23 October 2007 GST/HST Ruling 55696 - Application of GST/HST to the sale of serviced mortgages

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX, requesting information about the administrative policy and eligibility criteria pursuant to which a person may be designated to be a municipality under subsection 259(1) of the Excise Tax Act (ETA) by the Minister of National Revenue for purposes of section 259 of the ETA.

All legislative references are to the ETA and the regulations thereunder, unless otherwise specified.

Interpretation Requested

You would like to know the potential eligibility of the following organizations to be designated as municipalities under subsection 259(1) in order to qualify for a public service body rebate of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) they pay on their expenses at the percentage rate that is applicable to municipalities:

1. Community centres receiving funding from the city and providing recreational and other programs for the benefit of the residents of the surrounding community.

2. An "umbrella" organization for the community centres in the city providing support services to the community centre boards, facilitating cooperation and communication among the community centres and city administration, and administering municipal and provincial grant funding to the community centres.

3. Organizations providing residential accommodation on a rent geared to income basis.

4. Personal care homes where the fees are based on income.

5. An association of local governments acting as a lobby group and promoting the improvement of government services to the communities. Examples of government services are water supply, sewage and garbage disposal, roads and drainage systems, fire and police protection, street lighting, community planning, recreation, public transportation systems, libraries and schools.

6. Government subsidized day care centres.

Interpretation Given

The Minister of National Revenue is empowered by the definition of "municipality" in subsection 259(1) to extend that definition for purposes of section 259 by designating a person to be a municipality, but only in respect of activities specified in the designation that involve the making of supplies, other than taxable supplies, by the person of municipal services. A person that is designated to be a municipality will be entitled to claim a public service body rebate of the GST/HST paid on inputs acquired for use in making non-taxable supplies of municipal services.

The public service body rebate for municipalities, including persons designated to be municipalities, is 100% of the GST and the federal portion of the HST. In addition, municipalities resident in Nova Scotia or New Brunswick may claim a 57.14% public service body rebate for the provincial portion of the HST. Entitlement to the rebate is limited to the particular activities for which the person qualifies for municipal designation. Note that the ETA contains other provisions that set out conditions that apply to this rebate, including the calculation of amounts eligible for rebate and filing frequency ^[vii][Footnote 1].

Municipal designation is not automatic; rather a person must apply, in writing, to request this designation. As explained further below, the request must include supporting documentation. Such requests are addressed to the following:

Director, Public Service Bodies and Government Division
Excise and GST/HST Rulings Directorate
Canada Revenue Agency
Place de Ville, Tower A, 14th Floor
320 Queen Street
Ottawa ON K1A 0L5

The ETA does not define the phrase "municipal service" nor does it set out legislative criteria for municipal designation. Rather, municipal designation is an exercise of statutory discretion guided by administrative policy and eligibility criteria to grant a tax benefit to a person who is engaged in an activity contemplated by the Minister of National Revenue to qualify for this benefit. Accordingly, a person may be designated to be a municipality where the person is engaged in an activity contemplated under the administrative policy and eligibility criteria.

The administrative policy and eligibility criteria consider several factors when evaluating a person's request to be designated a municipality. As set out by the ETA, the activity in question must involve the supply of a municipal service that is not a taxable supply. Accordingly, the supply in question must be a service that has the characteristics of a service that a municipality typically provides the citizens in its locality pursuant to relevant provincial or territorial legislation governing the activities and functions of municipalities. The jurisdiction of the service provider must be comparable to that of a municipality; i.e., as with a municipality, the jurisdiction of the service provider must be local and the provision of the service limited to municipal boundaries or a similar localized geographic area.

Because the legislation imposes the requirement that the activity must involve the making of a supply that is not a taxable supply, the activity must involve making an exempt supply under the ETA. The exempting provisions considered under the administrative policy and eligibility criteria for municipal designation are included in Part I and in sections 20, 21, 21.1, 22, 23 and 24 of Part VI of Schedule V. Each of these sections imposes specific legislative requirements, which must also be met. Further, please note that a service is not a municipal service by virtue of being described in any of these sections as they cover services that may be supplied by other persons, such as governments.

For instance, section 21 of Part VI of Schedule V exempts a supply of a standard residential municipal service when supplied by a municipality or by a government, or on behalf of a municipality or a government, and where the supply is made to an owner or occupant of real property situated in a particular geographic area who either has no option but to receive the service or the service was supplied because the owner or occupant failed to comply with an obligation imposed under a law.

