Many real estate joint ventures own their property in the name of a bare trustee or nominee. This is done for a number of reasons, but generally the primary one is for operational convenience in that one company can sign documents on behalf of all the owners of the joint venture without requiring multiple signatures. For income tax purposes, a trustee which holds the property, but has no discretionary powers to exercise, is considered to be a bare trustee for tax purposes. All income and loses are for the benefit of the underlying beneficial owners and the bare trustee is invisible for income tax purposes. If a trustee is given discretionary authority and decision making powers in relation to the property, that trust is no longer considered to be a bare trust. As CRA would deem it to be an active trust, it would have to file its own trust tax returns on the income received on behalf of the joint venture.
For HST purposes, a real estate joint venture cannot register and account for HST in its own right. Usually the joint venture owners will elect one participant that is an HST registrant to be the “operator” for purposes of filing the HST returns on behalf of all the joint venture owners. The operator also claims the input tax credits in relation to the expenses incurred by the joint venture. The election made to choose a joint venture participant to be the operator is called a “Section 273 Election”.
As the bare trustee is the public face of a joint venture it has been common for the joint venture to elect the bare trustee to be the operator and file the HST returns on behalf of the joint venture. But in a notice issued in February 2014, CRA has advised that the election of a bare trustee will no longer be “tolerated”.
To qualify as an “operator” for purposes of the Section 273 Election, the person must be a “participant” in the joint venture. CRA defines participant to mean either a person who has a financial interest in the venture as an owner or a person without financial interest who is responsible for the managerial or operational control of the joint venture. Obviously, a bare trustee would not qualify under the first part of the definition as it has no assets of its own. In order to qualify under the second part of the definition, the bare trustee would have to assume managerial or operational control over the joint venture, which includes having the authority to engage personnel and enter into contracts on behalf of the joint venture. CRA has advised that merely filing the HST returns will not cut it unless it qualifies as a participant. The question then becomes would this change its status from a passive bare trust to an active trust.
CRA has advised that it will tolerate the current use of bare trustees as operators under a Section 273 election until December 31, 2014, but starting next year this will be disallowed. Real estate joint ventures which are affected by this position of CRA must change the way they file HST in order to ensure that they are onside.
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