Participants in joint ventures, particularly those in the commercial real estate sector, who frequently elect bare trustees or nominee corporations to report GST/HST on their behalf, should be aware of a recent announcement by the Canada Revenue Agency (CRA) in GST/HST Notice No. 284 - Bare Trusts, Nominee Corporations and Joint Ventures. For reporting periods ending after 2014, the tax authorities will no longer tolerate the use of bare trustees or nominee corporations that do not have sufficient managerial or operational control of the joint venture. The administrative tolerance available for the remainder of 2014 is contingent upon a joint venture's full compliance with current GST/HST obligations, and the understanding that joint ventures will restructure, where necessary, to ensure that, beginning January 1, 2015, any elected operator is recognized as an actual "participant " in a joint venture.

GST/HST joint venture election

As a joint venture is not recognized as a "person" under the Excise Tax Act (ETA), it cannot register for GST/HST purposes. In theory, each participant in a joint venture would have to register and separately account for its share of GST/HST obligations. To simplify what would otherwise be burdensome co-reporting obligations, section 273 of the ETA currently allows joint ventures with activities in certain prescribed sectors to elect one of the participants to serve as the "operator" who collects and remits GST/HST on behalf of the venture. The "operator" can also claim, on behalf of the other participants, any input tax credits with respect to the joint venture's expenses (a "JV Election").

Bare trusts and nominee corporations

Pursuant to the CRA's GST/HST Policy Statement P-106, the "operator" of a JV Election must be either:

(a) a person who, under a joint venture agreement evidenced in writing, makes an investment by contributing resources and takes a proportionate share of any revenue or incurs a proportionate share of the losses from the joint venture activities; or

(b) a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture.

When an operator does not contribute resources and could only qualify as a participant because of its managerial or operational control of the joint venture, the CRA requires that the participant exercise the level of management authority necessary to run the daily functioning of the joint venture.

From the tax authorities' perspective, bare trusts and nominee corporations are often mere shell entities that have no authority in a joint venture other than to hold the legal title to property. Thus, these entities cannot be recognized as eligible operators under a JV Election. As a result, there has been a considerable increase in audit activity relating to the use of bare trustees and nominee corporations in the context of JV Elections, as well as voluntary disclosures undertaken in reaction to the CRA's increased enforcement of its position. While the tax authorities recently asserted that, rather than retrospective audits, their focus would now be on ensuring compliance and the need for joint ventures with ineligible operators to undertake future restructuring, the latest announcement marks the twilight of this administrative tolerance. On a go-forward basis, post-2014, the tax authorities will require full adherence to their position that operators must be eligible participants in the joint venture either by way of contributing resources and sharing proportionately in revenue or losses, or by exercising sufficient managerial and operational control.

Steps to take before the December 31, 2014 deadline and for future JV Elections

All joint ventures that have made a JV Election should evaluate whether their elected operators meet the requirements to be considered an "operator" and whether they have sufficient management and control. If necessary, restructuring measures should be established and implemented before December 31, 2014. Joint ventures that elected an operator should also ensure that their current tax obligations are up to date. More generally, given that the 2014 federal budget just announced plans to expand the availability of JV Elections to all commercial joint ventures, those considering taking advantage, in the future, of the expanded availability of the JV Election should ensure that their elected operators have the requisite level of operational and management control.

JV Elections in Quebec

Quebec provincial tax authorities have already confirmed that, in administering JV Elections for GST/HST, as well as for QST purposes, they will follow the approach announced by the CRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.