Treatment of GST and QST audit files for situations involving joint ventures, mandataries and nominee corporations
The Agence du revenu du Québec (Revenu Québec) communicated its decision on how it will treat the approximately 800 files targeted by the exceptional audit initiative undertaken over a year ago. Accordingly, mandataries involved in certain joint ventures have been retroactively granted administrative tolerance, but will be required to rectify their situation by January 1, 2015 (“prospective approach”). An arrangement will be offered to others under which assessments will be issued for a 24-month period, with a 4% penalty.
The prospective approach applies to situations in which a written joint venture agreement existed and a joint venture election was in effect, but the joint venture’s designated operator did not fully meet the definition of “participant,” as defined in Policy Statement P-106 Administrative definition of a 'participant' in a joint venture.
In essence, persons without a financial interest in the joint venture will be recognized as participants if they are responsible for the managerial or operational control of the joint venture (authority to manage daily operations). However, recent interpretations by the Canada Revenue Agency indicate that bare trusts and some nominee corporations whose powers and actions are not considered sufficient in this regard do not meet the definition of participant for the purposes of the joint venture election.
The agreement under which there is an election must also qualify as a joint venture agreement. Therefore, joint ventures, including undivided co-ownerships, will be evaluated on a case-by-case basis to determine whether they are valid.
For eligible files, the administrative tolerance will be as follows:
- No assessments will be issued retroactively, as long as the goods and services tax (GST) and the Quebec sales tax (QST) were remitted to Revenu Québec.
- For assessments already issued, penalties and interest charged, if any, will be reversed.
- The administrative tolerance will be contingent upon confirmation that all returns have been filed, all amounts owing have been remitted and that the participant of the joint venture fully complies with the rules overning joint ventures.
- This administrative tolerance will apply to reporting periods ending before January 15, 2015.
If the administrative tolerance was applicable to your situation, but you did not file a joint venture election, we invite you to discuss the matter with your tax advisor.
Retroactive approach over 24 months
For files involving sole proprietors or joint ventures that cannot take advantage of the above treatment, the administrative tolerance will be as follows:
- No adjustments may be made on taxes collected and remitted by the mandatary.
- Assessments for ITCs and ITRs claimed in error by mandataries will cover a maximum period of 24 months.
- A 4% penalty will apply when no tax loss occurred.
- Beneficial owners or co-owners must register retroactively to claim the ITCs and ITRs that were denied to the mandatary. However, principals may claim the ITCs-ITRs for the last 24 months in the last reporting period.
- The 4% penalty in assessments already issued will be adjusted.
- Persons who will agree to this proposed arrangement must waive their right to object.
Mandataries that claimed the ITCs and ITRs in error must remit them to the tax authorities and principals once their returns have been filed, and then wait for processing and the refunds.
We understand that the registration department received instructions to ensure that the files to be corrected are processed diligently.
Revenu Québec has already written to the mandataries and their representatives, in accordance with the administrative tolerance measures described above.
It is worth noting that a significant number of people among the 800 or so identified by Revenu Québec have not responded, and that it would be in their interest to do so to determine the appropriate remedy to their situation.
It is our understanding that a similar decision may apply to other structures or organizations.
For these files and those described above, but which Revenu Québec has not yet identified, it would be useful to review the options available, including forwarding the file to Revenu Québec’s voluntary disclosure department (service des divulgations volontaires).
To help you determine which organizations and structures may be covered by this treatment, we have summarized a few examples.
A classic example is a building manager who, as part of the management services provided to owners, collected rent and applicable taxes, remitted these amounts to Revenu Québec and claimed all the taxes paid related to operating the building. In this case, only the owners were eligible for ITCs and ITRs.
A business corporation was created as a nominee corporation for one or more building owners to operate a building. The nominee corporation’s name is used to enter into lease agreements, collect taxes and claim ITCs and ITRs. In this case, ITCs and ITRs were only available to the owners.
The general partner in a limited partnership collected all taxes applicable to the partnership’s activities and claimed all ITCs and ITRs. In this case, only the limited partnership was entitled to ITCs and ITRs.
We urge you to take a few minutes to review your clients’ situation or your own, determine whether the tolerance measures apply or whether other steps should promptly be taken.
Jean Lanoue, FCPA, FCA and Jean-Marie Audet, CPA, CA, of Lanoue Taillefer Audet Inc., and members of the Technical working group on taxation and commodity taxes