GST/HST Joint-Venture Elections and Nominee Corporations

Written By John (Jay) A. Winters and Douglas Chen

Joint-ventures (JVs) with nominee corporations or bare trustees that have been elected to account for the GST/HST of the JV should be aware of the period of CRA administrative tolerance expiring on January 1, 2015. This situation is often seen in the context of JVs for the development of real property.

Generally, a person involved in commercial activity will be required to register for GST/HST (i.e., become a registrant), and accordingly will collect GST/HST on its sales and claim input tax credits (ITCs) for GST/HST paid on its expenditures. However, for GST/HST purposes, a JV is not a "person" and cannot itself become a registrant. This means each co-venturer is responsible for becoming a registrant and accounting for its own portion of the GST/HST collected by the JV and for claiming its own portion of ITCs incurred by the JV. This can lead to administrative nightmares for JVs.

Fortunately, section 273 of the Excise Tax Act allows many JVs to elect for a "participant" in the JV to be the "operator". The operator is then allowed to account for all of the GST/HST collected, and to claim all of the ITCs incurred by the JV (essentially allowing the JV to be considered its own separate entity for GST/HST reporting purposes).

However, a "participant" is not defined in the Act. Under the CRA's administrative interpretation, a "participant" in a JV (i.e., a person eligible to become the operator) is a person that (a) has a financial interest in the JV (i.e., one of the co-venturers), or (b) is responsible for the managerial or operational control of the JV.

Often, the co-venturers of a JV for the development of real property will use a nominee corporation or a bare trustee to hold title to the real property to be developed. Generally, the bare trustee will have legal ownership of the real property, but has no other duties, obligations or responsibilities other than to transfer, under the absolute control and instructions of the co-venturers, title to the real property. In many cases, the co-venturers desire to elect the bare trustee as the operator for GST/HST purposes.

The problem with electing the Bare Trustee as the "operator" is that it does not have a financial interest in the JV and has no responsibilities or discretion of its own. Accordingly, the CRA does not consider a Bare Trustee to fit within its administrative definition of "participant" and therefore ineligible to be designated as an "operator".

In the past, the CRA has tolerated the election of bare trustees as an operator. However, this is about to change. The CRA has provided notice that their period of administrative tolerance will expire January 1, 2015. Therefore, to avoid costly disputes with the CRA, JVs should consider ensuring that their operators fit within CRA's administrative definition of "participant".

Please contact us if you have any questions respecting any bare trust or nominee corporation operators, and we would be pleased to assist you.

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