On November 21, 2023, the Government of Canada released its Fall Economic Statement (“2023 FES”) which includes certain sales and excise tax measures, including draft legislative proposals to implement long-awaited new GST/HST joint venture election rules. The Government first mentioned its intention to update the joint venture election rules in the 2014 Canadian federal budget (“2014 Budget”) and has reiterated that commitment in several subsequent budgets.
As discussed below, the draft legislative proposals indicate that the Government intends to implement a new broad “commercial” joint venture election (the “Commercial JV Election”) in parallel to the existing election covering limited joint venture structures. In other words, once the legislative proposals have been enacted, it would still be possible to elect under the existing rules as long as the legal requirements are still met.
Background
Because a joint venture is not a legal entity and not a person under the Excise Tax Act (“ETA”) for GST/HST purposes, it cannot register and account for tax. In practice, this means that each joint venturer or participant must account separately for its proportionate share of GST/HST that is collectible, payable or refundable through input tax credits in the course of the joint venture activities.
From a GST/HST compliance standpoint, this exercise is cumbersome for all participants. Under the existing rules, section 273 of the ETA provides for an election where participants in certain joint ventures involved in certain specific eligible activities can elect for one participant to be the “operator”. In that case, such “operator” accounts for the GST/HST collectible on taxable supplies made by the operator on behalf of the other participants. The operator also claims any input tax credits in relation to the expenses incurred by the operator on behalf of the other participants in respect of the joint venture activities. The joint venture election essentially allows the joint venture to be viewed as a separate entity for GST/HST reporting purposes.
The goal behind the implementation of the new Commercial JV Election is the same as the one mentioned in the 2014 Budget – to allow more participants in joint ventures access to the simplification benefits. Draft legislative proposals (the “Draft Proposals”) have been released by the Department of Finance, pursuant to which the ETA will be amended by adding a new section 273.01 after section 273 (i.e., the section providing the existing joint venture election rules). In other words, the proposed Commercial JV Election rules should be available in parallel to the existing joint venture election in section 273 ETA.
Comments on the Draft proposals are being accepted until March 15, 2024.
Proposed New Commercial JV Election Rules
The proposed new Commercial JV Election rules are outlined as follows:
- Expanding Eligibility Criteria
Contrary to the existing joint venture election rules where joint venture activities are limited to eligible activities set out in the legislation or regulations, pursuant to the new “qualifying joint venture” definition in the Draft Proposals, the Commercial JV Election will be available where all or substantially all of the joint venture activities described in the joint venture agreement are commercial activities for GST/HST purposes.
- Mandatory GST/HST Registration
Under the existing regime, participants do not have to be a GST/HST registrant to make the election. On the other hand, all participants making a Commercial JV Election would be required to be registered for GST/HST purposes pursuant to the proposed rules. This is based on the new definitions of “qualifying participant” and “specified person” included in the Draft Proposals.
- Qualifying Participant
In the Draft Proposals, the definition of “qualifying participant” in a joint venture provides that such participant must contribute resources (other than nominal resources) for consumption, use or supply in the course of the joint venture activities so as to obtain (a) an interest (other than a nominal interest) in the property that is the subject matter of the joint venture, and (b) a right of mutual control or management of the joint venture.
- Qualifying Operator
The Draft Proposals essentially write into law the current CRA's administrative interpretation applicable to a person eligible to become the operator for the purpose of the existing joint venture election rules. Accordingly, in the context of the Commercial JV Election, the proposed definition of “qualifying operator” means, notably, either (a) a “qualifying participant” in the joint venture; or (b) a person designated as the operator of the joint venture under the joint venture agreement and has the primary responsibility for the operational control over the carrying on of the day-to-day operations of the joint venture. Accordingly, a third party manager responsible for the managerial or operational control of the joint venture should qualify as a “qualifying operator” while nominee corporations or bare trustees used to hold title to the real property that is the subject matter of the joint venture would not.
