Canada: Tax Court Concludes That Property Manager And Real Property Owners Operate Together As Joint Venturers For GST/HST Purposes

  • The Tax Court of Canada recently issued its decision in Medallion Corporation v. The Queen, finding that Medallion Corporation ("MC"), a property manager, had no obligation to collect GST/HST on its share of the revenues generated by the property under its management since it was viewed as operating a joint venture with the relevant owners.
  • In reaching its decision, the Court referred to the identifying criteria of a joint venture as established by the jurisprudence. The Court further noted that the term "joint venture" had a flexible meaning that may depend on the intentions of the parties, on their conduct and on the surrounding facts and circumstances.
  • Since each of MC's agreements established a valid joint venture, the Court dismissed the Canada Revenue Agency's GST/HST reassessments under the Excise Tax Act ("ETA") which relied on the assumption that MC supplied taxable property management services to the owners and received a consideration in return.

BACKGROUND

MC carries on a property management services business. Between 2011 and 2013, MC entered into ten contracts with the owner(s) of various Ontario residential and commercial real properties. Each of these contracts bore the title "Joint Venture Agreement" and – without intending to prejudge the Court's ruling – we refer to them collectively as "the JV Agreements".

The JV Agreements

Each JV Agreement provided for the formation of a joint venture to earn income from the leasing of the relevant property. Each joint venture was managed by a "Joint Venture Management Committee" composed of two managers, one appointed by each side.

A schedule to each agreement set out the parties' proportionate interests in each property covered by the agreement, which interests entitled each party to its proportionate share of each property's "Gross Rental and Other Income", defined to include rent, parking and laundry income, maintenance charges and property tax billings, while excluding security deposits and damage and loss reimbursement payments.

The parties' respective contributions to the joint ventures were essentially as follows:

  • Owners: making the properties available for leasing for the benefit of the relevant joint venture.
  • MC: property operations expertise; assumption of several expenses (i.e. administrative costs, salaries, maintenance, etc.).

One key point is that MC had no ownership interest in the properties and the owners had no ownership interest in MC's equipment and property.

Basis of the GST/HST reassessments

The GST/HST reassessments were issued on the basis that the JV Agreements did not constitute valid joint ventures from a legal standpoint and that, as a consequence, all of MC's income under the JV Agreements was actually consideration for the taxable supply of property management services supplied by MC to the relevant owners. MC argued that only the amounts received with respect to commercial leases were taxable under the ETA and that each JV Agreement constituted a valid joint venture for purposes of the ETA.

THE ISSUES

The Court had to decide whether the alleged joint ventures were in fact valid joint ventures in law. If they were, then the GST/HST reassessments would be invalid.

APPLICABLE PRINCIPLES

Joint ventures under Canadian law

The status of joint ventures under Canadian law has always been a complex issue. While the joint venture concept has long been recognized commercially, from a legal point of view, its status under Canadian law has never been entirely clear, partly because this form of business organization is not a creature of statute. Thus, whenever it becomes necessary for the law to decide whether a given business arrangement constitutes a "joint venture", it is necessary to refer to case law and commentaries, as the Court did here (given the taxation context, it also referred to the tax authorities' own policy statements).

The basic characteristics of a joint venture have been considered in a number of cases. Here, the Court looked to Central Mortgage & Housing Corp. v. Graham, a 1973 Nova Scotia ruling which, with the aid of Williston on Contracts (3d, 1959) identified the following six essential factors (collectively, the "Williston Factors"):

  1. A contribution by the parties;
  2. A joint property interest in the subject matter;
  3. A right of mutual control;
  4. An expectation of profit;
  5. A right to participate in the profits, and usually; and
  6. A limitation of the objective to a single undertaking

Flexibility in interpretation

Reviewing the relevant jurisprudence, the Court observed that the Williston Factors are general principles whose application depends on "all the facts and circumstances" of a case ( S.G. Levy and Sons Ltd. v. Dover Financial Corp., 1996 CanLII 5563 (NS CA)).

THE RULING

The tax authorities appear to have based its reassessment on a list of requirements similar to the Williston Factors (see, for example, the CRA's Policy Statement P-171R). Its conclusion was that four of the factors – i.e., (2), (3), (4) and (5) – were not satisfied in the alleged joint ventures between MC and the various owners.

Contrary to the tax authorities, the Court concluded that in each case the factors were satisfied, as discussed below.

MC had joint property interest in the subject matter of the venture

The tax authorities argued that the subject matter of the venture was the properties themselves. Since the properties were all entirely owned by the owners, the tax authorities concluded that MC did not have an interest in the subject matter of the venture and that factor (2) was accordingly not satisfied. For its part, MC raised the argument that the subject matter of the joint venture was in reality the revenue generated from the operations described in the JV Agreements.

The Court stated that the undertaking of each joint venture was not the sale of the properties, but rather their use (i.e. leasing). Because MC had a right under the JV Agreements to lease the subject properties in its own name, it had a sufficient property interest in the subject matter of the venture. The Court also noted that the definition of "property" in subsection 123(1) of the ETA includes that "a right or interest of any kind".

MC had a right of mutual control or management of the enterprise of each alleged joint venture

The Court rejected the tax authorities' argument to the effect that MC had no right of mutual control or management of the enterprise of each joint venture. The Court based its decision on the specific provisions of the JV Agreements, which provided that both MC and the relevant owners would each have one representative on the JV Management Committee, which could only make decisions "by mutual agreement".

MC had an expectation of profit or was in the presence of an adventure in the nature of trade

The Court also dismissed the tax authorities' contention that MC did not have an expectation of profit and that there was no "adventure in the nature of trade". The Court found that the tax authorities failed to present any convincing evidence of such argument, which made little sense in light of the profit-making scheme that was implicit in the signing of the various JV Agreements with different owners.

MC could participate in the profits

This fourth element had apparently originally been the tax authorities' main argument in support of the reassessments, but had been de-emphasized somewhat in light of the P.E.I. Court of Appeal decision in ADI International Inc. v. WCI Waste Conversion Inc., in which it was held, following S. G. Levy, that the "sharing of overall profits is not essential". As was the case for its first argument, the Court considered MC's right to a share of the operating revenues to be MC's right to participate in the profits. The fact that the JV Agreements provided that MC had no right in the profits in the event of the sale of the properties could not support the tax authorities' argument because the sale of property was simply beyond the scope of the joint ventures.

KEY TAKEAWAYS

  • Overall, this decision seems to ease the possibility of implementing joint venture structures in place from a GST/HST standpoint.
  • The obvious benefit of such structures in the real estate industry would be to limit potential GST/HST leakage for owners of residential property or mixed-use property.
  • It will be interesting to see whether the Crown will decide to appeal the decision or not. In the meantime, a cautious approach is still advised for taxpayers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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