3 November 2000 GST/HST Ruling 32023 - Joint Venture Arrangement for Operation of Nursing Home

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th Floor 320 Queen Street Ottawa, ON K1A 0L5XXXXX XXXXX XXXXX XXXXXXXXXX

Case: 32023November 3, 2000

Subject:

GST/HST APPLICATION RULING Joint Venture Arrangement for Operation of Nursing Home

Dear XXXXX

Thank you for your letter of July 13, 2000, (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. XXXXX is a registered charity that establishes and operates facilities as hospitals, nursing homes and/or related facilities that provide health care to patients and the elderly in need of health care.

2. XXXXX is a corporation that owns and/or manages nursing homes, retirement homes and other extended health care or similar facilities. XXXXX is a wholly-owned subsidiary of XXXXX[.]

3. XXXXX and XXXXX have formed a joint venture to establish and operate an interim-care nursing home (the "Facility") located in a building of the XXXXX. The details of the joint venture are outlined in a Joint Venture Agreement ("the Agreement") effective XXXXX, and signed on XXXXX, by XXXXX and XXXXX[.]

4. The Facility is a XXXXX interim-care nursing home, fully funded by the XXXXX, and meets the definition of a health care facility under section 1 of Part II of Schedule V to the Excise Tax Act (ETA). XXXXX and XXXXX are supplying institutional health care services, as defined in section 1 of Part II of Schedule V to the ETA. The supply of such services is exempt from GST/HST under section 2 of Part II of Schedule V to the ETA.

5. The term of the Agreement is from XXXXX until the later of

(a) 18 calendar months after the admission of the first resident, or

(b) the closure of the last of the resident beds located in the Facility, as stated in XXXXX of the Agreement.

6. XXXXX contributions to the joint venture, outlined in the preamble and XXXXX of the Agreement, include the following:

•   the license to operate the nursing home, issued by the XXXXX;

•   the furnishings and equipment used in the Facility, which are either owned or leased by XXXXX;

•   the lease of the building at XXXXX, owned by the XXXXX, in which the Facility is located; and

•   XXXXX, the principal of a bank loan, to pay for the construction and renovation costs to the Facility.

7. XXXXX contributions to the joint venture, outlined in the preamble and XXXXX of the Agreement, include the following:

•   its management services and expertise on a day-to-day basis;

•   the specifications for, and supervision of, the construction and renovations to the Facility;

•   providing the staff necessary to operate the Facility; and

•   acquiring the utilities, food, operating supplies, and all other goods or services necessary for the operation of the Facility, through contracts with third parties.

8. Under XXXXX of the Agreement XXXXX has the sole and exclusive right to supervise, manage and operate the Facility in the name, and for the account of, the joint venture.

9. XXXXX of the Agreement states that XXXXX is responsible for hiring and training all the employees of the Facility. All such employees are employees of XXXXX or under contract to XXXXX, and the joint venture reimburses XXXXX promptly for the total compensation paid by XXXXX to these employees.

10. XXXXX of the Agreement states that XXXXX is responsible for entering into contracts for the utilities, services, concessions, and supplies necessary for the maintenance and operation of the Facility, in the name of XXXXX, and at the expense of the joint venture.

11. XXXXX is responsible for entering into contracts for the food, beverages, operating supplies and other materials and supplies necessary for the maintenance and operation of the Facility, in the name of and for the account and at the expense of the joint venture, under XXXXX of the Agreement.

12. XXXXX is responsible for all necessary repairs, replacements, additions and improvements in and to the Facility and the Furnishings and Equipment in order to keep and maintain the same in good repair, working order and condition, at the joint venture's expense, under XXXXX of the Agreement.

