December 8, 2023
Canadian government releases proposed changes for applying GST/HST to joint ventures
On 21 November 2023, the federal government released for public consultation long-awaited draft legislative proposals with respect to the goods and services tax (GST)/harmonized sales tax (HST) rules for joint ventures as part of its 2023 Fall Economic Statement.1 This announcement advances the government's commitment made in its 2014 budget to expand access to the joint venture election rules. Public comments on the draft legislative proposals are sought by 15 March 2024.
This Tax Alert provides an overview of the proposed joint election rules.
Under the existing rules, joint venture participants must each separately account for the GST/HST in respect of activities conducted as a joint venture. However, joint venture participants who are engaged in certain activities specified by the Excise Tax Act or the Joint Venture (GST/HST) Regulations may elect to appoint a person to be the "operator" of the joint venture for GST/HST purposes. This election simplifies the accounting of the GST/HST in respect of the joint venture as it allows the operator to account for the GST/HST collectible for supplies made by the joint venture, and to claim input tax credits for the expenses incurred by the joint venture. Absent the election, each participant would be required to account for the GST/HST on their proportionate share of the joint venture's revenue and claim their proportionate share of the input tax credits for GST/HST incurred on joint venture expenses.
The challenge with limiting access to the GST/HST joint venture election to specifically legislated activities or those prescribed by regulation is that it could result in inequitable treatment between similar activities. For example, the operation of a natural gas liquids pipeline as a joint venture was an activity for which the GST/HST joint venture election could be made, but the operation of any other type of pipeline was not.
The restriction on the availability of the joint venture election could result in disputes with the Canada Revenue Agency (CRA) in instances where a joint venture had conducted its operations as if the GST/HST joint venture election was in place (i.e., one participant, the "operator," was accounting for all of the GST/HST on behalf of all of the participants) even though the joint venture's activities were not specifically set out in the legislation or prescribed by regulation. Once the CRA's assessment was issued, the operator of the joint venture either dealt with a significant GST/HST assessment or contacted the Minister of Finance to request that their activity be added to the list of prescribed activities eligible for the election.
It was for this reason that, in 2022, the federal government proposed prescribing "the operation of a pipeline, rail terminal or truck terminal used for the transportation of oil, natural gas or related or ancillary products" as an activity that qualified for the GST/HST joint venture election and, notably, did so retroactive to the introduction of the GST in Canada on 1 January 1991. This proposed amendment to the existing joint venture rules was included in Bill C-59, Fall Economic Statement Implementation Act, 2023, tabled in the House of Commons on 30 November 2023.
Who can elect under the proposed new rules
The draft legislation proposes to add a new section to the GST/HST legislation that would expand access to the joint venture rules to more GST/HST-registered persons whose activities are not on the existing prescribed list of activities.
For joint ventures with activities that are not on the existing lists, the draft legislation provides that any joint venture could now elect to appoint a single person to be the operator of the joint venture to account for the related GST/HST, provided that all or substantially all of the joint venture's activities are commercial activities for GST/HST purposes.
There are proposed conditions, however.
First, the joint venture would have to operate under a written agreement describing the property that is the subject matter of the joint venture and the activities, obligations and entitlements of each of the participants and operator of the joint venture.
Second, only a person who is resident in Canada, registered for GST/HST purposes, engaged all or substantially all in commercial activities, and has fiscal monthly GST/HST reporting periods could be appointed as the operator of the joint venture for GST/HST purposes. Notably, public sector bodies (e.g., nonprofit organizations, municipalities, governments) and listed financial institutions would be excluded.
Third, the appointed operator of the joint venture would not need to be a participant in the joint venture.
Fourth, not only the operator, but also each qualifying participant would be required to be registered for GST/HST purposes. This is different from the existing joint venture election provision, which only requires the operator to be a "registrant" without expressly requiring participants to be registered.
Finally, and different from the existing rules, for the joint venture election to be valid under the proposed new additional rule, the election would be required to be filed with the CRA. Further, the election would cease to be valid on the day a party to the election ceased to meet the criteria set out above (e.g., a party ceasing to be registered for GST/HST purposes).
Effects of the election under the proposed rules
Broadly speaking, once the election is validly made:
Notably, the new rules as currently proposed would not apply to the various deemed supplies found in the Special Cases and Capital Property rules set out in subdivisions C and D of Division II of the Excise Tax Act. These include the rules on employee benefits, employee allowances and reimbursements, and the capital property change-in-use rules. As such, the participant, rather than the operator of the joint venture would have to account for the GST/HST for these matters. The government has specifically invited joint venture participants to provide input and feedback regarding how they currently account for GST/HST under these special cases and capital property rules.
The government is also seeking input into the coming into force of the proposed rules and how the existing rules should be transitioned to the new rules.
Participants in joint ventures in Canada will want to consider the impact that the draft legislative proposals may have on how GST/HST is accounted for by each joint venture as between the co-venturers and any operator of the joint venture, review the proposed changes with a GST/HST advisor, and consider providing comments and feedback to the government by 15 March 2024.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP Canada
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 For more information on the measures released in the Fall Economic Statement, see EY Global Tax Alert, Canada releases Federal Fall Economic Statement 2023, dated 28 November 2023.