4 October 2002 GST/HST Interpretation 42229 - The Application of the Joint Venture Rules

This is in respect of the memorandum of XXXXX wherein you requested our comments regarding the application of the joint venture rules to the supply of a lease by a joint venture operator to a participant in the joint venture.

Our understanding of the facts are as follows:

1. XXXXX and XXXXX, each own XXXXX % of XXXXX, a commercial building located in XXXXX.

2. XXXXX have entered into a joint venture agreement relating to the lease of space in that building and have made an election under 273(1) of the Excise Tax Act (ETA), which allows XXXXX as the joint venture operator to account for the GST in respect of the joint venture activity.

3. In addition to being a participant in the joint venture, XXXXX is a tenant in XXXXX, occupying XXXXX % of the entire building. XXXXX has a lease agreement with XXXXX for space it occupies in the XXXXX and pays consideration attributable to XXXXX % of that space.

4. XXXXX has charged and remitted GST on consideration attributable to XXXXX % of the space that XXXXX occupies in the building (i.e., XXXXX %, which is XXXXX ownership interest in the space occupied by XXXXX ).

5. XXXXX is a financial institution involved mainly in the provision of exempt supplies.

XXXXX has put forward the position that GST in not applicable on rent attributable to XXXXX in respect of the property that XXXXX owns and occupies (i.e., XXXXX %) since XXXXX cannot be considered to be supplying to XXXXX that portion of the property owned by XXXXX.

You have asked us to confirm that no GST is payable with respect to the portion of the premises owned and occupied by XXXXX (XXXXX % of the XXXXX %).

Based on the facts above, it is our opinion that XXXXX is required to collect and remit GST on consideration attributable to XXXXX % of the space XXXXX occupies in the building.

In the Joint Venture (GST) Regulations (the Regulations) certain activities with respect to real property are identified as prescribed activities for purposes of subsection 273(1) of the ETA (including the sale or lease of commercial real property). Subsection 3(2) of the Regulations contains an exclusion in respect of an activity that is undertaken as a joint venture in respect of real property that is not a residential complex.

Pursuant to subsection 3(2), an activity related to real property is not a prescribed activity where a participant in the joint venture, or a person associated with or related to a participant in the joint venture, uses all or a portion of the property otherwise than exclusively in the course of a commercial activity, and is not the recipient of a taxable supply of a right that entitles that person to so use, occupy or possess the property; or is the recipient of such a supply and does not pay tax in respect of that supply or pays tax calculated on consideration that is less than fair market value of the use, occupation or possession.

We interpret subsection 3(2) of the Regulations to mean that a joint venture activity will not qualify as a prescribed activity under subsection 273(1), where a participant in a real property joint venture occupies space in the building for which a joint venture agreement applies, and either is not the recipient of a supply of a right to occupy or use that space or is the recipient of such a supply but pays no tax in respect of that supply or pays tax calculated on consideration that is less than the fair market value of its use, occupation or possession (of the space).

Our position impacts XXXXX in the following manner:

•   The election under subsection 273(1) which applies to the lease of space in the XXXXX is valid provided that XXXXX collects and remits GST on consideration that is not less than the FMV of the total space used, occupied, or possessed by XXXXX (i.e., XXXXX %).

•   XXXXX as the joint venture operator is then entitled to claim full ITCs for expenses related to the leasing of the property.

•   If the GST collected by XXXXX is calculated on consideration that is less than the fair market value of the space used, occupied or possessed by XXXXX then the election is not valid and XXXXX must account for taxes in accordance with the manner identified in GST/HST Policy Statement P-172R, Supplies To Joint Venture Participants In A Building Owned By The Participants As Tenants-In-Common With Undivided Interests.

•   XXXXX would only be entitled to claim ITC's with respect to the expenses related to its ownership interest in the property.

•   XXXXX would be responsible for accounting for GST on its portion of the property.

If you have any questions or comments with respect to this matter, please do not hesitate to contact me at (613) 954-4397 or Dwayne Moore at (613) 952-8530.