13. XXXXX of the Agreement states that XXXXX shall deposit in a banking institution selected by XXXXX in XXXXX name, as agent for the joint venture, all funds resulting from the operation of the Facility or otherwise received by XXXXX for and on behalf of the Joint Venture, and XXXXX is authorized to pay from this account such amounts and at such times as the same are required to be made in connection with:

(a) the ownership, maintenance and operation of the Facility;

(b) payment of the costs, expenses and expenditures outlined above;

(c) payments of the amounts for which XXXXX is entitled to reimbursement from the Joint Venture pursuant to this Agreement;

(d) payments on the bank loan; and

(e) payment of XXXXX Priority Distribution outlined below.

14. XXXXX of the Agreement states that the joint venture will pay all reasonable costs and expenses for the maintenance, operation and in-house supervision of the operation of the Facility, and will reimburse XXXXX for all expenses reasonably incurred by XXXXX for the account of or in connection with the operation of the Facility.

15. XXXXX outlines the Priority Distribution paid to XXXXX:

"In recognition of the services rendered by XXXXX in managing the Facility and XXXXX contributions to the feasibility and start-up of the Nursing Home Joint Venture, the Joint Venture ... shall pay to XXXXX ... at the times hereinafter specified, a priority share of surplus (a "Priority Distribution") during each month that the Facility is operated as a nursing home during the Term of this Agreement equal to:

(a) XXXXX revenues derived from the XXXXX interim beds from the date that the first resident takes up occupancy in the Facility until the earlier of:

(i) the date that the operation of the Facility is ceased; and

(ii) the thirty-sixth calendar month from the month of admission of such first resident, inclusive; and

(b) such other amount as may be agreed to in writing between XXXXX and XXXXX in respect of any period that extends beyond the period described in paragraph (a).

Such Priority Distribution ... shall arise and be owing commencing with the calendar month in which the first resident takes up occupancy in the Facility and shall be paid in monthly instalments on the last day of each month for the preceding month on the above-mentioned percentage of the gross revenues for such preceding month."

16. XXXXX outlines the provisions respecting the loan taken out by XXXXX. It states, in XXXXX, "The parties agree that all surplus arising from the operation of the Facility will be paid to the Joint Venture Banker on account of the Joint Venture Loan on a monthly basis as soon as possible after such surplus has been determined by XXXXX and, in any event, within 15 days after delivery to XXXXX of the Monthly Income Statement by XXXXX."

17. XXXXX outlines the sharing of any surplus revenue: "Provided and subject to the precondition that exclusively from revenues from the Facility arising in respect of the Scheduled Operating Period, the Joint Venture Loan has been repaid in full, the Joint Venture shall pay to XXXXX an amount ("XXXXX of Scheduled Operating Period Surplus") equal to XXXXX of all Scheduled Operating Period Surplus. Such amount, if any, as is payable hereunder shall be paid to XXXXX within 60 days after the end of the Scheduled Operating Period ... XXXXX shall not withdraw Scheduled Operating Period Surplus from XXXXX bank account maintained under XXXXX prior to payment by the Joint Venture to XXXXX of XXXXX XXXXX of Scheduled Operating Period Surplus. XXXXX shall be entirely unrestricted in respect of withdrawal and payment in XXXXX discretion of Facility Surplus arising after the Scheduled Operating Period." The Scheduled Operating Period is defined in the paragraph as the first 18 months of operation of the Facility.

Ruling Requested

1. Is the Priority Distribution to XXXXX subject to GST?

2. Are the reimbursements to XXXXX for expenses paid in respect of the Facility subject to GST?

Ruling Given

Based on the facts set out above, we rule that the Priority Distribution and the reimbursements to XXXXX are subject to GST to the extent of XXXXX interest in the joint venture.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Section 273 is the only provision in the Excise Tax Act (ETA) that applies specifically to joint ventures. Under section 273 of the ETA, the participants of a joint venture, whose activities are the exploration or exploitation of mineral deposits or a prescribed activity, may make a joint election with the operator of the joint venture such that:

(a) all properties and services that are, during the period the election is in effect, supplied, acquired, imported or brought into a participating province under the agreement by the operator on behalf of the co-venturer in the course of the activities for which the agreement was entered into shall, for the purposes of this Part, be deemed to be supplied, acquired, imported or brought into the province, as the case may be, by the operator and not by the co-venturer;

(b) section 177 does not apply in respect of a supply referred to in paragraph (a); and

(c) all supplies of property or services made, during the period the election is in effect, under the agreement by the operator to the co-venturer shall, for the purposes of this Part, be deemed not to be supplies to the extent that the property or services are, but for this section, acquired by the co-venturer for consumption, use or supply in the course of commercial activities for which the agreement was entered into.

