GST/HST POLICY STATEMENT

Transcription

1 GST/HST POLICY STATEMENT P-171R DISTINGUISHING BETWEEN A JOINT VENTURE AND A PARTNERSHIP FOR THE PURPOSES OF THE SECTION 273 JOINT VENTURE ELECTION Date of Issue February 21, 1995 Revised February 24, 1999 Subjet Distinguishing between a joint venture and a partnership for the purposes of the section 273 joint venture election. Legisllative Reference(s) Subsection 123(1) and section 273 of the Excise Tax Act.(the ETA) National Coding System File Number(s) and Effective Date January 1, 1991 for the GST April 1, 1997 for the HST Text Issue and Decisions: Only "persons" are permitted to register for the GST/HST under section 240 of the Excise Tax Act. According to subsection 123(1), a partnership is a "person" for GST/HST purposes whereas a joint venture is not, unless it takes the form of a corporation, a partnership or a trust. Provided all of the other conditions for GST/HST registration have been met, (1) a partnership may register for the GST/HST in respect of partnership activities (refer to Policy Number P-216 for information concerning the eligibility of some corporate partners to register for the GST/HST in respect of partnership activities), and (2) the participants in a joint venture may register for the GST/HST in respect of joint venture activities, but the joint venture may not. Under the general GST/HST each participant in a joint venture (which is not a partnership, corporation or trust) must account separately for the GST/HST payable on its purchases and collectible on its supplies, whether they are made directly by the participant or through the joint venture operator acting as its agent. To simplify the administration of the GST/HST for joint ventures, section 273 of the Excise Tax Act permits the operator of a qualifying joint venture (other than a partnership) and any other participant in the joint venture, to elect to designate the operator as the person responsible for accounting for the GST/HST on all properties and services supplied, acquired, imported or brought into a participating province for or on behalf of the joint venture participants.

2 To determine whether registration is permitted for the contractual entity or whether the parties to the contract can make a joint venture election, it is necessary to distinguish a joint venture arrangement from a partnership arrangement. Making this distinction can be difficult for the following reasons: (1) The Excise Tax Act does not define either "partnership" or "joint venture". Therefore, the rules of statutory interpretation require that the common meaning of "partnership" and "joint venture" apply. However, since confusion exists as to the precise legal nature of a joint venture, there is no common definition of "joint venture". (2) The organization of partnerships and joint ventures is frequently similar, and they have some common characteristics. For example, where a joint venture is organized so that one participant handles the day-to-day activities it may be mistaken for a limited partnership in which a general partner with unlimited liability carries on the day-to-day management of the partnership for one or more limited partners, whose liability is limited to the amount of their investment in the partnership. (3) The common law did not always recognize the existence of joint ventures and, until recently, frequently characterized joint ventures as partnerships. Although early decisions have hampered the development of independent principles for joint ventures making it hard to distinguish between the two arrangements, there is now some evidence that Canadian courts recognize the existence of joint ventures and view joint ventures as relationships other than partnerships. (4) The Civil Code of Lower Canada and the Civil Code of Québec do not, and never have, recognized the existence of joint ventures ("coentreprise") as such. The courts have, however, recognized the possibility of joint ventures existing in the province of Québec in very restricted circumstances. To determine whether a particular relationship is a joint venture or a partnership, the circumstances of the relationship should be reviewed to ascertain whether it is either: (1) an arrangement in which two or more persons work together in a limited and defined business undertaking, which does not constitute a partnership, a trust or a corporation, the expenses and revenues of which will be distributed in mutually agreed portions (i.e. the Department's administrative definition of "joint venture"); or (2) a relationship that subsists between persons carrying on business in common with a view to a profit (the Department's administrative definition of "partnership"). Where, based on the circumstances of the case, neither definition applies and the arrangement is neither a partnership nor a joint venture the case should be further researched to determine the nature of the relationship. Where the arrangement satisfies both definitions, the relevant provincial Partnership Act or the Civil Code of Québec, whichever is applicable, should be consulted for guidance on whether the arrangement constitutes a partnership. Where the arrangement is definitely a partnership under the relevant provincial Partnership Act or the Civil Code of Québec, the Department will view the Act as persuasive. The relevant provincial Partnership Act or the Civil Code of Québec may not, in itself, resolve the question of whether the arrangement is a joint venture or a partnership by itself. In such cases it should be applied together with the following guidelines. Note that these guidelines may be used to help determine the existence of either a partnership or a joint venture arrangement, but they are not individually decisive and have no legal force. Also, they should be applied and weighed on a case-by-case basis having regard for the substance of the relationship (e.g. the fact an agreement says that the parties to the agreement have not formed a joint venture/partnership does not preclude the existence of a joint venture/partnership,the fact that the parties are referred to as partners does not mean a partnership exists). GUIDELINES UNDER THE COMMON LAW

