It is quite common for joint ventures holding commercial real estate to appoint a bare trustee or nominee corporation to hold title to the property (often the nominee corporation is the trustee of the bare trust). The co-venturers and the nominee corporation often enter into a GST/HST joint venture election, to allow the nominee corporation to collect and remit GST/HST (e.g., on lease payments) on behalf of the joint venture. The Canada Revenue Agency (CRA) has indicated that it will not permit co-venturers to make the GST/HST election with a bare trust or nominee corporation going forward. Rather, the election must be made with an entity that has “managerial or operational control” of the joint venture, with authority to manage the joint venture’s daily activities without requiring the input or approval of the other participants. This restrictive policy may ultimately require many joint ventures to reorganize their structure.
A joint venture is not a “person” for GST/HST purposes, so without an election, each co-venturer would be required to report and remit GST/HST to the extent of its co-ownership interest. The joint venture election under section 273 of the Excise Tax Act allows a joint venture to act, for GST/HST purposes, like a partnership, with a single entity (the “operator”) filing GST/HST returns on behalf of the joint venture. The operator must be a “participant in a joint venture.”
In GST/HST Policy Statement P-106 – Administrative Definition of a “Participant” in a Joint Venture (Policy P-106), issued on November 7, 1993, the CRA defined a “participant” to mean 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.”
In the past, the CRA has taken the position that a bare trustee or nominee corporation did not qualify under either of the categories of “participant,” since by definition they do not contribute resources or receive a share in the revenue/losses of the joint venture, and they do not have independent “managerial or operational control” of the joint venture. In fact, the CRA has actively de-registered bare trustees and nominee corporations for GST/HST purposes on audit, on the basis that they have no independent commercial activity and are not eligible to register. The joint venture elections were thus retroactively invalidated.
In GST/HST Notice No. 284 – Bare Trusts, Nominee Corporations and Joint Ventures, released on February 6, 2014, the CRA announced that auditors have been advised not to assess for any GST/HST owing where an assessment could be raised because the bare trust or nominee corporation is not a “participant” for purposes of the joint venture election. This administrative tolerance is contingent upon confirmation that all returns have been filed, all amounts have been remitted and the joint venture participants are otherwise fully compliant. However, this administrative tolerance is in place with the understanding that the joint venture will arrange its affairs to ensure that a “participant”, as defined in Policy P-106, is the operator of the joint venture. The administrative tolerance is only available for GST/HST reporting periods ending before January 1, 2015.
In the meantime, joint ventures that have appointed a bare trust or nominee corporation as an “operator” have time to review their structures to become compliant with the CRA policy. The CRA expects an operator to have authority to engage personnel or contractors on behalf of the joint venture in order to manage the joint venture’s day-to-day activities. If the bare trust or nominee corporation has no independent powers, discretion or responsibilities, and its primary responsibility is to hold title to the property for the benefit of the other participants and carry out limited functions solely at the direction of the participants, there is a significant risk that the CRA will not permit it to qualify as an “operator.” This could lead to an assessment of GST/HST, interest and penalty against the co-owners who have failed to collect and remit GST/HST to the extent of their individual ownership interests.
The CRA does acknowledge, however, that the terms “nominee corporation” and “bare trust” may be used somewhat loosely by businesses, and so-called nominee corporations/bare trusts may in fact have the managerial or operational control of a joint venture. As a result, the CRA will consider the powers of a nominee corporation or bare trust on a case-by-case basis. Co-owners of joint venture property should review their joint venture agreements to ensure that the operator of the joint venture for GST/HST purposes is endowed with sufficiently independent powers, discretion and responsibility to fit within the CRA’s definition of a “participant” for purposes of making the election. Alternatively, co-venturers may want to consider establishing a new entity with managerial powers, similar to the managing partner of a partnership, to act as the “operator” going forward.