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: 135772
September 18, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
Eligibility for input tax credits on the acquisition of real property and construction services
Thank you for your letter of [mm/dd/yyyy] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the acquisition of certain lands (the Land) by […] (the Town) and the construction and subsequent lease of […] (the Facility) on the Land.
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.
STATEMENT OF FACTS
We understand the following from your letters dated […]:
1. The Town is a “municipality” and a “public service body” as those terms are defined in subsection 123(1) and is registered for GST/HST purposes under business number [#].
2. The Town will purchase the Land on which the Facility will be constructed from a developer who will sell the Land as a condition of development pursuant to Town By-Law No. […]. […].
3. The Town will file an election under section 211 in respect of the Land.
4. The Facility will be constructed on the Land. It is not clear as to the circumstances under which the Facility will be constructed. (Footnote 1)
5. Upon completion of construction of the Facility, the Town will own 100% of the Facility.
6. The Town will lease the Facility to the Operator under a long term lease for $[…] to $[…] per year in addition to an upfront rental payment of one-half of the construction costs. The fact that the Town and the Operator will each provide half the funds necessary for the construction of the Facility will be reflected in the annual lease payment.
7. The Operator will operate concerts, sporting events and cultural events at the Facility and will charge attendees taxable admission to such events.
8. The Operator will have sole responsibility for the operation of the Facility and the running of the events. The Town will not participate in any capacity in the operation of the Facility or in the running of the events.
9. The Operator will, at times, licence parts of the Facility to the Town for the Town’s municipal purposes for consideration. There will be no lease or continuous use licence between the Operator and the Town for the use of the Facility by the Town.
RULINGS REQUESTED
You have requested that we confirm the following:
1. By leasing the Facility to the Operator, the Town will be engaged in a commercial activity as that term is defined in subsection 123(1).
2. The Town will be entitled to full input tax credits (ITCs) pursuant to section 169 in respect of:
a) GST/HST payable on the acquisition of the Land;
b) GST/HST payable on the construction of the Facility;
c) GST/HST payable on any rental charges the Town pays to the Operator for the licence of the Facility to the extent the Town uses the Facility in the course of making taxable supplies. To the extent the Town cannot claim ITCs for rental charges, the Town is eligible for a municipal rebate under section 259.
INTERPRETATIONS GIVEN
As provided in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, a ruling will only be issued in respect of a clearly defined fact situation of a particular taxpayer. Despite our requests, we have not received the agreements detailing the acquisition of the Land and the construction and subsequent lease of the Facility. As such, we are unable to provide a ruling on this matter. However, we are able to provide you with the following interpretation. If you are able to provide us with all relevant agreements at a later time, you may request a ruling at that time.
1. The supply of the Facility by the Town to the Operator by way of lease would be excluded from the exemption in section 25 of Part VI of Schedule V to the ETA. No other exemptions in Schedule V to the ETA would apply to the supply of the Facility made by the Town in the circumstances described. In that case, the Town would be engaged in a commercial activity with respect to the supply of the Facility to the Operator.
2. With respect to claiming ITCs:
a) If GST/HST is payable on the purchase of the Land and the Land is capital real property of the Town, the Town will be eligible to claim an ITC for that tax payable to the extent that the Land is acquired for use or supply in commercial activities of the Town, subject to a minimum use of more than 10% in commercial activities. If the Land is for use or supply exclusively (90% or more) in commercial activities of the Town, a full ITC will be available.
b) If the property and services acquired to construct the Facility constitute improvements to the Land, the Town will be eligible to claim ITCs with respect to those properties and services to the extent that the Land was used in commercial activities of the Town immediately after the Land, or a portion of it, was last acquired by the Town.
c) The Town will be eligible to claim ITCs in respect of the GST/HST payable on the licence of the Facility from the Operator to the extent that the property is acquired for use or supply in commercial activities of the Town. To the extent that the Town acquires the Facility from the Operator for use otherwise than in commercial activities, the Town would generally be eligible for a rebate under section 259 with respect to such tax paid or payable.
EXPLANATION
Lease of the Facility to the Operator
A “commercial activity” is defined in subsection 123(1) to mean, in part, “the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.” Accordingly, the making of a supply of real property is a commercial activity unless the supply is specifically exempted under a provision of the ETA. Exempt supplies are listed in Schedule V to the ETA.
Section 25 of Part VI of Schedule V to the ETA is the general exempting provision for supplies of real property made by many public service bodies. However, this provision does not apply to a supply of real property made by a municipality unless the supply is made under an agreement in writing entered into before March 10, 2004. Based on the scenario you have provided, it appears that the lease between the Town and the Operator was not entered into before March 10, 2004. Therefore, the supply of the Facility by the Town to the Operator by way of lease is excluded from exemption in section 25 of Part VI of Schedule V to the ETA. No other exemptions in Schedule V to the ETA would apply in the circumstances described.