3 i. TWO OR MORE PARTIES Partnerships and joint venture both comprise two or more parties. ii. INTENTION OF THE PARTIES The intention of the parties is an important factor in determining whether an arrangement constitutes a joint venture or a partnership. The intention of the parties is often apparent in their conduct, the nature of the undertaking and the other circumstances of the arrangement. A written joint venture agreement, if any, may provide evidence of the intention of the parties. However, the existence of such an agreement is not, by itself, sufficient proof that a joint venture exists (even if it states clearly that a joint venture exists), that the parties do not intend to create a partnership, or that the parties intend to create a joint venture. If there is no written agreement, then any other evidence used to establish the existence of the joint venture should be reasonably clear and unequivocal. Note that a joint venture election may not be made unless the agreement is evidenced in writing. Note also that, when a partnership is formed, the partners normally intend to treat any property as partnership property, and each partner ordinarily acts as the agent of all the other partners. iii. LIMITATION TO A SINGLE UNDERTAKING OR AD HOC UNDERTAKING Unlike partners in a partnership, participants in a joint venture do not normally intend to participate in a "business in common" with the other participants. A joint venture is almost invariably confined to a particular defined business undertaking, which may be of short or long duration, and/or has a specific termination date and allows the participants to carry on their own business outside the joint venture. For example, a joint venture may be formed to construct a building and sell it, to construct a building and lease space in it (e.g. the joint venture is limited by the life of the building), or to purchase a building and lease space in it for a limited time. In addition, the activities of the joint venture do not normally require the continuous attention of every participant (e.g. not all participants are involved in the daily operation of the joint venture). A partnership, on the other hand, is ordinarily engaged in one or more ongoing businesses which involve an indefinite number of distinct undertakings such as an ongoing real estate development business which involves an indefinite number of real estate developments. Occasionally, however, a partnership may involve just one undertaking. Further, each partner may be involved in other businesses apart from the partnership. Since joint ventures are ordinarily limited to a single undertaking and therefore exist for a definite time or purpose, unlike a partnership, the death of a participant will not normally terminate the joint venture, unlike a partnership, unless the joint venture contract is a personal service contract. iv. A RIGHT OF MUTUAL CONTROL OR MANAGEMENT A joint venture is not an entity separate from its participants. Therefore, while one participant may carry out the day-to-day activities of the joint venture on behalf of, and at the direction of, the other joint venture participants, there is usually no delegation of ultimate authority or abandonment of final control over the joint venture operations by one participant to another. Instead, essential strategic and functional decisions(e.g. major decisions such as disposition of joint venture capital property, acquisition of new capital property, large expenditures, etc.) normally require the consent of all the participants and they cannot usually be made by one participant acting as agent for another. Where the consent of all the participants is not required to make a decision, the agreement between the

4 participants should at least require the consent of the majority of the participants (where the majority is not based on the interests of the participants in the joint venture). Therefore, no single participant or group of participants exercises unilateral control. The participants in a joint venture can set up a joint management board/committee to control and manage the joint venture's activities. Where this occurs, any important decisions to be made by the board/committee should be subject to a unanimous vote of the board/committee or should, at least, require approval by a majority of the board/committee members. The board/committee should include a representative of each participant and is not normally structured so that control is completely delegated to one or more of the joint venture participants. In practical, if not legal, terms, a partnership is an entity separate from its partners. Mutual control/management is not a requirement for forming a partnership. In fact, sometimes only particular partners are entitled to manage a partnership. In addition, only a general partner, or a group of general partners, can exercise unilateral control since a general partner is usually the agent of all the other partners for partnership matters. Typically each general partner is authorized to transact business and sign for and bind the partnership, without the consent of the other partners. Note that some courts have found that a partnership will not exist where a firm name, joint bank account and a division of profits are absent. Under the common law, a firm name and a joint bank account may indicate the existence of a partnership but they are not sufficient evidence that a partnership exists. v. CONTRIBUTION BY EACH PARTICIPANT Participants in a joint venture are required to contribute resources (such as money, property, knowledge, skills, experience or time), for use in the performance of the joint venture's activities. They are also entitled to receive a specific allocation of revenues or output from those activities. Since joint venture arrangements normally include a well-defined separation of interest in, and ownership of, property, joint venture participants generally retain title to any property they contribute to be used in performing the activities, unless some or all of the property is sold to the other participants. For example, a participant may contribute a drilling rig for use in the activities of the joint venture without relinquishing its interest in the rig to the other participants. Partners in a partnership may also contribute resources (such as money, property, knowledge, skills, experience or time) for use in the performance of partnership activities, however they are not required to do. They are also entitled to a share of the profits. vi. JOINT OWNERSHIP IN THE VENTURE SUBJECT MATTER The production or profits from the joint venture, prior to any allocation to the participants, belong to the participants. The participants, therefore, develop an interest in the joint venture's production during the term of the agreement, and the agreement should confer on each participant an interest in the production equal to the participant's specified interest. The participant's specified interest could be x% of every product produced or 100% of one product and 0% of the other products. This factor frequently indicates that the parties to an agreement intended to form a joint venture, as the production of a partnership is generally owned by the partnership, not the partners, until the profits are allocated to the partners or the partnership is dissolved.

