to the joint venture which in turn is making supplies to the client.
While the relationship between XXXXX will not qualify as a joint venture in the province of XXXXX , it will qualify as a particular or undeclared partnership under the XXXXX . Since those types of partnerships qualify as persons according to subsection 123(1) of the Act, the entity can register for GST purposes.
Although the joint venture is not recognized as such in the province of XXXXX and, therefore, is not recognized as a joint venture for the purposes of the GST, we have responded to your questions in the memorandum for your information only.
1. Who are the participants in the joint venture?
If XXXXX was a joint venture, clause 18.1 of the Agreement requires the prior written agreement of the other party before a party can assign its interest in the joint venture. Accordingly, the determination of the participants in the joint venture will depend on whether XXXXX received the written approval of XXXXX prior to assigning its interest to XXXXX That information is not available. If the approval was given, XXXXX and XXXXX are the participants. If it was not given, XXXXX is still the participant with XXXXX
2. Are the activities undertaken by the joint venture prescribed activities (or approved by the Department of Finance to be prescribed) as farming?
There is no definition in the Excise Tax Act or in the suggested wording for the proposed addition to the Joint Venture (GST) Regulations for the term "farming". Where a specific term is not defined in the related legislation, the common, ordinary and generally accepted meaning of the term should be applied. Revenue Canada does have a definition that it administered for purposes of the fuel tax rebate. Revenue Canada also has a definition of farming in the Income Tax Act.
Some of the common dictionary definitions include:
1. Funk & Wagnalls' Standard College Dictionary: "the business of operating a farm, agriculture" where a farm is defined as "a tract of land forming a single property and devoted to agriculture" and agriculture is defined as "the cultivation of the soil; the raising of food crops, breeding and raising of livestock, etc.; tillage";
2. Houghton Mifflin Canadian Dictionary of the English Language: "to cultivate or produce a crop on (land)"; and
3. Websters' Third New International Dictionary: "the practice of agriculture" where agriculture is defined as "the science or art of cultivating the soil, harvesting crops, and raising livestock; the science or art of the production of plants and animals useful to man and in varying degrees the preparation of these products for man's use and their disposal (as by marketing)".
The administrative definition of "farming" for purposes of the fuel tax rebate included "such activities as breaking, tilling and cultivating the land for the purpose of producing vegetables, fruits, grains or other farm produce, raising livestock or poultry, beekeeping, fur farming, cultivating in greenhouses and other similar activities ...".
The definition of "farming" for purposes of the Income Tax Act includes "tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming".
If this arrangement were a joint venture, we would have to consider its supplies in order to determine if the activities qualify as farming. The purpose of the arrangement is to provide technical advice, assistance and expertise in the area of flood control, irrigation and farm management. As these services are not within the common definitions of the term "farming", nor the Department's administrative definition and the definition in the Income Tax Act, it is our opinion that the activities would not be prescribed activities nor have they been approved by the Department of Finance for prescription.
We have an additional general comment on your response to the Chief of Audit concerning the first two paragraphs on page 4. These comments assume that a joint venture exists and that an election under section 273 is not in effect. They are for your information only.
In clause 13.1 of the Agreement, each participant is required to invoice the joint venture for the amount of non-reimbursable and reimbursable time spent on the project. As a joint venture is not a legal entity, the joint venture cannot be the recipient of the supply. We would therefore view each participant as being the recipient. Accordingly, each participant is required to collect tax from the other participant to the extent of the other participant's interest in the joint venture. For example, when XXXXX invoices the joint venture, it is required to collect tax in the amount of 7% of 62% of the consideration for the supply (the portion of the supply that reflects XXXXX interest). The other participant may be eligible to claim an ITC. Each participant is required to collect and remit tax based on their interest in any supplies invoiced to the client.
If you require any further information, please do not hesitate to contact Sherry Moran at (613) 952-8807 or Sandy Marr at (613) 957-8253.
Sincerely,
H.L. Jones
Director
General Tax Policy
Policy and Legislation
Excise/GST
c.c.: XXXXX
S. Marr
XXXXX
S. Moran
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