The Town’s ITC eligibility
General ITC eligibility
Subsection 169(1) allows a registrant to claim ITCs in certain circumstances. This subsection provides the basic rules with respect to determining a person’s ITC eligibility for the GST/HST paid or payable on the acquisition of property and services.
The ITC of a person is the amount determined by the formula A x B in subsection 169(1). In the formula, element A is the tax that is paid or becomes payable by a person on the acquisition of the property or service, while element B is the percentage determined under paragraph (a), (b) or (c). Paragraph (a) of the description of element B is not relevant in the situation described. Where property or a service is acquired for use in improving capital property of the person, paragraph (b) of the description of element B provides that the percentage is equal to the extent to which the person was using the capital property in commercial activities of the person immediately after the capital property, or a portion of it, was last acquired by the person. Paragraph (c) of the description of element B provides that in any other case, the percentage is based on the extent to which the property or service is acquired for consumption, use or supply in commercial activities of the person.
Note that for all ITC claims, the Town must also meet the documentary requirements for claiming ITCs and must claim the ITCs within the allowable time frame, generally four years from the time the tax is paid or becomes payable.
Acquisition of the Land
[…]. If no GST/HST is payable by the Town on the acquisition of the Land, there will be no ITC eligibility on the acquisition of the Land as there is no GST/HST paid or payable.
Subsection 155(1) applies in certain situations where a supply is made between persons not dealing at arm’s length. That subsection provides, in part, that where a supply is made between persons not dealing at arm’s length for no consideration or for consideration less than the fair market value at the time the supply is made, and the recipient is not a registrant acquiring the property or service for use exclusively in commercial activities of the recipient, the value of consideration is deemed to be the fair market value of the property or service at the time the supply is made.
It is a question of fact as to whether persons are dealing at arm’s length. If the vendor of the Land is dealing with the Town at arm’s length, the provisions of subsection 155(1) would not apply to the vendor’s supply of the Land to the Town.
It should be noted that if an election under section 211 were not in effect in respect of the Land and the Land is capital real property of the Town, the Town would be eligible for an ITC for any GST/HST paid or payable on the acquisition of the Land only if it were acquired for use or supply primarily (more than 50%) in the Town’s commercial activities. If the Land is acquired for use or supply primarily in commercial activities, the Town would be deemed to have acquired the Land for use or supply exclusively in commercial activities and a full ITC would be available.
Construction of the Facility
The Facility would generally be considered an improvement to the Land. “Improvement” is defined in subsection 123(1) as any property or service supplied to a person for the purpose of improving particular property of the person to the extent that the consideration payable for the property or service would be included in determining the cost (or in the case of capital property, the adjusted cost base) of the particular property for purposes of the Income Tax Act.
While an election under section 211 is expected to be in effect when the construction of the Facility takes place, we would like to inform you of an ITC provision in the event that the election is not made. In addition to the provisions of paragraph (b) of the description of element B in subsection 169(1), subsections 209(1) and 199(4) may further affect the Town’s ITC eligibility in the event an election under section 211 is not in place. Those subsections provide that where an election under section 211 is not in effect in respect of capital real property, a municipality is entitled to full ITCs on the acquisition of an improvement to capital real property only if, at the time tax in respect of the improvement is paid or becomes payable, the capital real property is used primarily (more than 50%) in commercial activities of the municipality. No ITC is permitted on the improvement if the capital real property is used otherwise than primarily in commercial activities at the time tax in respect of the improvement is paid or becomes payable.
Licence of the Facility from the Operator
The Town will be eligible to claim ITCs under paragraph (c) of the description of element B in subsection 169(1) for expenses in respect of non-capital property (e.g., the license of the Facility from the Operator) and services acquired, other than improvements to capital property, to the extent that the property or service is acquired for consumption, use or supply in commercial activities of the Town.
The rebate under section 259 generally allows a municipality to recover 100% of the GST (or federal part of the HST) paid or payable where the amount cannot be recovered as an ITC. Municipalities in British Columbia, Ontario, Nova Scotia, or New Brunswick, may also claim a rebate for a percentage of the provincial part of the HST paid on eligible expenses.
If a municipality is not a GST/HST registrant, it can apply for a rebate of the GST (or federal part of the HST) paid on all eligible expenses. If a municipality is a GST/HST registrant, it can apply for a rebate of the GST (or federal part of the HST) paid on eligible expenses for which an ITC cannot be claimed.
Further information on the public service bodies’ rebate is available in guide RC4034, GST/HST Public Service Bodies’ Rebate and RC4049, GST/HST Information for Municipalities.
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 613-954-4393. 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,
Melissa Mercer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
FOOTNOTE
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