Tax Liability and Input Tax Credit Entitlement of Non-Electing Joint Venture Participant

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-139R

Date of Issue

June 9, 1994
Revised April 30, 1999

Subject

Tax liability and input tax credit entitlement of a non-electing joint venture participant

Legislative Reference(s)

Sections 148, 177, 240, 245 to 249 and 273 of the Excise Tax Act (the ETA)

National Coding System File Number(s)

11660-0, 11660-1, 11725-1, 11725-8, and 11725-12

Effective Date

January 1, 1991, for the GST, except where the policy concerns the application of section 177 [as amended by 1997, S.C. c. 10, s. 26(1)] which applies to supplies made on or after April 24, 1996 (subject to the two exceptions detailed in the coming into force provision relating to the amendment).

April 1, 1997, for the HST

Issue and Decision:

Participants in a joint venture normally have a joint interest in its production. As a result, they frequently authorize one participant to sell the joint venture production and distribute the resulting sales revenue based on their respective interests in the production. Further, where a participant in a joint venture agrees to acquire goods and services on behalf of the other participants, the other participants often agree to periodically reimburse that participant for an amount equal to a percentage, based on their respective interests in the joint venture, of the costs incurred.

Since a joint venture is not a "person" for GST/HST purposes, it cannot register in its own right. Therefore, under the general rules, each participant must generally account for the tax on its share of joint venture sales and claim input tax credits for tax paid or payable on its share of joint venture purchases.

To provide some flexibility in accounting for tax in respect of certain qualifying joint venture arrangements, section 273 of the Excise Tax Act permits one participant (called an operator) to make an election with another participant (called a co-venturer) which deems supplies and purchases made by the operator on behalf of the co-venturer to have been made by the operator, not the co-venturer. It also deems most supplies made by the operator to the co-venturer under the joint venture agreement not to be supplies.

It is possible that some co-venturers will make an election under section 273 while others will not. Throughout the remainder of the paper, co-venturers who have not made the election will be referred to as "non-electing participants", and co-venturers who have made the election will be referred to as "electing participants".

Where an election has been made, the operator will collect and account for tax on the relevant joint venture supplies and claim input tax credits for tax paid or payable on the relevant joint venture purchases. Where, for example, an election is made by three individuals who each have a 1/3 interest in a joint venture, and supplies made by the operator in the course of the activities of the joint venture total $100,000.00, the operator would be deemed to have made supplies of $100,000.00. The other two participants would be deemed to have made no supplies in respect of the joint venture activity at all.

Where an election is not made, section 273 will not apply. In these circumstances, whether a non-electing participant must account for the tax on joint venture sales or may claim input tax credits for tax paid or payable on joint venture purchases depends on whether the operator is acting as agent on behalf of the participant in respect of those sales and purchases. Whether or not an operator is acting as agent on behalf of a participant must be determined on a case-by-case basis.

There is a rebuttable presumption that an agency relationship exists whenever the actions of the operator, and the manner in which the parties account for the tax, are consistent with the existence of such a relationship. For additional information on agency, see Policy No. P-182, Determining the Meaning of the Terms "Agent" and "Agency" as used in the Relevant Sections of the Excise Tax Act and Identifying Those Factors that may be used to Determine the Likelihood of Agency.

Where an agency relationship exists between a joint venture operator and a non-electing participant in respect of supplies of tangible personal property (other than exempt or zero-rated supplies) made by the operator on behalf of that participant in the course of joint venture activities, and the participant is not required to collect tax in respect of the supply (e.g., where the participant is not a registrant), generally, the supplies are deemed under subsection 177(1) of the Act to have been made by the operator (agent) and not the participant (principal). Further, the operator (agent) is deemed not to have made a supply to the participant (principal) of services related to making the supply.

Where such an agency relationship does not exist, or it exists but the non-electing participant is required to collect tax in respect of supplies made by the operator as agent on its behalf, subsection 177(1) does not apply. Consequently, the general rules apply, and the participant must collect and remit tax in respect of supplies made by the operator on its behalf. Where an agency relationship exists in circumstances in which the non-electing participant is required to collect tax in respect of supplies made by the operator on its behalf, the operator (agent) and the participant (principal) may elect under subsection 177(1.1) of the Act to have the operator account for the tax.

Where a joint venture operator purchases property or services as agent on behalf of a non-electing participant, the participant (principal), not the operator (agent), may claim an input tax credit under section 169 of the Act for the tax payable in respect of the purchase, subject to the usual restrictions. However,

where an operator purchases property or services otherwise than as agent on behalf of a non-electing participant, the operator, not the participant, may claim an input tax credit under section 169 for the tax payable in respect of the purchase, subject to the usual restrictions. If the participant subsequently reimburses the operator for all or part of the amount of the purchase, the reimbursement is regarded as part of the consideration for the supply of services made by the operator to the participant (i.e., the service of operating the joint venture) and is therefore subject to tax.

For information on the eligibility of an electing joint venture participant to register and claim input tax credits, see Policy No. P-138, The Effect of Making a Joint Venture Election on a Participant's Eligibility to Register and Claim Input Tax Credits.

SAMPLE RULING NO. 1

Statement of Facts

Companies A, B and C are all registered for the GST/HST. The three companies have formed a joint venture. Each company has a 33 1/3% interest in the joint venture. An election under section 273 has not been made. Company A, the joint venture operator, sells all of the joint venture's production. For GST/HST purposes, each sale of joint venture production is a taxable supply. Company A is not acting as agent on behalf of the other two companies when making these supplies.

Ruling Given

Since the companies have not made an election under section 273, the rules set out in that section do not apply. Each company must account separately for the tax collectible on the supplies made in the course of the joint venture in proportion to their respective interests (i.e., 33 1/3%) in the joint venture.

SAMPLE RULING NO. 2

Statement of Facts

Companies X, Y and Z have formed a joint venture in which each company has a 33 1/3% interest. Company X is registered for the GST/HST, but companies Y and Z are not. Company X, the joint venture operator, sells all of the joint venture's production. For GST/HST purposes, each sale of joint venture production is a taxable supply. Company X is acting as agent on behalf of the other two companies when making these supplies. The companies have not made an election under section 273.

Ruling Given

Since the companies have not made an election under section 273, the rules set out in that section do not apply. Further, since Company X is acting as agent on behalf of Companies Y and Z, and Companies Y and Z are not required to collect tax in respect of the supplies made on their behalf (as neither Company is registered for the GST/HST), the supplies are deemed under section 177(1) to have been made by Company X, not Companies Y or Z. Company X is also deemed not to have made a supply to Companies Y or Z of of services related to making supplies on their behalf.

SAMPLE RULING NO. 3

Statement of Facts

Companies P, Q and R have formed a joint venture in which each company has a 33 1/3% interest. All three companies are registered for the GST/HST. Company P, the joint venture operator, sells all of the joint venture's production. For GST/HST purposes, each sale of joint venture production is a taxable supply. Company P is acting as agent on behalf of the other two companies when making these supplies. The companies have not made an election under section 273.

Ruling Given

Since the companies have not made an election under section 273, the rules set out in that section do not apply. Further, as registrants, Companies Q and R are required to collect tax in respect of the supplies of joint venture production made by Company P as agent on their behalf, so the rules set out in section 177(1) do not apply. Thus, each company must account separately for the tax on its share of production. Company P and one or both of the other two companies may elect under subsection 177(1.1) to have Company P account for the tax on these supplies.