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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
Attention: XXXXX
Case Number: 101532
July 14, 2009
Dear XXXXX:
Subject:
GST/HST RULING
"Cost Sharing Agreement"
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a "cost sharing agreement" between XXXXX (the Corporation) and XXXXX.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand the following.
1. XXXXX entered into a ground lease with the XXXXX in XXXXX for certain land located in XXXXX. The lease is for a term of XXXXX years.
2. XXXXX constructed a building (the Project) on the leased land. The Project contains a retail area on the lower levels, several residential floors above the retail area and underground parking spaces.
3. XXXXX filed a Declaration under the XXXXX, creating a residential leasehold condominium and the Corporation. The leasehold condominium (the Condominium) is comprised of XXXXX leasehold condominium units, storage units, parking spaces and common areas. The legal description of the Condominium is set out in XXXXX to the Declaration as follows, XXXXX.
4. The retail area of the Project is defined in the Declaration as the "Retail Development" and is designated as XXXXX. iFootnote 1 The definition also provides that the Retail Development forms no part of the Condominium. As such, no part of the Retail Development (the Retail Portion) of the Project is governed by the Corporation.
5. XXXXX continues to own a leasehold interest in the Retail Portion and subleases space therein to persons who operate stores and restaurants.
6. The Declaration contains the following provisions:
(a) Under XXXXX, each owner is to have an undivided interest in the common elements of the Condominium as a tenant in common with all other owners and the owner is to contribute to the common expenses in the proportion set out in XXXXX to the Declaration. iiFootnote 2
(b) Under XXXXX, the Corporation is to repair and maintain the common elements of the Condominium at its own expense. Under XXXXX, each owner is to pay the Corporation the owner's proportionate share of the common expenses of the Corporation. The common expenses are set out in XXXXX to the Declaration.
(c) Under XXXXX, the Corporation is to enter into an agreement (the Reciprocal Agreement) with XXXXX that provides, among other things, for the sharing of costs for the operation and management of the shared facilities, including making all payments thereunder. XXXXX provides that "Shared Facilities" means the portion of the common elements of the Condominium which are subject to the provisions of the Reciprocal Agreement between the Corporation and XXXXX.
7. The Reciprocal Agreement, dated XXXXX, was entered into between XXXXX and the Corporation and contains the following provisions:
(a) The recitals provide that XXXXX and the Corporation are entering into the agreement for the purposes of providing for the mutual use, maintenance and cost sharing of the common interior roadways, outdoor pedestrian walkways and shared utility and service easements which will serve and benefit both the Corporation and the Retail Portion, i.e., that part of the property whose leasehold interest is owned by XXXXX.
(b) XXXXX lists a number of easements, rights and rights in nature of easements that the Corporation and XXXXX grant to each other which provide for the mutual use and maintenance of interior roadways, pedestrian walkways and other areas such as the loading dock. For example, under XXXXX grants the Corporation, owners of units in the Condominium and any occupants of the Residential Portion the right to use XXXXX (XXXXX owns the leasehold interest for these Parts) for the purposes of a loading dock.
(c) Under XXXXX, XXXXX is responsible for making any repairs to the Retail Portion and the Corporation is responsible for making any repairs to the Condominium. Further, XXXXX and the Corporation are each responsible for governing and arranging for the maintenance, operation, replacement and inspection of the Required Easements situated on each of their respective properties (i.e., the Retail Portion for XXXXX and the Condominium for the Corporation). iiiFootnote 3 In the event that either party fails to perform such maintenance, operation, replacement or inspection, the other party may undertake the work and the cost of such is to be borne in accordance with the agreement.
(d) Under XXXXX, XXXXX, the Corporation and the owners of units in the Condominium agree that the Shared Facilities are for the benefit of both the Condominium and the Retail Portion and are to be operated, maintained, repaired, improved, altered, and replaced only in accordance with the manner set out in the agreement. ivFootnote 4
(e) The Shared Facilities are defined in XXXXX as those portions of the Building that are for use by both XXXXXand the Corporation in accordance with XXXXX of the agreement, regardless of who actually owns the leasehold interest in the facility. The Building is defined in XXXXX to mean the Residential Portion, as defined in XXXXX, and the "Retail Portion", as defined in XXXXX. The Residential Portion means the Lands (i.e., XXXXX) together with the Condominium, while the Retail Portion means the Lands together with that part of the building whose leasehold interest is held by XXXXX. As such, the Shared Facilities purportedly include such areas as the common interior roadways, outdoor pedestrian walkways, and the utility easements, all as identified in the recitals, in addition to the areas set out in Fact #7(f). (Footnote 5)
(f) Under XXXXX, the Shared Facilities include the Transformer Rooms and the Electrical Room, which form part of the Condominium. Under XXXXX, the Shared Facilities include the Loading Area (which we assume refers to the Loading Dock described in XXXXX), the Garbage Room and the Emergency Generator, all of which form part of the Retail Portion.