We consider standard residential services to be water, sewage, and drainage. Municipalities are empowered by various statutory means to provide such standard residential municipal services to their citizens. However, not all of the territory in a province is organized into municipalities. When a standard municipal service cannot be supplied by a municipality to citizens within a particular local geographic area, the provincial government might either directly provide them or create a local governing body to provide localized services of a municipal nature. When a person supplies standard residential municipal services on behalf of a municipality or a government, the activities of the person involved in making such supplies would qualify for municipal designation.

Activities undertaken by a charity or a non-profit organization that involve the supply of long-term residential accommodation to tenants on a rent-geared-to-income (RGI) basis that is exempt under Part I of Schedule V and for which the charity or non-profit organization receives government funding to assist it in supplying this accommodation is an activity contemplated under the administrative policy for municipal designation for purposes of subsection 259(1). The eligibility criteria that apply to this activity are outlined below.

Because municipal designation is an administrative process, before municipal status can be granted the supplier must demonstrate with documentary evidence that the activity for which municipal designation is being requested satisfies the administrative policy and eligibility criteria and that this supply meets the conditions of the applicable exempting provision included in Part I or in Part VI of Schedule V.

Generally speaking, the activities undertaken by community centres, personal care homes, lobby groups and day care centres, would not involve an activity contemplated by the Minister of National Revenue to qualify for the tax benefit under the administrative policy and eligibility criteria for municipal designation under subsection 259(1). For instance, recreational programs are not described in the above-noted sections included in Part VI of Schedule V and would generally involve the provision of taxable supplies.

Where a municipality provides funding to another organization that is legally distinct from the municipality, for example a museum, zoo, veterinary facility, animal protection agency, community centre, community organization, lobby group, or daycare centre, the activities of the other organization would not qualify for municipal designation under the administrative policy and eligibility criteria, regardless that its activities are funded by a municipality. That a municipality gives funding to an organization does not equate the organization's supplies to be municipal services. In addition, residential accommodation supplied at market rates and residential care accommodation provided in facilities such as nursing homes and personal care homes, irrespective of whether the fees for the accommodation are based on income, are not activities contemplated for purposes of granting municipal designation.

RGI Long-Term Residential Accommodation

A charity or a non-profit organization that receives government funding to supply long-term residential accommodation to tenants on an RGI basis may apply for municipal designation for purposes of subsection 259(1). We consider the supply of long-term residential accommodation to mean the rental of self-contained housing units (private living quarters which include cooking facilities and a bathroom) for periods of one month or more. The government funding must be payable to subsidize the cost of those housing units that are supplied on a RGI basis. Note that the government funding in these situations includes funding provided by a municipality. The activities described above must be undertaken within a program to provide housing to low to moderate-income households.

Municipal designation does not apply to any other activities of the charity or non-profit organization such as the supply of residential units that are not on an RGI basis or for which no government subsidy is payable (sometimes referred to as market rent) or for the supply of commercial space. In addition, a supply that includes accommodation as one element but also includes other elements such as meals, personal care services, laundry, or housecleaning may not be considered an eligible supply of long-term accommodation. Accordingly, the activities engaged in by operators of personal care homes and nursing homes that involve these mixed or composite supplies are not eligible activities under the administrative policy and eligibility criteria for municipal designation for purposes of subsection 259(1).

Documentary evidence that a charity or non-profit organization must provide to demonstrate that the long-term residential accommodation in question meets the administrative policy and eligibility criteria for municipal designation includes:

•   A copy of the charity or non-profit organization's Certificate and Articles of Incorporation;

•   A copy of a dated and signed agreement that describes that it is providing RGI housing for which the charity or non-profit organization receives funding from a government; and

•   A copy of a document that attests to the number of RGI units for which the charity or non-profit organization receives funding from a government relative to the total number of units in the project. This information is generally provided to the funding source annually. We will require this information for at least the latest/current year.

We will also require documentation that demonstrates that the selection of eligible households that benefit from the supply of long-term residential accommodation on an RGI basis supported by government funding is within a program that is geared to low to moderate-income households. Such documentation may include the written policies, guidelines and/or operating manuals that apply to the eligibility process for RGI housing.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call the XXXXX GST/HST Rulings Centre at 1-800-959-8287 (service in English) or 1-800-959-8296 (service in French).

Yours truly,

Susan Eastman
Municipalities and Healthcare Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

2007/10/19 — RITS 86120 — Application of GST to the Supply of Real Property Via Tax Sale