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XXXXX
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File #: 11680-4, 11725-8(km)February 5, 1996
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Dear Mr. XXXXX
This is in response to a request from XXXXX XXXXX XXXXX Tax Services, for an interpretation concerning the activities of the above noted company, which was forwarded to the General Applications Division by XXXXX of your staff on August 14, 1995. XXXXX[.] Please note that both Ken Mathews and Carol Ann Villeneuve of my staff have already discussed these issues with XXXXX[.] I have addressed each issue separately.
Issue 1 - reimbursement of XXXXX by co-owners of various commercial properties
Background:
• XXXXX has an ownership interest in several XXXXX properties, specifically the XXXXX the "projects"). Each of these projects has received a GST registration number. The legal status recorded in RCCE for each is, respectively, "other", "partnership" and "partnership".
• XXXXX has been routinely invoiced by various suppliers for supplies in relation to the projects. XXXXX has been reimbursed by third parties for these expenses but did charge and remit GST on the such amounts. XXXXX has proposed that XXXXX be assessed in respect of these reimbursements.
• XXXXX forwarded a letter to your office, dated June 30, 1995, in which he argues the proposed assessment is invalid because the expenses in question were incurred by XXXXX as agent for the third parties.
• XXXXX has entered into a series of agreements with the other owners of the XXXXX[.] These agreements are respectively called the XXXXX. In his letter to the Department XXXXX indicates that agreements similar to the above were not entered into in respect of the XXXXX, however, he asserts that XXXXX operated "under the same principles and procedures as contemplated by the agreements entered into in respect to the other two projects".
• Copies of the three agreements in respect of XXXXX have been forwarded to the Department and are hereafter referred to as the sample agreement(s).
• Both the XXXXX are schedules to the XXXXX. The XXXXX, being the lead agreement, provides for the holding of title to the property, the division of profits and losses therefrom and various other matters relating to the common ownership of the property (including the financing and development of the property and the ongoing operation thereof). The agreement is to be in effect until XXXXX unless otherwise extended or terminated by the co-owners. Certain specific provisions in the agreement are to be updated upon the registration of a condominium plan for the property as contemplated by article XXXXX of the agreement.
• The XXXXX is an agreement between the co-owners (including XXXXX. Pursuant to the agreement, XXXXX agrees to undertake the co-ordination and supervision of the construction of the property on behalf of the co-owners.
• The XXXXX is an agreement between the co-owners (including XXXXX[.] Pursuant to the agreement, XXXXX agrees to manage the property according to the specific terms of the agreement for an initial five year term, following which the agreement is automatically renewed every two years unless terminated.
Question:
Is GST exigible on the amounts reimbursed to XXXXX by the third parties?
Response:
The first step in answering this question is to determine exactly who is reimbursing XXXXX for the expenses incurred (i.e. the "project" or the co-owners). That determination is dependent on how the co-ownership of each project is structured (e.g. a partnership; a joint venture). Once it is determined who is reimbursing XXXXX then the relationship between that person and XXXXX must be examined.
The letter by XXXXX is based on the premise that each "project" is a person for GST purposes. The fact that the Department has issued a GST registration number to each project would seem to support their premise. The XXXXX letter is also based on the premise that it is the "project", as a separate person, who is reimbursing XXXXX[.] Given that fact, it is important to determine if the assertions made by XXXXX (i.e. that each "project" is a person for GST purposes and that it is the "projects" that are reimbursing XXXXX are indeed correct. In that regard, it is interesting to note that the XXXXX states that the particular "project" is not a partnership. Further, XXXXX has indicated that XXXXX have verbally stated that the relationship between the co-owners is not one of partnership but that the "projects" qualify as a person under the last part of the definition of person in subsection 123(1) of the Excise Tax Act (ETA) (i.e. a body that is a society, union, club, association, commission or other organization of any kind). However, it would appear that the "projects" do not qualify as a person under that part since the words "other organization of any kind" are restricted, under the legal principle of ejusdem generis, by the specific words (i.e. society, union, club, association, and commission) that precede them. As such, only an organization of the same class as a society, union, club, association or commission would be included in the meaning of person pursuant to the words "other organization of any kind". The "projects" do not appear to meet that criteria.
