Are you a participant in a joint venture that is using a bare trust or nominee corporation to report its GST/HST? If so, you must act before the joint venture’s first 2015 GST/HST return becomes due. In 2014, the Canada Revenue Agency (“CRA”) issued GST/HST Notice No. 284 which included an important policy change that will now no longer allow bare trustees or nominee corporations to account for GST/HST collection and related input tax credit claims on the joint venture’s behalf. As a result of this policy change, participants in joint ventures should give careful consideration to whether their structure remains compliant with the CRA policy. Should a change in the operator be required, participants must give careful consideration to restructuring their arrangements as any change may have legal consequences beyond GST/HST considerations.
It is common practice in joint venture arrangements, especially those in the real estate development sector, for a bare trustee or nominee corporation (the “Nominee”) to hold legal title to assets, but have no other duties, obligations or responsibilities, other than to transfer title to the assets on the instructions of the beneficial owners (i.e. the joint venture participants).
Often the participants of a joint venture make an election to have the Nominee become the GST/HST “operator” of the joint venture. The Nominee would then become responsible for collecting and remitting GST/HST and claiming any input tax credits on behalf of the joint venture participants. This election1 avoids the need for each participant having to register and separately account for its share of the joint venture’s GST/HST obligations.
Previously, the CRA had generally provided administrative tolerance to the election of a Nominee as an operator. However, beginning on January 1, 2015, the CRA has announced that it will no longer allow such arrangements unless the Nominee meets the requirements of being a “participant” in the joint venture.
The CRA considers a “participant” as a person who: (a) has a financial interest in the joint venture activities, or (b) is responsible for the “managerial or operational control” of the joint venture. Although, the CRA interpretation of “managerial or operational control” does not necessarily require an authority to initiate significant business decisions, the person must possess the authority to manage the daily activities of the joint venture without requiring the approval of the joint venture participants.
Possible Solutions for Existing Joint Ventures
The impact of the CRA’s announcement is significant and participants in joint ventures should consider whether their elected operator is compliant with the CRA’s requirements and, if necessary, undertake restructuring measures. A possible solution for existing joint ventures where the Nominee has been elected operator may be to amend the arrangement between the Nominee and the beneficial owners to provide the Nominee with some degree of managerial or operational control over property management or property development.
Alternatively, the Nominee may make a nominal contribution into the joint venture and the arrangement is amended to provide for the Nominee to take a proportionate share of any revenue or incur a proportionate share of the losses from the joint venture activities.
It may also be possible to have one of the beneficial owners (i.e. a joint venture participant) elected as the “operator” responsible for GST/HST compliance for all of the beneficial owners in the joint venture.
Joint venture participants may wish to consider the use of a special purpose corporation to act as the operator of the joint venture. Through properly drafted agreements, that corporation would have sufficient authority with respect to the operations of the joint venture to permit the use of the joint venture election while ensuring that the venture participants maintain control of the operations of the venture. Further, the new special purpose corporation could hold a very small interest in the venture, further supporting the availability of the election.
Give Careful Consideration in Restructuring
Joint venturers who have restructured or are considering doing so in order to be compliant with the CRA policy should carefully consider the potential legal and tax consequences that may arise. Notably, if a Nominee operator is given managerial or operation control or contributes to the joint venture, it may become liable to assessments and obligations under the Income Tax Act. Further, such a change may trigger income tax consequences for all of the joint venture participants.