Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 103548
July 31, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
Municipal infrastructure/improvements transactions
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain municipal infrastructure transactions. We apologize for the delay in providing you with our response.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
BACKGROUND
The following information is based on your letter to us, samples or drafts of […] [various agreements] between a county and a developer whose lands are situated in an adjacent municipality.
In […] [province X], subdivisions of land and developments upon lands must proceed through the authority given to municipalities under the ([…][Act]). Part of this authority includes the general requirement that developers of lands be responsible for all of the costs of new improvements that are required in order to properly access and service the development.
In general, a particular developer who applies for a development permit or a subdivision approval may have to:
* pay a levy,
* construct or pay for the construction of municipal improvements required in order to access and service the particular developer’s land,
* construct or pay for the construction of municipal improvements in excess of what is required for that the particular developer’s land (improvements with excess capacity) that will benefit subsequent developer’s lands,
* pay a portion of the costs of improvements constructed or paid for by a prior developer or by the municipality that will benefit the particular developer’s land, and
* pay an amount as its share of the costs of future improvement from which the particular developer’s land will benefit.
Municipal improvements constructed by a developer and located on or under public property generally become property of the municipality without any cost or expense to the municipality.
The relevant [Act] provisions in this case are sections […].
[…][Levy X]
Section […] of the [Act] allows a municipality to pass bylaws giving the municipality the right to impose a levy ([…]) on developers […].
Development agreement
Sections […] of the [Act] allow a municipality to require a developer, as a condition of a development permit being issued or as a condition for subdivision approval, to enter into a development agreement with the municipality that requires the developer to:
* construct or pay for the construction of municipal improvements (such as roads, curbs, gutters, bridges and overpasses, and water, sewer, storm sewer, natural gas and other services identified as public utilities under the [Act] that are required in order to properly access and service the proposed subdivision;
* pay [Levy X] or […] levy.
Where the developer constructs or pays for the construction of the required municipal improvements, the development agreement requires that the developer construct the improvements in accordance with approved plans and standards, and the improvements are turned over to the municipality at zero or nominal cost.
Where the developer is required to pay a fee to the municipality for existing or future improvements, the development agreement requires the developer to pay a proportionate share of the improvement costs based upon proportional use and benefit by the proposed subdivision or development.
Front-ending agreement
A municipality may also, as a condition of a development permit being issued or as a condition for subdivision approval, require a developer to construct or pay for all or a portion of municipal improvements with excess capacity that will benefit future subdivisions or developments.
Section […] of the [Act] provides that an agreement referred to in […] [of the Act] may, prior to the issuance of a subdivision approval or a development permit, require a developer to:
(a) pay for […] improvements constructed or paid for in whole or in part by the municipality prior to the approval of the development permit or subdivision approval application, or
(b) construct or pay for all or a portion of improvements with excess capacity.
The front--ending agreement governs the manner in which the improvements will be designed, constructed, and turned over to the municipality, as well as how the costs of doing so are to be addressed under the [Levy X] regime.
Where the developer constructs or pays for the construction of improvements that are in excess of what will benefit the developer’s land, the front-ending agreement allows the developer, […] to be reimbursed for the costs incurred. […]. Fees collected from a subsequent developer are generally used by the municipality to reimburse some or all of the costs incurred by a prior developer who constructed or paid for the improvements that have excess capacity.
Servicing agreement
Prior to, and in anticipation of a subdivision or development of land, a developer may approach a municipality to propose the construction of improvements necessary to properly access and service lands that will eventually be the subject of a subdivision approval or development permit (e.g. construction of roads within municipally controlled road plans). This may be proposed in advance of the subdivision approval or the development permit due to construction season restrictions, construction timing, advantageous costs, etc. In such instances, the developer and the municipality may enter into a servicing agreement in order to govern the manner in which the improvements will be designed, constructed, and turned over to the municipality. This servicing agreement pre-dates a subdivision approval or a development permit, but deals with the same improvements […] required […] under a development agreement.
Adjacent municipalities
Where a proposed subdivision or development is adjacent to a municipality’s boundaries such that the servicing of the proposed subdivision or development and its impact requires the construction of improvements in an adjacent municipality, the subdivision approval or the development permit may again contain conditions requiring that improvement requirements and impacts in the adjacent municipality be addressed between the developer and the adjacent municipality. A development agreement between the developer and the adjacent municipality will deal with the developer’s obligations to either construct or pay for new improvements required to properly access and service the proposed subdivision or development.