Since none of the projects are incorporated and do not appear to be partnerships, it is likely they are joint ventures (which do not qualify as a person under subsection 123(1) of the ETA). In this regard policy paper P-171, titled, "Distinguishing between a joint venture and a partnership for purposes of section 173 joint venture election" was examined in light of the sample agreements. The conclusion reached was that there is nothing in the sample agreements that is inconsistent with a joint venture. This conclusion creates a significant problem in that if each "project" is not a person for GST purposes, then they should never have been registered.
If the "projects" are not separate persons pursuant to subsection 123(1) of the ETA (e.g. they are joint ventures), then, in the absence of a section 273 joint venture election, it is necessary to examine the relationship between XXXXX and each co-owner. However, if the "projects" are each a separate person pursuant of subsection 123(1) of the ETA, then it is necessary to examine the relationship between XXXXX and that separate person. If the "projects" are joint ventures and a section 273 election was in effect, then GST would not be exigible on the amounts reimbursed. However, for this scenario to exist the current GST accounts for the "projects" as registrants would have had to exist as branch accounts of XXXXX[.] Irrespective of the status of the various "persons" in this particular case, the examination of the relationship between XXXXX and either the "project" as a separate person or each co-owner (both referred to here as the "other party") is a two tier process. First, one must determine if an agency relationship exists between XXXXX and the "other party". Secondly, one must examine individual transactions to determine if they were conducted in that capacity.
If the parties conduct themselves according to the terms of the sample agreements, then it is reasonable to conclude that an agency relationship exists between XXXXX and each "other party". In other words, the three essential qualities of agency as described in policy paper P-182 titled, "Determining the meaning of 'agent' and 'agency'" have to some extent been fulfilled. However, as noted above, the existence of an agency relationship between XXXXX and each "other party" is not sufficient to determine whether GST is exigible on the amounts reimbursed. As detailed in policy paper P-182, given the existence of an agency relationship, it is then necessary to examine individual transactions to determine if they were conducted in that capacity. In this case individual transactions (e.g. individual expenses incurred by XXXXX which are subsequently reimbursed by the "other party") would need to be examined in light of the eight indicators of agency detailed in P-182 to determine if they were incurred by XXXXX in its capacity as agent. For example, amounts incurred to pay employees of XXXXX would not be incurred as agent for the "other person" even if the employees worked solely at a particular "project". If the expenses are not incurred as agent for the "other person", then pursuant to section 178 of the ETA, the amount reimbursed would be deemed to be part of the consideration for the supply by XXXXX to the "other person" of its services (either of acting as developer or as manager). As such, GST would be exigible on the amount reimbursed, however, XXXXX would be entitled to an input tax credit for any tax included in the expense. If the expense is incurred as agent for the "other person", then no tax is exigible on the reimbursement, however, XXXXX is not entitled to an input tax credit in respect of the tax included in the expense (to the extent to which that expense was incurred as agent).
Issue 2 - provision of management services to foreign subsidiary
Background:
• XXXXX provides management services to XXXXX[.]
• XXXXX based in XXXXX, XXXXX, is a wholly owned subsidiary of XXXXX[.]
• XXXXX is not registered under Part IX of the ETA.
• XXXXX forwarded a letter to your office, dated May 24, 1995, in which he argues that XXXXX is not required to charge GST to XXXXX in respect of the services provided.
Question 1:
Is XXXXX considered resident in Canada for purposes of Part IX of the ETA?
Response:
Pursuant to subsection 132(1) of the ETA, a corporation is deemed to be resident in Canada if the corporation is incorporated or continued in Canada and not continued elsewhere. Since XXXXX is not incorporated or continued in Canada, it is not deemed to be resident in Canada pursuant to that provision. However, if the central management and control of XXXXX is located in Canada, based on general legal principles, it could still be considered to be resident in Canada. Factors that determine whether an organization is centrally managed or controlled in a country include:
- the place where its directors live and hold their meetings;
- the place where its shareholders live and hold their meetings;
- the place where its managers live and hold their meetings; and
- the place where the organization performs its principal business and operations and where its keeps its books.
Accordingly, if it is determined through the above criteria that central management and control of XXXXX is in Canada, then XXXXX would be considered resident in Canada for purposes of Part IX of the ETA.
Question 2:
Is XXXXX required to charge GST in respect of the services provided to XXXXX[.]
