Joint Ventures and the Use of a Bare Trustee/Nominee and HST
Builders, developers and investors have been utilizing base trustees/nominees for years to hold title on behalf of the co-owners/co-tenants (“Co-tenancy” or “Joint Venture”) of the property. Ideally the participants want the bare trustee to do all HST filing with none of the participants of the Joint Venture having to file. Under certain conditions an election
has been available under S. 273 of the Excise Tax Act (Canada) (the “Act”) to permit the participants of the joint venture to elect to have an “operator” (who must be a “participant” in the joint venture) to be responsible for filing and accounting for the HST on behalf of the electing members of the Joint Venture.
If the election has not been made then all participants of the joint venture have to report such participant’s portion of the HST collected and claim their share of the input tax credit for the joint venture. The election is obviously more beneficial as it reduces the administrative work and puts the joint venture in the same position as a partnership for HST filing purposes.
In order for the participants of a joint venture/co-tenancy to be eligible to make the joint venture election all of the following must be satisfied:
• The co-ownership/joint venture must not be a partnership;
• A written joint venture/co-ownership agreement;
• The joint venture must be engaged in an eligible “prescribed activity” – in the real estate industry this would include real estate development and the rental of commercial real estate;
• The operator must be a “participant”;
• The operator is an HST registrant.
Bare Trustee/Nominee Corporation
Normally owners of real estate want title to be registered in the name of a nominee corporation, which is a corporation having no assets save for the registrations of the property in question. The trustee/nominee will hold title for all of the co-owners/joint venturers in proportion to their proportionate share of the project. All contracts including development, construction, leases, etc. would be in the name of the base trustee/nominee.
The base trustee/nominee would be designated as the “operator” for purposes of making the joint venture election and be responsible for all HST filings on behalf of the other participants. In this case, the base trustee/nominee must be one of the “participants” in the joint venture/co-ownership. As “participant” is not defined in the Excise Tax Act, Canada, CRA will accept the base trustee/nominee even if it does not have a financial interest in the venture but is designated as the operator of the joint venture/co-ownership in the agreement and is responsible for the managerial or operational control of the joint venture. The nominee/bare trustee will not have a financial interest in the joint venture if it has not contributed funds to the acquisition and development of the property and does not share in any of the profits or losses of the joint venture/co-ownership.
CRA’s administrative position is that a nominee/bare trustee designated as the “operator” in the written joint venture/co-ownership agreement is also a participant if it has been given managerial or operational control of the joint venture/co-ownership whether or not the bare trustee/nominee is remunerated. This will be accomplished in the joint venture/co-ownership agreement by ensuring that the written agreement governing the joint venture confers some degree of property management or property development responsibility on the nominee/bare trustee.
CRA has stated that managerial or operational control does not necessarily require authority to initiate significant business decisions such as the acquisition of or selling of certain business assets – it can be limited to the daily functions necessary to operate the business but must include all of the significant responsibilities for operating the joint venture/co-tenancy.
If the only function of the nominee/base trustee is to hold the property for the participants and has no independent powers or discretion or responsibilities the nominee/bare trustee will not be considered to have the managerial or operational control of the joint venture/co-ownership and therefore will not be considered a “participant”.
It would therefore be best to designate what is normally the bare trustee/nominee with some other title such as manager.Temporary Administrative Tolerance by CRA Where existing bare trustees/nominees do not have managerial or operational control but have elected under s. 273 to be the “operator” CRA has stated a temporary administrative tolerance where auditors will not assess HST owing due to the bare trustee/nominee not being a “participant”. This temporary administrative tolerance is only in effect for reporting periods prior to January 1, 2015 and is contingent upon the following in respect to the joint venture/co-ownership:
• All HST returns have been filed;
• All taxes have been paid;
• All joint venture participants are otherwise fully compliant.
Future Planning for Joint Ventures/Co-ownerships
Where participants have made the section 273 joint election they should review and possibly restructure their agreements before 2015. The simplest form of change would be to amend the joint venture/co-ownership agreement or the agreement between the nominee/base trustee and the joint venture participants to give more managerial or operational control to the bare trustee/nominee corporation in regard to the ownership, development, management of the property. Alternatively, one of the beneficial owners could be designated as the “operator” for purposes of the section 273 election and thereupon the named “operator” would commence to become responsible for the HST compliance for all participants of the joint venture/co-ownership.
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