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Joint Ventures – Part I: The Business Arrangement and GST / HST

01/11/2013


Joint ventures are under increasing scrutiny by the Canada Revenue Agency (CRA) these days. That’s because a joint venture represents a business arrangement, not an actual ‘legal person’, which blurs the regulatory lines between operating like a person yet not being one.

When joint ventures are large and complex, the participants quickly realize their GST / HST accounting is best processed through a single participant (the operator) to simplify things. In practice, I’ve seen many circumstances where GST / HST accounting is not given proper consideration, resulting in many unnecessary assessments.

Current and future joint venture structures must be considered carefully to limit GST / HST exposures. The main focus by CRA in reviewing joint ventures is determining if the operator is in fact an operator. Given the complexities of joint ventures, I will be looking at this situation in a two-part series. In Part I, we will outline how the joint venture and GST / HST work together. In Part II, we will discuss using different structures as an operator.

What is a joint venture?

A joint venture is a business agreement between multiple people (i.e. joint venture participants or co-venturers). These participants come together for a finite –as opposed to an infinite – time for the purpose of a specific economic activity. It is not a partnership, although there is a very fine line between the two. This is a legal concept that consists of legal persons operating as entity (as opposed to being a single, legal person) in the GST / HST world.

Electing an operator in a joint venture

In a typical joint venture arrangement, the accounting for the GST / HST is cumbersome. The more participants there are, the more difficult it is to issue and obtain proper GST / HST documentation and distribute everyone’s pro rata share of the tax. In addition, not all participants may be registered, bringing even more challenges.

The solution appears to lie in electing a single operator to account for all of the GST / HST for the joint venture. This relieves the participants from having to account for their pro rata share of the net GST / HST. However, it does not relieve each participant in the joint venture of the tax on liability associated with each transaction. This means, you must ensure the elected operator is aware of this and does what they agreed to do without unknowingly creating a liability exposure for all members of the joint venture.

Not every activity undertaken by a joint venture can use the election method, so you should determine if the particular activity is prescribed in the GST legislation before your joint venture election is put in place. Where the activity is not prescribed, the joint venture election is not valid. An incorrect use of the election unwinds the GST / HST accounting.

In mounting an election, there are specific criteria that must be satisfied in who can be legally considered an operator:

  • The joint venture is not a partnership or a corporation.
  • The operator must be a registrant under the Excise Tax Act;
  • The operator usually needs to be a participant in the joint venture under the joint venture agreement, but in some circumstances the CRA may allow a non-participant to be the operator;
  • The joint venture must be evidenced in writing;
  • The joint venture must be for a prescribed activity;
  • The joint venture election can become effective at any time once the written agreement is in place; and
  • The joint venture election must be evidenced in prescribed form and identify each party to the joint venture election.

Without even looking at who the operator is, you can see that the use of a joint venture structure and an operator election should not be taken lightly. Many times the GST / HST is not accounted for properly because the election has not been completed or updated, some participants have not been included or some participants are not registered, among other considerations. The documentation on the transactions may not be accurate, resulting in unnecessary exposures.

From the list of criteria above, you will have noted the operator must be a registrant and is generally required to be a participant in the joint venture before it can be eligible to be an operator. The CRA is focused on this aspect in many of their audit reviews.

What to do now?

If you are considering a joint venture, be sure to review your joint venture agreements carefully and ensure the arrangement is well-documented to determine who has agreed to do what for whom. If the joint venture is already in operation, review the agreements and the activity to determine if an exposure has inadvertently been created, then determine how it can be corrected.

Need help?

The GST / HST audit activity is aggressive in most sectors these days. There seems to be a strong focus on businesses that once had a low risk factor of being audited by the CRA.

MNP has an experienced group of Indirect Tax Specialists to assist you with your questions and concerns. Should you require assistance, please contact a local member of our Indirect Tax Team for assistance.

Stay tuned for my next post on this subject: Part II – Who can be an Operator in a Joint Venture?