5 vii. FREEDOM TO DISPOSE OF INTEREST IN THE PROPERTY Both joint venture participants and partners may have one of several types of interest in the underlying assets, including joint tenancy, tenancy in common, joint property, common property or part ownership in the underlying assets. Partners generally have indirect interests in the partnership assets (.i.e. upon dissolution of the partnership the partnership assets may be distributed in specie). Even where a partner is recorded on title for a specific asset, the partnership usually has the beneficial interest in the asset and the partner is only entitled to a share of the net proceeds when the partnership is wound up. Therefore, a partner can deal with its interest in the partnership but not the underlying partnership assets. Partnership interests are not normally transferable without the consent of the other partners. Unlike partners, joint venture participants: 1. have a well-defined separation of interests in, and ownership of, the property subject to the joint venture; 2. retain title to any property they contribute to be used in the venture, unless an interest in the property is supplied to one or all of the other participants; so they have unfettered control of the property which they contribute to the joint venture; 3. would usually, but not necessarily, be able to sell their interest in the joint venture without obtaining the consent of the other joint venture participants to do so (subject to possible rights of first refusal of other joint venturers); and 4. do not necessarily have a joint undivided interest in all the property (e.g. one participant may own one asset while another participant owns another asset or contributes expertise). viii. EXPECTATION OF BENEFITS OR THE PRESENCE OF AN "ADVENTURE" Since definitions of "partnership" generally indicate that the partners must be "carrying on a business", partnerships are generally expected to produce a profit. A joint venture, however, is not required to "carry on a business". It may, for example, be involved in an adventure or concern in the nature of trade. Nevertheless, the courts have generally looked for an "expectation of profit" (a benefit) or "presence of adventure" as an important feature of a joint venture. The benefit the joint venture participants expect to realize may be either tangible (e.g. oil or gas or a building) or may be intangible (e.g. seismic data or a patent for an invention). ix. A RIGHT TO PARTICIPATE IN THE BENEFITS The sharing of the profits of a business is prima facie evidence that a partnership exists, however, case law dealing with the application of the provincial Partnership Acts recognizes that there may be a sharing of profits in a joint venture as well. Nevertheless, the gross revenues (or production) and expenses of a joint venture are typically allocated to the participants based on their respective interests in the joint venture, and each participant then calculates its net profit or loss. Where, parties to an arrangement share in losses as well as profits, (i.e. where net profits or losses are calculated before a shore of the profits or losses is allocated to each party, instead of separately allocating revenues and expenses without the calculation of net profit or loss), a partnership probably exists. Therefore, where a project is financed by investors the investors have no other involvement in the project and do not share in its revenues or expenses, the project would be considered a joint venture. Similarly, where a landlord leases space in a building to a tenant, the monthly lease payment is calculated as a percentage of the profits earned by the tenant in the course of its business, and the

6 landlord has no other involvement in the tenant's business, the landlord and the tenant would not be considered to be a joint venture. In one case, the court decided that a joint venture could exist even where there is no mutual sharing of profits, provided that the parties to the agreement had a financial interest at stake and there is an assumption of risk in the overall success or failure of the endeavour. x. LIMITATION OF LIABILITIES Partners in a partnership are general agents of the other partners and are ordinarily jointly and severally liable for the expenses of the partnership, although, in the case of a limited partnership, limited partners are only liable to a limited extent. Joint venture participants are usually liable for their respective portions of the joint venture's expenses (e.g. 25% of the expenses, regardless of the amount). A joint venture participant cannot usually enter into contracts which binds the other participants without first obtaining their consent. It may, however, act as agent for other participants within the limited scope of the joint venture agreement. A joint venture cannot normally contract in its own right; only the participants may do so. Therefore, the joint venture, unlike a partnership, cannot incur obligations on its own account. xi. INCOME TAX TREATMENT The income tax treatment for joint ventures differs from that of partnerships. Therefore, to determine whether an arrangement is a joint venture or partnership, it may be useful to consider the income tax treatment of the arrangement. Joint ventures and partnerships are not "persons" under the Income Tax Act. Therefore, they are not regarded as entities distinct from their participants or partners. Nevertheless, for income tax purposes the income of a partnership is calculated as if the partnership were a distinct entity, even though the income is taxed in the hands of the partners after it is allocated to them. Therefore, a partnership deducts expenses, capital cost allowance, etc. from its income before the respective shares of the net income or loss is flowed through to each partner. On the other hand, the income, expenses, and capital receipts and outlays of a joint venture are allocated to the participant in the joint venture who then compute their net income based on their own particular tax position. Partnerships establish a fiscal period for the partnership for income tax purposes. Where participants in a joint venture have different taxation year ends, the joint venture may be allowed to establish its own fiscal period for income tax purposes provided all the participants agree even where the participants all have the same taxation year end, the joint venture may nevertheless be allowed to establish a different fiscal period for income tax purposes if there is a valid business reason for doing so. Where a joint venture has been allowed to establish its own fiscal year end for income tax purposes, each participant in the joint venture would include in its income for a given taxation year its share of joint venture income for the fiscal period of the joint venture ending in or coincident with its taxation year. Another difference in the treatment of partnerships and joint ventures for income tax purposes arises where a partnership or joint venture is dissolved. The dissolution of a partnership usually results in a disposition of property whereas, the dissolution of a joint venture only results in a disposition of property if it involves a change in ownership of the property used in the joint venture.