(g) Under XXXXX, XXXXX and the Corporation agree to share the costs of operating and maintaining the Shared Facilities and Required Easements in accordance with the cost sharing formula set out in XXXXX. We note that there is no formula, per se, in XXXXX, only an indication that XXXXX's share is XXXXX% of the "Total Cost" (that phrase is not defined) of certain property and services and the Corporation's share is XXXXX% of the Total Cost. Under XXXXX unless otherwise provided under the agreement, XXXXX is responsible for maintaining and paying all costs in connection with the Retail Portion and the Corporation is responsible for maintaining and paying all costs in connection with the Condominium.
(h) Under XXXXX, in using the Shared Facilities and Required Easements, XXXXX and the Corporation are each responsible for any damages they cause to the property of the other person.
(i) XXXXX provides that an agency relationship between XXXXX and the Corporation is not created under the agreement.
(j) XXXXX provides that a failure by the Corporation or XXXXX to pay its share of the costs related to the Shared Facilities may lead to the suspension of its enjoyment of all easements, rights or privileges and where such failure covers a period of twelve (12) months it may lead to the termination of all easements, rights and privileges provided for under the Reciprocal Agreement.
8. You indicated that the Corporation generally pays the costs with respect to the Shared Facilities and recovers a portion of those costs from XXXXX. You provided the following example of a cost with respect to the operation of the Shared Facilities. The Corporation has an account with a supplier and receives an invoice from the supplier in respect of services supplied in relation to the Shared Facilities. The Corporation pays the full amount invoiced by the supplier and then issues a statement to XXXXX for its share of the cost, including GST/HST, based on the proportion set out in XXXXX to the Reciprocal Agreement. The Corporation attaches a copy of the supplier's invoice to the document it sends to XXXXX. The Corporation does not claim any input tax credits (ITCs) in respect of the tax paid to the supplier, nor does it remit any tax on any part of the payment received from XXXXX.
9. The Corporation is not registered for GST/HST purposes. XXXXX is registered for GST/HST purposes.
Rulings Requested
You would like to know the following.
1. Does an agency relationship exist between the Corporation and XXXXX with respect to the costs incurred by the Corporation relating to the Shared Facilities?
2. Can the Corporation remain a non-registrant?
3. Is the Corporation's current procedure for passing on invoices from suppliers sufficient to enable XXXXX to claim ITCs with respect to the GST paid on Shared Facility costs?
Rulings Given
Based on the facts set out above, we rule that:
1. The Corporation is making a taxable supply of real property by way of lease, licence or similar arrangement to XXXXX in respect of the Shared Facilities for which the leasehold interest is owned by the Corporation and certain amounts payable by XXXXX to the Corporation under the Reciprocal Agreement are consideration for the supply.
2. The Corporation is required to register for the GST/HST unless it is a small supplier.
3. Where the Corporation is not a small supplier, the Corporation is required to charge and collect GST is respect of taxable supplies of real property and provide XXXXX with the necessary documentation to enable XXXXX to claim ITCs in respect of the GST payable for those supplies.
These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
EXPLANATIONS
Ruling 1
We are unable to conclude that the Corporation is an agent of XXXXX in respect of paying certain costs of the Shared Facilities. Information with respect to the issue of agency is included below under the heading "Interpretation Given". However, we would like to address the fact that the Corporation is making supplies of real property by way of lease, licence or similar arrangement to XXXXX.
It is important to note that the Reciprocal Agreement does not provide for the sharing of costs incurred in respect of real property whose leasehold interest is owned jointly by the Corporation and XXXXX. Any leasehold interests in the Project, at least with respect to the leasehold interests relevant to our response, are owned by either the Corporation or XXXXX, not by both. As such, when the Corporation grants XXXXX the easements, rights and rights in the nature of easements, as is provided in XXXXX of the Reciprocal Agreement, the Corporation is making a supply of real property to XXXXX. As there are no exemptions for such supplies, the supplies are subject to tax. We view that portion of the costs that XXXXX is required to pay the Corporation for maintaining, operating, repairing, replacing and inspecting the Shared Facilities whose leasehold interest is held by the Corporation as consideration for the Corporation's supply of real property.
For example, the Transformer Rooms and Electrical Room form part of the Condominium (i.e., the rooms form part of the real property whose leasehold interest is owned by the Corporation). Nonetheless, these rooms form part of the Shared Facilities and the Corporation has granted XXXXX the rights to access and use these rooms. If the Corporation incurs a maintenance expense of $XXXXX for these rooms, XXXXX is required to pay $XXXXX (XXXXX% of $XXXXX) to the Corporation. We view this $XXXXX as consideration for the taxable supply of the right to use the rooms made by the Corporation and XXXXX is required to pay the GST to the Corporation in respect of this amount.
Where an agency relationship does not exist and the Corporation makes a taxable supply to XXXXX, before claiming an ITC, XXXXX must obtain sufficient evidence that enables the amount of the ITC to be determined, including the information prescribed in the Input Tax Credit Information (GST/HST) Regulations (the Regulations).
Ruling 2
If the Corporation is making taxable supplies it will generally be required to register pursuant to subsection 240(1). In general, every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for GST/HST purposes.
A "commercial activity" of a person, as defined in subsection 123(1), includes a business carried on by the person, or an adventure or concern of the person in the nature of trade, except to the extent it involves the making of exempt supplies by the person. It also includes making a supply (other than an exempt supply) of real property, including anything done by the person in the course of or in connection with the making of the supply.