XXXXX and XXXXX are not eligible to make an election under section 273 since the joint venture activities are not the exploration and exploitation of a mineral deposit or a prescribed activity. Therefore, the general GST/HST rules will apply to supplies made to and by the participants under the Agreement. The application of the general GST/HST rules to a joint venture is outlined in Policy Statement P-139R, Tax Liability and Input Tax Entitlement of a Non-Electing Joint Venture Participant (copy attached). Pursuant to Policy Statement P-139R, "Since a joint venture is not a "person" for GST/HST purposes, it cannot register in its own right. Therefore, under the general rules, each participant in a joint venture must generally account for the tax on its share of joint venture sales and claim input tax credits for tax paid or payable on its share of joint venture purchases."

The payment of the Priority Distribution is one of the expenses of the joint venture; it is not part of XXXXX share of the revenue from the joint venture. It is a payment to XXXXX for performing the day-to-day supervision, management and operation of the Nursing Home. XXXXX is making a supply of services to the joint venture. Since a joint venture is not an entity separate from its participants, XXXXX is supplying these services to the participants in the joint venture. XXXXX commercial activity is the management of nursing homes, retirement homes and other extended health care or similar facilities. The supply of management services to the joint venture is made in the course of XXXXX commercial activity, and would be taxable. As such, the consideration paid to XXXXX is subject to GST under subsections [sic] 165(1) of the ETA. XXXXX is making a taxable supply of services to XXXXX, and would collect GST on the consideration paid for providing these services.

XXXXX receives the Priority Distribution in recognition of the supply of management services; XXXXX does not pay XXXXX directly. The Priority Distribution is paid out of the revenues of the joint venture in which both XXXXX and XXXXX are participants. The consideration for the supply of services is the Priority Distribution to the extent of XXXXX interest in the joint venture.

Policy Statement P-139R states "where an operator purchases property or services otherwise than as agent on behalf of a non-electing participant, the operator, not the participant, may claim an input tax credit under section 169 for the tax payable in respect of the purchase, subject to the usual restrictions. If the participant subsequently reimburses the operator for all or part of the amount of the purchase, the reimbursement is regarded as part of the consideration for the supply of services made by the operator to the participant (i.e., the service of operating the joint venture) and is therefore subject to tax."

XXXXX is reimbursed by the joint venture for the wages and salaries it pays to its employees. These expenses are incurred by XXXXX alone, and XXXXX makes a supply to the joint venture of the services of these employees. A joint venture is not a separate entity; XXXXX is supplying these services to its co-participant XXXXX. The reimbursements of the salaries and wages would form part of the consideration for the supply. The reimbursements are paid out of the revenues of the joint venture in which XXXXX is a participant; therefore the reimbursements would be consideration for the supply to the extent of XXXXX interest in the joint venture.

The Agreement indicates that there may be other expenses that XXXXX pays directly, in the course of managing the Facility, for which XXXXX is reimbursed by the joint venture. These reimbursements would be part of the consideration for the supply of management services by XXXXX to XXXXX. As these reimbursements are paid out of the revenues of the joint venture, the reimbursements are consideration for the supply to the extent of XXXXX interest in the joint venture.

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

Encl.:	Policy Statement P-139R, Tax Liability and Input Tax Entitlement of a Non-Electing Joint Venture Participant
c.c.:	Donna Harding

Legislative References:	273(1) 165(1) 123(1)
NCS Subject Code(s):	11660-1 11720-1