Tax rules for joint ventures

Joint ventures are under increasing scrutiny by CRA.

One area the agency’s particularly concerned about is how these business arrangements handle GST/HST accounting.

When joint ventures are large and complex, GST/HST accounting is best processed through a single participant (the operator). Not giving proper consideration to GST/HST accounting can result in unnecessary assessments.

CRA’s main focus is determining if operators are what they say they are. Here, I’ll outline how the joint venture and GST/HST work together.

Joint ventures and GST/HST

A joint venture is a business agreement between multiple people (i.e. participants or co-venturers). It’s not a partnership, though there’s a fine line between the two. It’s a legal concept that consists of legal persons operating as an entity to which GST/HST applies.Accounting for GST/HST is cumbersome in a typical joint venture. 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. Also, not all participants may be registered, introducing additional complexity. The solution appears to lie in electing a single operator to account for all GST/HST. This relieves participants from having to account for their pro rata shares of the net GST/HST. But it doesn’t relieve participants of the tax on liability associated with each transaction. The elected operator must be aware of this and do what he or she agreed to do without unknowingly creating liability for all members of the joint venture.

The election method can’t be used for everything, so you must determine if a particular activity is prescribed in the GST legislation before the election’s put in place. Where the activity is not prescribed, the election isn’t valid. Incorrect use of the election invalidates the GST/HST accounting.

Several criteria must be satisfied to be 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 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.

In many cases, GST/HST isn’t properly accounted for because the election hasn’t been completed or updated; some participants haven’t been included; or some participants aren’t registered. Also, transaction documentation may be inaccurate, resulting in unnecessary exposures.

As noted, operators must be registrants and are generally required to be participants in the joint venture. CRA is focused on this in many of their audit reviews.

If your clients are considering joint ventures, be sure they review their agreements carefully and ensure the arrangement is well documented. If the joint venture’s already in operation, help them review the agreements and the activity to determine if they’ve inadvertently exposed themselves or their fellow participants to a tax liability, then determine how it can be corrected. And make no mistake: CRA’s GST/HST audit activity is aggressive in most sectors, with a focus on businesses that once had a low-risk factor.

Jeff Harrison, CMA, is senior manager at MNP LLP.