USE OF NOMINEES IN THE REAL ESTATE BUSINESS
In recent years, the Agence du revenu du Québec (“ARQ”) has stepped up its GST/QST audits of nominee corporations that manage commercial real estate on behalf of property owners. ARQ had a very restrictive interpretation of who was eligible to claim input tax credits (“ITC/ITC”), and issued several assessments. Following challenges from the industry, ARQ reviewed its position in agreement with the Canada Revenue Agency (“CRA”). Here are the main points and their impact.
CHOICE OF JOINT VENTURE
When several owners jointly own a property, the tax authorities consider that a joint venture situation exists, provided that the intention of the co-owners is to operate a real estate project jointly, and that the contracts reflect this intention.
A joint venture is not a person for the purposes of the Excise Tax Act (“ETA”) and therefore cannot register for GST/QST. Each co-owner must therefore manage the GST/QST in his or her own tax return according to his or her share. To simplify tax administration, the tax authorities allow co-owners to designate one person to manage taxes for all co-owners, provided certain conditions are met:
agreement recorded in writing;
qualifying activity1;
completed form FP-621 specifying the effective date of the election;
the designated person qualifies as a “participant”.
According to the CRA, a “participant” means :
a person who, under the terms of a joint venture agreement evidenced in writing, invests resources and retains its share of revenues or assumes its share of losses resulting from the joint venture’s activities; or
a person without financial interest who is designated as the operator of the joint venture under a written agreement and who is responsible for the management or operations of the joint venture.
For a person to be considered responsible for the management or operations of a joint venture, he or she must have the power to manage the day-to-day activities of the joint venture without needing the participation or approval of the other participants. This can mean responsibility for hiring employees or contractors on behalf of the joint venture.
However, one may be responsible for management or operations without necessarily having the power to make major operational decisions, such as the acquisition or sale of some of the joint venture’s core assets.
If a person merely holds title for the benefit of the other participants, he or she would not be considered a participant in the joint venture.
FILES UNDER AUDIT
For owners who have made an election regarding joint ventures with a nominee company that does not qualify as a participant under the interpretation of the tax authorities, no assessment will be issued provided all returns have been filed, amounts due have been paid and the conditions governing joint ventures are met. Owners in this situation will have to regularize their situation before January 1, 2015.
In other cases, ARQ will only contribute for 2 years plus interest and penalties when there is no tax loss for governments. Refused ITCs/ITRs will be granted to the true owners, and procedures will be put in place to speed up the processing of files.
For files that have already been contributed, interest and penalties will be adjusted in accordance with the above-mentioned rules. The ARQ recommends that you contact the auditor who performed the audit to have the interest and penalties waived.
ALTERNATIVES
To the extent that the joint venture election cannot be made, the co-owners could elect under section 177(1.1) ETA to have the registered nominee remit the taxes on their behalf. However, this choice does not allow the nominee to claim ITCs/ITRs, which will have to be claimed by the co-owners.
CONCLUSION
Administrative tolerance on the part of the tax authorities means that for some owners, unnecessary tax assessments can be avoided without any loss of tax revenue. However, commercial property owners will need to analyze all their nominee agreements to ensure that the new requirements are met after 2015 to avoid future assessments.
Should you require further information, please do not hesitate to contact our tax department.
Benoit Vallée, CPA, CGA
Senior Director, Indirect Taxes
514 878-0240 – Direct line
514 236-4242 – Cellular
bvallee@demersbeaulne.com
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1 The construction and operation of a building is a qualifying activity, but acquisition is not.
