Jeremy Scott Tax Law

Jeremy Scott Tax Law | HST/GST And Joint Venture In Canada

A joint venture in Canada is any agreement between two or more people who decide to work together to create a common commercial enterprise. The individual members of this collaboration might contribute money, goods, or services to this arrangement, but the goal is the same—to create a profit. Joint ventures are temporary, and they are more informal compared to a partnership. Because joint ventures are not legally the same as partnerships, they have different tax rules. Jeremy Scott Law may be able to help provide specifics about the differences between a joint venture in Canada and a partnership when it comes to HST/GST implications. Call (902) 403-7201 to learn more.

Joint Ventures in Canada: The Basics

A joint venture in Canada is a unique, temporary business structure. For instance, two businesses or individuals may come together on just one project, or work together on developing a single product or service. This is a much more informal relationship compared to a partnership. Joint ventures are commonly used for real estate development, but they can be used for many other purposes as well.

The co-venturers keep ownership of property in their own names; there is no requirement for joining of property or transferring the property to a separate legal entity. They also do not act as agents for each other. In addition, they only gain profit or have to pay for losses related to the very limited project instead of any business that they operate as a whole. However, venturers can create a separate joint venture corporation as well. Profits of the venture are taxed to the co-venturers individually in whatever individual or business structure they use for tax purposes. Some types of joint ventures require registration, but not every joint venture must be registered.

The GST/HST for Businesses in Canada

Among other potential taxes, and depending on location, most businesses must register and pay two major types of sales tax in Canada. The Government of Canada provides some helpful information about what these taxes are, how to register, and when to pay them.

  • GST: Goods and Services Tax
  • HST: Harmonized Sales Tax

These taxes apply nationally. The GST is effective everywhere, but some areas have tied their providential sales taxes to federal taxes to create one tax. This single tax is called the Harmonized Sales Tax. In other areas that still have an autonomous provincial sales tax, the GST is paid separately from the provincial sales tax.

Joint Ventures and HST/GST

GST/HST requirements set out that businesses must register and pay sales tax for certain types of sales. However, only “persons” can register for the GST/HST. A joint venture is not considered a “person” for purposes of GST/HST unless it is a separate corporation, partnership, or trust, so it cannot register on its own.

Instead, each co-venturer must register individually and account for the tax collected. They must also individually track supplies and purchases. This can get somewhat complicated, but there is an election that joint ventures can use to simplify joint venture GST/HST taxes in some situations.

Section 273 of the Excise Tax Act (ETA)

Section 273 of the ETA provides that a joint venture can designate an operator or participant of the joint venture to report and collect GST/HST. This person essentially functions as a manager of the joint venture, and every purchase flows through them. This makes calculating and paying GST/HST much easier and more streamlined.

At the same time, designating the joint venture under Section 273 does not affect the ability of the co-venturer to register and claim input tax credits that they incurred directly. The election also does not affect a co-venturer’s ability to register for the GST/HST under Section 240. As long as the co-venturer is engaged in a “commercial activity,” they can still register under Section 240 and also make the Section 273 election.

The Difference Between a Joint Venture and a Partnership

The joint venture can only make the Section 273 election if it is not considered a partnership, corporation, or trust. Distinguishing between a joint venture and a partnership can be difficult, however.

Not a Partnership

Neither the Canada Revenue Agency nor the applicable code sections define “joint venture” or “partnership.” Instead, a joint venture is defined as something other than a partnership, which entrepreneurs sometimes find confusing. However, each joint venture will also have the following attributes:

  • Two or more people working together
  • A limited, defined business undertaking
  • Revenue and expenses are distributed based on mutually agreed-upon portions

Characteristics of Partnership

A partnership, on the other hand, is indefinite. This kind of business relationships does not end after a single project or venture. A partnership might also have defined methods to split profits and losses, but the differentiating factor is usually that the relationship will continue beyond a single project.

The Role of Intent

The intentions of the parties will also play a role in determining whether it is a joint venture or a true partnership. I the parties intend for the relationship to be continuous, it is more likely to be considered a partnership.

Why the Joint Venture/Partnership Distinction Matters

In general, many co-venturers will want the relationship to be classified as a joint venture instead of a partnership because there are certain tax advantages referenced above. Joint ventures also have liability limitations that general partnerships do not have.

Specifically, joint venturers are only liable for the issues relating directly to a project or venture. Partners, in contrast, are often liable for all of the debts of the partnership, even if there is an agreement to the contrary; if a partner cannot pay their share, the other partner may have to pick up the slack. General partners are often held responsible for the full debts and other liabilities of the partnership, but joint ventures have more limitations.

Get Help With GST/HST for Joint Ventures

A joint venture in Canada can make taxes somewhat complicated. Understanding which structures are the most beneficial for your unique tax situation will help reduce tax obligations and make reporting and filing GST/HST less cumbersome. Jeremy Scott Law may be able to help joint ventures address their GST/HST tax obligations. Learn more by contacting our team at (902) 403-7201.