Response:
We understand from XXXXX notes that the supplies provided by XXXXX include a variety of services ranging from financial services to risk management. The letter by XXXXX further identifies these supplies as management, advisory and consulting services. Pursuant to paragraph 142(2)(g) of the ETA, management, advisory and consulting services performed wholly outside Canada are deemed to be made outside Canada and, pursuant to paragraph 142(1)(g) of the ETA, management, advisory and consulting services performed in whole or in part in Canada are deemed to be made in Canada. If the supplies in question are deemed to be made outside Canada, then no GST is exigible. If the supplies in question are deemed to be made in Canada, then one must examine whether or not XXXXX is considered resident in Canada for GST purposes.
If XXXXX is not considered resident in Canada, then, pursuant to sections 7 and 23 of Part V of Schedule VI to the ETA, the supplies in question will be zero-rated unless the services fall within the exclusion paragraphs in these two sections. It would appear, based on the letter by XXXXX that the services provided by XXXXX are not in respect of these exclusions.
If XXXXX is considered resident in Canada, then the fact that XXXXX has permanent establishments in XXXXX through which it carries on its business may impact on the GST status of the supplies in question. Subsection 132(2) of the ETA provides that where a person who is resident in Canada has a permanent establishment in a country other than Canada, the person is deemed to be a non-resident person in respect of activities of the person carried on through that establishment. Therefore, if XXXXX is considered resident in Canada and the services supplied by XXXXX relate solely to the activities of its permanent establishments in XXXXX then XXXXX will be deemed to be a non-resident in respect of those activities. As such, the supplies in question would be zero-rated pursuant to Part V of Schedule VI of the ETA. However, if XXXXX is considered resident in Canada and the deeming provision of subsection 132(2) do not apply, then the supplies in question will be taxable at 7%.
Issue 3 - impact of transitional rules on billings made in early 1991
Background:
• XXXXX and various third parties are involved in certain "investments".
• XXXXX routinely incurs expenses on behalf of the "investments". XXXXX subsequently rebills these expenses to the various third parties.
• When XXXXX rebilled the third parties after 1990 for expenses incurred in respect of services provided to the "investments" prior to 1991 (on which XXXXX did not pay GST pursuant to section 341 of the ETA) it did not collect GST.
Question:
Are the above amounts rebilled after 1990 subject to GST?
Response:
As noted in the response to issue 1, the answer to the above question is contingent on the relationship that existed between XXXXX and the various third parties at the time of the transactions in question. Were XXXXX and the third parties partners in a partnership? Were they participants in a joint venture for which a section 273 joint venture election was in effect? Did XXXXX incur the expenses as agent for the third parties? If any of the above three scenarios existed, then the amounts rebilled would likely not be subject to GST.
As already discussed, it is important to note in reference to the third scenario above that the existence of an agency relationship between XXXXX and a particular third party is not sufficient to determine that the amount rebilled is not subject to GST. One must examine each expense which is rebilled to determine if it was incurred by XXXXX in that capacity as agent. This two tier process was described in the response to issue 1.
If none of the above three scenarios existed, then one must determine what, if anything, was supplied by XXXXX to the third parties and if the amount reimbursed is part of the consideration for that supply. If nothing was supplied, then the amount rebilled is not consideration, therefore GST is not exigible. However, it is unlikely that nothing was supplied. If, as is likely, XXXXX has supplied a service to the third party (i.e. a supply of acting as agent, a supply of management services in respect of the "investment"), then section 178 of the ETA would deem the amount rebilled to be part of the consideration for the supply of that service. One must then determine if that supply is subject to GST. Of relevance in making that determination will be when the service was performed and when the consideration (i.e. the amount rebilled) was paid or became due (pursuant to section 152). In the case of ongoing services, the rebilled amount would generally be in respect of services performed at the time the expense was incurred. Pursuant to section 341 of the ETA, if the service was performed before 1991, GST is not exigible if the consideration was paid or became due before May 1991. Section 338 of the ETA provides some exceptions to this rule, but none of those exceptions would likely impact of the issue at hand.
If you require further clarification or information on these issues, please contact Ken Mathews (613) 952-9585 in respect of issues 1 and 3 or Carol Ann Villeneuve (613) 957-8224 in respect of issue 2.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
GAD#: 1398(REG)
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