7 A partnership interest is normally regarded as capital property for income tax purposes. As a result, the sale of a partnership interest usually results in a capital gain or loss. A joint venture interest, however, is not recognized as capital property, and the sale of such an interest is taxed as though an interest in each of the assets in the venture were sold. Where the Department has ruled that a particular arrangement is either a partnership or a joint venture for income tax purposes, the Department will generally adhere to the ruling for GST/HST purposes as well. xii. FORMAT OF AGREEMENT Both partnerships and joint ventures have a contractual basis, however, the format of a typical written partnership agreement differs from the format of a typical written joint venture agreement. A typical written partnership agreement may include some or all of the following components: 1. Name, address and purpose of firm 2. Name and address of each partner 3. Amount of each partner's investment 4. Manner in which profits/losses are to be shared 5. Partner's privileges for drawing on accounts, if any 6. Duties of each partner 7. Limits to a partner's right to individual action 8. Life of the partnership -e.g. what activities will terminate the agreement 9. Settlement procedure with respect to retired, deceased or expelled partner's share 10. Dispute settlement mechanism between partners 11. Manner for dissolving partnership - e.g. each of the partners may have the right to terminate the partnership A typical written joint venture agreement may include some or all of the following components: 1. Organization and structure of the joint venture 2. Financing of the joint venture 3. Management and control of the joint venture/voting procedures 4. Employees of the joint venture 5. Marketing of the joint venture product 6. Restrictions on activities of joint venture participants 7. Default by joint venture participants 8. Proprietary rights 9. Liability and indemnity

8 10. Term and termination of joint venture 11. Miscellaneous considerations 12. Documentation CIVIL LAW GUIDELINES The joint venture relationship is not recognized in Québec civil law by either the Civil Code of Lower Canada or the Civil Code of Québec. Nevertheless, Québec civil law does not prohibit the formation of a joint venture. Therefore, where an arrangement in Québec is, according to the Common Law Guidelines outlined above a joint venture and not a partnership, it will generally be regarded as a joint venture for GST/HST purposes. The courts in Québec have held that an arrangement that satisfies the Common Law Guidelines will nevertheless be regarded as a partnership under Québec civil law where: (a) the agreement is oral; (b) the written agreement does not contain a clause which indicates that the contractual relationship is not governed by the rules concerning partnerships ("société de personnes") in the Civil Code; (c) there is a delegation of ultimate authority or abandonment of final control over the joint venture operations by a participant to another participant and a single participant or group of participants exercises unilateral control; or (d) the contractual organization is autonomous; that is: (1) the organization has a separate name which is registered under the Civil Code; (2) the organization has its own funds, bank account, management committee or accounting system; (3) the organization has an estate and can purchase and dispose of property; or (5) the participants do not individually or jointly carry out the transactions necessary to realize the joint venture's objectives. Statement of Facts SAMPLE RULING A and B entered into an agreement for the purpose of constructing a building. Pursuant to the terms of the agreement, they have not formed a partnership and A is required to contribute the land while B will contribute his services as the general contractor. Upon completion of the building, A will receive 60% of the revenue from the sale or lease of the building and B will receive 40%.

9 B has been designated as the manager (operator) of the undertaking and will manage the day-to-day operations of the undertaking. All decisions concerning the undertaking, however, require the unanimous consent of both parties. Interpretation Given Based on the information provided, A and B appear to have formed a joint venture, which is not a partnership. They can, therefore, make an election pursuant to section 273, provided the other conditions specified in section 273 are satisfied.