The […] agreement between a county and a corporation […] allows the corporation to construct vehicular access to its lands from a road under the care and control of the county. […]. Among other conditions, the agreement provides that the vehicular access will be completed by the corporation at its sole cost and expense and that the corporation is required to pay the sum of $[…] to the county which amount will be applied to the cost of the upgrades to the road.
It is assumed that the municipality and the developers are not related and are dealing at arm’s length.
It is assumed that none of the developers are a charity.
RULINGS REQUESTED
[Levy X]
Confirmation that:
1. the supply of access and service through improvements in exchange for payment by a developer of [Levy X] is not subject to GST.
Development Agreement
Confirmation that:
2. the supply of infrastructure by the developer to the municipality under a Development Agreement is not subject to GST;
3. the supply of access and service through infrastructure in exchange for payment by a developer of a proportionate share of the cost of that infrastructure under a Development Agreement is not subject to GST.
Front-Ending Agreement
Confirmation that:
4. the supply of infrastructure by the developer to the municipality under a Front--Ending Agreement is not subject to GST;
5. the supply of access and service through infrastructure in exchange for payment by a subsequent developer of a proportionate cost of that infrastructure under a Development Agreement (i.e. the instance of a subsequent developer paying a proportionate share of any costs incurred by a Frontender under a Front--Ending Agreement), is not subject to GST.
Servicing Agreement
Confirmation that:
6. the supply of infrastructure by the developer to the municipality under a Servicing Agreement is not subject to GST;
7. the supply of access and service through infrastructure in exchange for payment by a developer of a proportionate cost of that infrastructure under a Servicing Agreement is not subject to GST.
Adjacent municipalities
Confirmation that:
8. the supply of infrastructure by the developer to the adjacent municipality under a Development Agreement is not subject to GST;
9. the supply of access and service through infrastructure in exchange for payment by a developer to the adjacent municipality of a proportionate cost of that infrastructure under a Development Agreement is not subject to GST.
INTERPRETATIONS GIVEN
We are unable to issue a GST/HST Ruling in respect of the foregoing matters. […]
While we are unable to issue rulings on these issues, we can provide the following interpretations.
[Levy X]
1. [A] [Levy X] charged by a municipality (to recover improvement costs incurred or to be incurred by the municipality) to a developer who applies for a development permit or subdivision approval would generally be consideration for a supply of a permit or similar right or consideration for a supply of a service in respect of the application for a right (to subdivide or develop lands) and would be exempt under paragraph 20(c) of Part VI of Schedule V to the ETA.
Development agreement
2. The supply by a developer to the municipality under a development agreement would generally be a taxable supply of construction and installation services. However, if the supply to the municipality is made for no consideration, there is no GST/HST payable by the municipality. If the supply to the municipality is made for nominal consideration, GST/HST is payable on the value of the consideration for the supply.
3. The amount payable by a developer to the municipality as its proportionate share of the improvement costs would generally be regarded as consideration for an exempt supply of a development permit or subdivision approval pursuant to paragraph 20(c) of Part VI of Schedule V to the ETA.
Front--ending agreement
4. The supply by a developer to the municipality in respect of the construction of an improvement with excess capacity would generally be a taxable supply of construction and installation services by the developer to the municipality. Fees collected by the municipality from subsequent developers would generally become consideration for a taxable supply when the fees are used to reimburse the developer who constructed or paid for the improvements with an excess capacity.
5. The amount payable by a subsequent developer to the municipality as its proportionate share of improvement costs incurrent by a prior developer would generally be regarded as consideration for an exempt supply of a development permit or subdivision approval pursuant to paragraph 20(c) of Part VI of Schedule V to the ETA.
Servicing agreement
6. A supply of construction and installation services made by a developer to the municipality under a servicing agreement would generally be a taxable supply for GST/HST purposes. GST/HST would be payable on the value of the consideration for the supply.
7. The amount payable by a subsequent developer to the municipality as its proportionate share of the improvement costs would generally be regarded as consideration for an exempt supply of a development permit or subdivision approval pursuant to paragraph 20(c) of Part VI of Schedule V to the ETA.
Adjacent subdivision/development
8. A supply of construction and installation services made by a developer to a county would generally be a taxable supply for GST/HST purposes.
9. The amount payable by a developer to a county as its proportionate share of the costs of future upgrades to the land in the adjacent municipality would generally be regarded as consideration for an exempt supply of a development permit or subdivision approval pursuant to paragraph 20(c) of Part VI of Schedule V to the ETA.
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 me directly at 613-952-9587. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Béatrice Mulinda
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate