30 March 2000 GST/HST Interpretation 8046/HQR0001652 - Joint Venture Election and Interest in Real Property

We are responding to your request of February 16, 1999, for an interpretation, which was forwarded to your office XXXXX[.] You asked if the relationship between the co-owners of mortgages was a joint venture, and whether the activities of the group were prescribed activities for the purpose of the joint venture election. Specifically, you wanted to know when a mortgage would be considered an interest in real property rather than a financial instrument for GST/HST purposes.

The following is my understanding of the case, based on the agreements provided and our telephone conversations:

1. XXXXX[.] The corporation has filed several credit returns.

2. XXXXX is a co-owner of mortgages and has filed a joint venture election to act as an operator with respect to activities concerning these mortgages.

3. XXXXX[.]

4. XXXXX that the parties have acquired certain loans from XXXXX (the Vendor) and that "the parties desire to enter into this Agreement to provide, among other things, for their relationship as co-owners."

5. XXXXX "the loans acquired by the Co-owners from the Vendor, as XXXXX, all rights derived therefrom or appurtenant or incidental thereto and all proceeds in respect of the restructuring, realization upon or disposition XXXXX including without limitation, any interest in property securing such loan and the indebtedness or other obligation of the buyer of a XXXXX[.]

7. XXXXX[.] All Purchased Assets shall be held by the Co-owners as tenants in common and not as joint tenants, each in accordance with its Percentage. All Purchased Assets which constitute mortgages or real property shall be registered in the name XXXXX XXXXX as nominee unless otherwise Approved by the Co-owners. Each of the Co-owners agrees to instruct the nominee as required by the terms of this Agreement or any Approval effected pursuant hereto."

8. XXXXX how the co-owners intend to treat their relationship: "This Agreement does not create, and shall not be construed to create, any trust, partnership or joint venture between any of the Co-owners, and each Co-owner expressly disclaims any intention to create a trust, partnership or joint venture. Except as expressly provided in this Agreement or in the Servicing Agreement, no Co-owner, nor any officer, director, shareholder, member, partner, employee, agent, servant, representative or independent contractor of such Co-owner, shall at any time be deemed to be agent or representative of any other Co-owner for any purpose whatsoever. Each Co-owner covenants and agrees with each of the other Co-owners that it shall not, at any time allege or claim that a relationship of trust, partnership, joint venture or (except as expressly provided in this Agreement) agency or representative among or between the Co-owners was or is created. Each Co-owner expressly declares its intention to rely upon (i) the provisions of any applicable statutory or common law to the effect that joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a trust, partnership or joint venture as to anything so held or owned; and (ii) the applicable statutory and common law as it applies to tenants in common to the extent that the same, by the express provisions of this Agreement, are not amended or varied. Except as specifically provided otherwise in this Agreement, no Co-owner shall have any authority to act for, or assume any obligation or responsibility on behalf of, any other Co-owner."

8. XXXXX to the loans acquired from XXXXX[.] The mortgages were acquired by XXXXX rough an Agreement for Purchase and Sale (the Purchase Agreement) XXXXX XXXXX. The mortgages were in distress at the time of purchase, and purchased at a discount. XXXXX has since gone out of business, and approximately half the mortgages have been foreclosed.

9. XXXXX was provided in full and indicates that Receivers had been appointed, either by XXXXX or by a court, for some of the loans. XXXXX XXXXX, also provided, lists the borrower and the Receiver for each of these loans.

10. XXXXX[.]

Interpretation Requested

1. Is the relationship between the co-owners a joint venture?

2. Are the activities of the co-owners in respect of their mortgages an interest in real property?

Interpretation Given

To make the election under section 273 of the Excise Tax Act (ETA), a joint venture must exist, it must be for specific activities, and there must be a written agreement for the joint venture. The election is made jointly by the operator and the co-venturer.

The existence of a joint venture can sometimes be difficult to determine, since there is no precise definition of such a relationship in the ETA or in common law. The Policy Statement P-171R, "Distinguishing Between a Joint Venture and a Partnership for the Purposes of the Section 273 Joint Venture Election," can be referred to for guidance in establishing if the relationship has the characteristics of a joint venture. To determine if the arrangement is a joint venture, the relationship between the parties involved and their intentions must be examined. How the parties intend their relationship to be treated is apparent from their conduct and the facts and circumstances of their situation.

The documentation provided to establish the relationship between the parties consists of the Co-owners Agreement, a portion of the Purchase Agreement, and the Assignment and Assumption Agreement.

The XXXXX is a written record of the intentions of the parties. XXXXX the parties state that they are not creating a trust, partnership or joint venture, and that they have no intention of forming any such relationship. The group is not, nor is it intended to be, a joint venture. Whether a joint venture exists is always a question of fact. In our view, however, where the parties have expressly indicated that the arrangement is not a joint venture, in the absence of evidence to the contrary, the co-owners would not be considered to have formed a joint venture based on the Co-owners Agreement.

The XXXXX has indicated that the companies are co-owners of mortgages with respect to commercial and residential properties, and that XXXXX[.] Information concerning the other co-owners or their transactions has not been provided. The fact that XXXXX has filed a joint venture election and is reporting the tax as the operator of a joint venture on its GST/HST returns would not be sufficient evidence by itself to indicate that the relationship is a joint venture, particularly since there is no information to indicate that the other co-owners wished to consider their relationship as such. Where a joint venture does not exist, the election under section 273 of the ETA would not be available to the co-owners.

Although it is our opinion that the business arrangement is not a joint venture, it is still necessary to examine the tax status of the mortgages as this will determine the extent to which input tax credits may be claimed.

The co-owners acquired loans, which they define as Purchased Assets in the Co-owners Agreement. The definition indicates the Purchased Assets are loans and the associated rights, including any interest in property securing the loan. XXXXX states that the Purchased Assets could be mortgages or real property. XXXXX refers to the loans acquired from XXXXX[.] The co-owners acquired mortgages from XXXXX[.] They acquired the rights associated with the mortgages, including the right to be paid money from the mortgagors. While a mortgage would include a security interest in real property, a mortgage is a right to be paid money, and as such, is a debt security for GST/HST purposes. Therefore, the mortgages would fall under the definition of a financial instrument in subsection 123(1) of the ETA.

Based on the information provided it is our view that the activities of the co-owners are in respect of mortgages, which are financial instruments, and not interests in real property for GST/HST purposes.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8253.