One exception to the registration requirement is for a person who is a small supplier. A person is a small supplier during any particular calendar quarter and the following month if the total value of the consideration for world-wide taxable supplies, including zero-rated supplies, made by the person (or an associate of the person at the beginning of the particular calendar quarter) that became due, or was paid without becoming due, in the previous four calendar quarters does not exceed $30,000 or, where the person is a public service body, $50,000. The calculation excludes consideration attributable to the sale of goodwill of a business, supplies of financial services, and supplies by way of sale of capital property.
However, a person ceases to be a small supplier at any time in a calendar quarter if the total value of the consideration that becomes due, or is paid without becoming due, in that quarter for world-wide taxable supplies made by the person, or an associate of the person at the beginning of the calendar quarter, exceeds $30,000 or, if the person is a public service body, $50,000. The person ceases to be a small supplier immediately before the consideration becomes due or is paid for the particular taxable supply that puts the person over the $30,000, or $50,000 for a public service body, small supplier threshold.
Interpretation Given
As stated in GST/HST Policy Statement P-182R, Agency, the position of the CRA is that, for GST/HST purposes, a person is an agent with respect to a particular transaction if that person is an agent based on a determination of fact and an application of the principles of law, certain of which are set out in the policy statement. The policy statement sets out the three essential qualities of an agency relationship, discusses its fiduciary nature, and lists a number of indicators and questions to consider in determining whether a particular relationship is one of agency.
In a true agency relationship it should be evident that a person acting in the capacity of agent has been given the authority to affect the principal's legal position. The most common example of the ability to affect a principal's legal position is where the agent is authorized to enter into contracts with third parties on behalf of the principal.
In a relationship of agency, it should be clear that the principal has a degree of control over the actions of the agent; the agent would be acting as an extension of the principal and, therefore, would be under the principal's general direction and control. This is sometimes evidenced by requiring the principal's approval for certain expenditures.
The Reciprocal Agreement does not establish, on its own, that an agency relationship exists between XXXXX and the Corporation, either generally or in respect of any particular transaction. There is no indication that XXXXX has granted the Corporation the authority to affect its legal position. In addition, the fact that the parties have expressly indicated that they did not intend to enter into an agency relationship, while not determinative, cannot be ignored. It is our view that the essential qualities of agency have not been demonstrated.
Where an agency relationship does not exist between parties, the agreement between the person(s) and the third party from whom the acquisition is made should be examined to determine who the recipient of the supply is. In certain situations, all of the cost-sharing principals may be parties to an agreement for a particular acquisition and all could be recipients. In this case, each would be considered to have paid GST/HST on their respective portion of the purchase, notwithstanding that one party makes the actual payment. If one party alone enters into an agreement for the acquisition, then it alone is the recipient (i.e., the person who is liable to pay the consideration for the supply) of the initial supply from the third party.
Where an agency relationship is not established, the allocation of costs under a cost-sharing arrangement may result in the imposition of the GST/HST when one party pays the other party.
To the extent that the Corporation is incurring and paying expenses with respect to property for which it owns the leasehold, the Corporation is acting on its own behalf and not as agent for XXXXX. To the extent that the Corporation pays a supplier with respect to property for which XXXXX owns the leasehold, the Corporation may be paying such amounts as an agent of XXXXX.
If XXXXX is the owner of a unit in the Condominium, the payment of common expenses by the Corporation would not be made as an agent of XXXXX. However, the amount that XXXXX pays to the Corporation as condominium fees, which are in respect of the common expenses, may be in respect of an exempt supply. Section 13 of Part I of Schedule V to the ETA, in part, exempts a supply of property or a service made by a condominium corporation to the owner of a residential condominium unit described by the condominium plan if the property or service relates to the occupancy or use of the unit.
In any situation, where a person acts as agent on behalf of another person (principal) in acquiring or importing property or services, it is the principal who is liable to pay the consideration in respect of the supply, and therefore, is the recipient of the supply. As a result, even if the agent pays the consideration and tax on behalf of the principal, it is the principal who may be entitled to claim an ITC in respect of the tax payable.
Generally, subsection 169(1) provides that each registrant principal/recipient is entitled to claim an ITC for the tax that becomes payable by the principal/recipient to the extent to which the principal/recipient acquired or imported the property or services for consumption, use or supply in the course of its commercial activities. However, subsection 169(4) provides that a registrant principal/recipient cannot claim an ITC until it has obtained sufficient evidence in such form containing such information as will enable the amount of the ITC to be determined, including any such information prescribed under the Regulations. Such evidence might include invoices, written agreements, letters or other supporting documentation. Finally, it should be noted that the Regulations provide that instead of the recipient's name being shown on invoices of $XXXXX or more, the name of the duly authorized agent or representative may be shown, for example, when supplies of property or services have been acquired or imported under the agent's or representative's name.
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 613-954-8852. 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,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
XXXXX
i 1. XXXXX.
ii 2. XXXXX.
iii 3. XXXXX.
iv 4. XXXXX.
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