Taxation law

GST/QST, Real Estate Owners and Prête-Nom Agreements

Feb 27th, 2014

By Alexandre Dufresne

Authors: Me Alexandre Dufresne, Me Robert Raich and Me Michael Citrome

Spiegel Sohmer Inc.

As you may know, we have taken an active role in dealing with Revenu Quebec in connection with its recent strategy of reassessing owner-operators of commercial real estate who have organized their affairs by placing title ownership and management of their property in the name of a nominee corporation, which handles executing leases, collecting rent, paying suppliers and filing GST/QST reports on behalf of the true owners.

This type of arrangement is commonly known as a “prête-nom arrangement”.

Revenu Quebec took the position that this type of arrangement, and the joint venture elections made as a component of such arrangement, were not valid because the nominee corporation was not eligible to be the operator of the joint venture, due to internal policy of Revenu Quebec and the Canada Revenue Agency. Consequently, it denied input tax credit claims made by the nominees and charged a 4% administrative penalty, as well as interest, on the inputs that must be reclaimed by the beneficial owners.

Our opinion is that the position of the taxing authorities was contrary to the law.

Last week, both Revenu Quebec and the Canada Revenue Agency announced an administrative tolerance with respect to prête-nom arrangements, such that through the end of the 2014 calendar year, Revenu Quebec will continue to accept GST/QST filings made under such an arrangement, even in circumstances where the nominee corporation reports no income, collects no fees and owns no equity in the property concerned.

However, for the tolerance to apply, Revenu Quebec requires that all GST/QST reports have been filed for the period, and that the beneficial owners and the nominee have executed a joint venture agreement and election form. However, as a point of caution, Revenu Quebec will evaluate whether the joint venture agreement validly forms a joint venture, and it remains to be seen how the government will approach this point.Most crucially, Revenu Quebec has announced that it will cancel assessments already issued in connection with such prête-nom arrangements, and refund the interest and penalties charged. This makes the assessments moot, and likewise any objections filed in connection therewith.

This administrative relief will not apply to arrangements where there is a single beneficial owner acting through a prête-nom. For such arrangements, reassessments will be limited to 24 months and the 4% penalty will apply. We believe in some cases this position isn’t correct.

We believe that our representations were instrumental in Revenu Quebec and Canada Revenue Agency’s about-face in this matter, as we demonstrated that the position taken by the taxing authorities was not supported by the legislation, and was in fact contradicted by jurisprudence.

To that end, the Federal Department of Finance announced last week in its 2014 budget that it would release draft legislation with respect to the joint venture election, which would open the joint venture election up to more types of business, and also introduce anti-avoidance provisions absent from the current law.

We intend to make submissions to Finance as to the proposed draft legislation, in order to protect our clients’ rights to organize their affairs in a commercially and tax-efficient manner.

The bottom line is that if you or your client came under audit for its prête-nom arrangement, that audit is likely over (save for an examination by Revenu Quebec of the joint venture agreement), and if an assessment was issued, that assessment will likely be cancelled, but all arrangements will likely need to be revisited by the end of the calendar year as Finance introduces amendments to the Excise Tax Act and its regulations (and consequentially to the Act Respecting the Quebec Sales Tax) that will necessarily impact how prête-nom arrangements will function post-January 1, 2015.

For any information on this matter, please contact a member of our firm’s working group on GST/QST prête-nom matters.

Me Alexandre Dufresne
(514) 875-3566

Me Robert Raich
(514) 875-2100