- Making or Revoking the Election
Under the proposed rules, only one “qualifying operator” and any “qualifying participant” in a “qualifying joint venture” could make or revoke the Commercial JV Election and only one person could qualify as the “qualifying operator” of a “qualifying joint venture at any given time.
- Filing Obligations
Under the proposed rules, the details of the Commercial JV Election, including the effective date, would have to be filed in prescribed manner with the CRA. This is a departure from the rules applicable under the existing joint venture election as the operator and the participants must simply keep the election form, or copies, on file.
- Effects of the Election
Under the Draft Proposals, the following effects would generally apply during the period a Commercial JV Election is in effect between a qualifying operator (“operator”) and a qualifying participant (“participant”):
a. Supplies Made on Behalf of the Participant
All tax collectible or collected by the operator in respect of a supply made on behalf of the participant in the course of the joint venture activities would be deemed to be collectible, charged or collected by the operator and not by the participant. This would have an impact on the following rules, notably: (a) determination of the net tax of the operator and participant, (b) section 222 of the ETA (i.e., deemed trust for amounts collected), (c) adjustments under the bad debt rules in section 231 ETA, (d) credit note rules in section 232 of the ETA; and (e) the filing frequency rules in section 249 of the ETA.
b. Tax Payable to the Receiver General
If a participant has to self-assess GST/HST on certain real property or emission allowances (subsection 228(4) of the ETA), of if Division IV or Division IV.1 tax is payable by the participant, in relation to property or services acquired by the operator on behalf the participant, if the property or service is to be consumed, used or supplied exclusively in the course of joint venture activities, then the operator (and not the participant) is required to remit such tax to the Receiver General for Canada. It is unclear whether such proposed rule would extent to the initial acquisition of real property by joint venturers.
c. Input Tax Credits
Where the operator acquires property or a service on behalf of the participant for consumption, use or supply all or substantially all in the course of the joint venture activities, and GST/HST becomes payable by the participant or is paid by the participant without having become payable at a time when the election is in effect, the participant is not entitled to claim the input tax credit. On the other hand, the operator can deduct an amount equal to the input tax credit in determining its net tax. This input tax credit claim is considered as if the participant claimed the input tax credit in the last reporting period before that time. Moreover, if a credit note is subsequently received (or a debit note is issued), the operator will have to make the required additions to net tax as prescribed under the ETA.
d. Tax Adjustments
Various tax adjustment measures are taken into account under the proposed rules with a default shift towards participants, rather than the operator, accounting for these adjustments. Participants would account for GST/HST regarding tax adjustments related to taxable benefits (section 173 ETA), allowances and reimbursements (sections 174 and 175 ETA), capital property change-in-use rules (Subdivision D of Division II ETA), and input tax credit repayment rules (sections 235 and 236 ETA). On the other hand, the operator would still have to account for certain tax adjustments, including credit and debit note rules (section 232 ETA), bad debt rules (section 231 ETA), drop-shipment rules, and forfeiture and extinguished debt rules (section 182 ETA).
Proposed rules regarding these tax adjustment measures will be revisited following public consultations.
e. Supplies by the Operator to the Participant
As it is generally the case under the existing joint venture election rules, the proposed Commercial JV Election rules also provide that where the operator supplies property or services to the participant (other than a supply by way of sale of real property), and the property or service is acquired for consumption, use or supply by the participant all or substantially all in the course of both the joint venture activities and the participant’s commercial activities, the supply will be deemed to be made for no consideration.
f. Joint and Several or Solidary Liability
The operator and the participant making the election would be jointly and severally, or solidarily, liable for all GST/HST obligations arising from activities carried on under the agreement. This proposed rule slightly expand the liability of the persons making the Commercial JV Election in comparison to the rule applicable for the existing joint venture election as, in the latter case, such liability is limited to obligations that result from the activities for which the agreement was entered into and that are engaged in by the operator on behalf of the other participant.
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