21 July 1996 GST/HST Interpretation 11895-5 - Extension Fees Under

I refer to the E-Mail message of October 24, 1994 from XXXXX of your staff sent to Mr. Owen Newell of Special Sectors. XXXXX XXXXX has requested an interpretation from your office on the application of GST under the Excise Tax Act (the Act) to extension fees charged by XXXXX On December 9, 1994, Mr. Newell contacted XXXXX XXXXX to request additional information.

Facts

1. Any person (applicant) who wishes to have XXXXX extend XXXXX electric supply system to serve any land or lands not previously served by the electric supply system may make application to XXXXX to have the extension of the electric utility system (the extension) constructed.

2. XXXXX (the Municipal Act) provides the conditions under which a municipality will construct an extension. The extension requires a council bylaw and the approval of XXXXX In compliance with the Municipal Act, XXXXX passed By-Law XXXXX (the by-law) on XXXXX, 19XX. The by-law stipulates that the request for the extension must be justified i.e., sufficient potential electricity users will make use of such extension.

3. XXXXX electric utilities department provides the construction services to the applicant. XXXXX is a registrant for the purposes of the GST. Title to the extension remains with XXXXX[.]

4. Under article XXXXX of the by-law, where XXXXX approves and authorizes the request for the extension, the applicant is required to enter into an agreement with XXXXX to pay the entire cost of the extension.

5. Under XXXXX of the Municipal Act, the by-law may further provide for refunds of the cost of the extension to the applicant according to a formula based on the number of service connections which could be made by other persons (users) subsequently using the extension.

6. As part of the process of issuing development permits to the subsequent users, XXXXX requires the users to pay the extension fee as calculated by the formula in (5) above.

7. Under XXXXX of the Municipal Act, refunds shall not be made under XXXXX after 5 years from the completion of the extension, and in no case shall refunds exceed the amount of the charges borne by the applicant under this section.

8. Article XXXXX of the by-law which requires the agreement between the applicant and XXXXX also provides for refunds to the applicant based on the terms of the agreement.

9. Under the terms of a sample agreement obtained from XXXXX the amount of possible refunds to the applicant was specified in the agreement based on the number of possible service outlets.

10. XXXXX is a registrant for GST. XXXXX invoices the applicant for the taxable supply of the construction services of the installation of the electrical utility main. The supply of the construction services is subject to GST at 7%.

11. The fees collected from the subsequent users by XXXXX during the five year period are remitted to the applicant by XXXXX issues credit notes with the remittances.

Question:

Are there GST implications in this method where credit notes are issued by XXXXX to the applicant? Could the credit notes be considered a reduction of consideration for the taxable supply between XXXXX and the applicant?

Response:

The supply of the extension by XXXXX to the applicant is a taxable supply of construction services. XXXXX as a registrant, will charge GST on the value of the consideration for the supply of the extension.

The extension fee collected by XXXXX from the users is consideration for an exempt supply of service in respect of an application for a supply of a development permit.

Pursuant to XXXXX of the Municipal Act and article XXXXX of the by-law, XXXXX is required to refund to the applicant extension fees it charges to subsequent users of the extension. Payment of the refund by XXXXX to the applicant is a reduction in the value of the consideration for the supply of the extension for which the applicant was charged by XXXXX[.] Subsection 232(2) of the Act provides for a reduction in the amount of GST charged as a result of the reduction in the value of the consideration for a supply. Under subsection 232(3), credit notes may be used to account for this tax adjustment. The proceeds from the extension fees collected by XXXXX from subsequent developers, when remitted by XXXXX to the original applicant, represent a reduction in the value of the consideration for the supply of the extension. The credit notes represent a reduction of consideration paid for the original taxable supply. In those situations where XXXXX refunds the GST, the applicant will be required, pursuant to paragraph 232(3)(c) of the Act, to adjust the ITC's previously claimed. Pursuant to paragraph 232(3)(b) of the Act, XXXXX will be eligible to claim ITC's for the GST refunded to the applicant.

Should you have any questions, please contact Ms. Enikö Vermes, Manager, MUSH at (613) 954-5127 or Mr. Owen Newell, Policy Officer, Municipalities at (613) 954-4280.

J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations