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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 131923
Business Number: [...]
January 17, 2012
Dear [Client]:
Subject:
GST/HST RULING
Tax Status of Supplies made by a Municipality
Thank you for your letter of [mm//dd/yyyy] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by the [...] [municipality] to [...] [ACo] and [...] [BCo].
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
Based on your letter of [mm/dd/yyyy] and additional research we understand the facts as follows:
1. The [municipality] was incorporated in [yyyy]. In [yyyy], [the municipality] [...] located in [...] [Province X].
The [municipality] is registered for GST/HST and operates under Business Number [...].
2. [...] [CCo] was formed in [yyyy] and [...] [provided] [...] [Y] to residents in [the municipality].
3. In [YYYY], [...] [Province X] [...]
[...] [CCo] was transformed into a holding company which became the owner of: [BCo] and [ACo]. [CCo] remains a holding company and operates under Business Number [...].
[BCo] and [ACo] were created pursuant to [...] by the [...] of the [municipality] as per the [municipality's] By-law No. [...] dated [mm/dd/yyyy].
[BCo] and [ACo] were [...] incorporated on [mm/dd/yyyy] and are located in [the municipality]. [BCo] supplies [...] [Y] [...] and operates under Business Number [...].
[ACo] supplies [Y] to customers within [...] including the [municipality]. [ACo] operates under Business Number [...].
[CCo], [BCo], and [ACo] file separate GST/HST returns.
4. [...] of the [municipality's] Bylaw indicates that any common shares or other securities issued by [CCo], [BCo], or [ACo] upon incorporation would be issued in the name of the [municipality]. This was confirmed in a facsimile dated [mm/dd/yyyy] [...]. The facsimile also confirmed that the [municipality] was responsible for appointing the Board of Directors of [CCo], [BCo], and [ACo].
On [mm/dd/yyyy], the Stock Transfer Register and the Shareholders' Register for [CCo] indicate that [#] Common Shares were transferred from [...] to the [municipality]. The [municipality's] Shareholders' Ledger indicates the [municipality] owns [#] Common Shares of [CCo].
The Shareholders' Register for [BCo] indicates that the [municipality] was the [...] shareholder of [#] Common Shares on [mm/dd/yyyy]. On the same day, these shares were transferred to [CCo] as supported by [BCo's] Share Transfer Register. The [municipality's] and [CCo's] Shareholders' Ledger correspond with the transfer.
The Shareholders' Register for [ACo] indicates that the [municipality] was the [...] shareholder of [#] Common Shares on [mm/dd/yyyy]. On the same day, these shares were transferred to [CCo] as supported by [ACo's] Share Transfer Register. The [municipality's] and [CCo's] Shareholders' Ledger correspond with the transfer.
As a result of these transfers, the [municipality] owns 100% shares of [CCo] and [CCo] owns 100% of the shares of [BCo] and [ACo].
[...] the [municipality's] Bylaw indicates that all the assets and assumed liabilities of the [municipality] associated with [...] [Y] and associated business would be transferred to and assumed by [BCo] and [ACo].
5. On [mm/dd/yyyy], the [municipality] wrote to the Canada Revenue Agency (CRA) requesting that [CCo], [BCo], and [ACo] be determined as "municipalities", as para-municipal organizations, for purposes of the ETA. Effective [mm/dd/yyyy], CRA granted municipal status to [CCo], [BCo] and [ACo].
6. According to your letter of [mm/dd/yyyy], the [municipality] does not own any shares of [BCo] and [ACo] and does not directly control either corporation.
In addition, the members of the Board of Directors of [BCo] and [ACo] are appointed by [CCo] and the budgets for [BCo] and [ACo] are approved by [CCo].
Ruling Requested
You would like to know whether supplies, other than specifically excluded supplies, made between the [municipality] and [BCo] and [ACo] are exempt from GST/HST pursuant to paragraph 28(a) of Part VI of Schedule V on the basis that [BCo] and [ACo] are para-municipal organizations of the [municipality].
In addition, you would like confirmation that supplies, other than specifically excluded supplies, between the [municipality] and [CCo] are exempt pursuant to paragraph 28(a) of Part VI of Schedule V on the basis that [CCo] is a para-municipal organization of the [municipality].
Ruling Given
Based on the facts set out above, we rule that supplies made between the [municipality] and [BCo] and [ACo] are not exempt under paragraph 28(a) of Part VI of Schedule V because [BCo] and [ACo] are not para-municipal organizations as that term is defined in section 1 of Part VI of Schedule V. Therefore, supplies made between the [municipality] and [BCo] and [ACo] are taxable at a rate of [#]% unless another exemption or zero-rating provision is applicable.
In addition, we rule that supplies, other than supplies of electricity, gas, steam and telecommunication services, between [...] the [municipality] and [CCo] are exempt under paragraph 28(a) of Part VI of Schedule V because [CCo] is a para-municipal organization of the [municipality] as that term is defined in section 1 of Part VI of Schedule V.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling 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.
Explanation
Section 28 of Part VI of Schedule V exempts certain supplies between a municipal body and any of its para-municipal organizations. This section exempts:
A supply between
(a) a municipal body and any of its para-municipal organizations,
(b) a para-municipal organization of a municipal body and any other para-municipal organization of the municipal body,
(c) a regional municipality and any of its local municipalities or any para-municipal organization of any of those local municipalities,
(d) a para-municipal organization of a regional municipality and any local municipality of the regional municipality or any para-municipal organization of the local municipality, or
(e) a regional municipality or any of its para-municipal organizations and any other organization (other than a government) the designated activities of which include the provision of water or municipal services within an area over which the regional municipality has jurisdiction,
but not including
(f) a supply of electricity, gas, steam or telecommunication services made by a municipal body or a para-municipal organization, or a branch or division thereof, that acts as a public utility, or
(g) any supply made or received by
(i) a provincially established designated body,
(ii) a para-municipal organization designated under section 259 of the Act or section 22 or 23 of Part VI of Schedule V, or
(iii) another organization referred to in paragraph (e),
otherwise than in the course of the designated activities of the body or organization, as the case may be.
For purposes of this exempting provision, "municipal body" and "para-municipal organization" of a municipal body are defined in section 1 of Part VI of Schedule V. A "municipal body" means a municipality or a provincially established designated body.
Subsection 123(1) defines a "municipality" to mean:
(a) an incorporated city, town, village, metropolitan authority, township, district, county or rural municipality or other incorporated municipal body however designated, and
(b) such other local authority as the Minister may determine to be a municipality for the purposes of this Part.
Section 1 of Part VI of Schedule V defines a "provincially established designated body" to mean a body that is established by Her Majesty in right of a province and designated under section 259 of the Act, to be a municipality for purposes of that section.
Section 1 of Part VI of Schedule V outlines the criteria that must be met for an organization to be a para-municipal organization of a municipal body that is a municipality:
(a) The organization must be owned or controlled by the municipal body; and
(b) The organization must be designated under section 259, or under section 22 or 23 of Part VI of Schedule V, to be a municipality, or established by the municipality and determined under paragraph (b) of the definition "municipality" in subsection 123(1) to be a municipality for the purposes of Part IX; or
For the above purposes, an organization will be considered to be owned by a municipality if:
• The municipality owns 90% or more of the shares or capital of the organization; or
• The municipality owns the organization's assets or having control of the disposition of the organization's assets so that the assets are vested in the municipal body in the event that the organization is wound-up or liquidated.
For the above purposes, an organization will be considered to be controlled by a municipality if:
• the municipality appoints more than 50 percent of the members of the governing body of the organization (e.g., directors, governors, commissioners); and
• the municipality is responsible for reviewing and approving the organization's operating and capital budgets.
For the above purposes, an organization is eligible to be determined a municipality if:
• it is established by one or more municipalities, or by a province at the request of one or more municipalities; and
• it is owned or controlled by one or more municipalities.
[BCo] and [ACo] as para-municipal organizations
For [BCo] and [ACo] to be a para-municipal organization for purposes of paragraph 28(a) of
Part VI of Schedule V, [BCo] and [ACo] must be a body, board, commission, corporation, or other organization created by a province or a municipality that is owned or controlled by a municipality and have been determined by the CRA to be a municipality.
The [municipality] is [...] a municipality as defined in paragraph (a) of the definition of that term in subsection 123(1). [BCo] and [ACo] have each been determined by the CRA to be a municipality. [BCo] and [ACo] are corporations created by [...] of the [...] [municipality] and are therefore a body, board, commission, corporation, or other organization established by a municipality. The current issue is whether [BCo] and [ACo] are owned or controlled by a municipality. For the exemption to apply in section 28 of Part VI of Schedule V, the [municipality] itself must own all or substantially all of the shares or assets of [BCo] and [ACo] or appoint the majority of the governing body and review and approve [BCo's] and [ACo's] operating and capital budgets.
At the time the [municipality] requested para-municipal status for [BCo] and [ACo], a facsimile dated [mm/dd/yyyy] was sent from [...] to J.A. Venne (the facsimile). The facsimile indicated that the [municipality] was the sole shareholder of [CCo], [BCo] and [ACo].
However, the Shareholders' Registers for [BCo] and [ACo] both indicate that [CCo] is the sole shareholder of the [#] Common Shares issued for each company. Although the [municipality] was the original shareholder of the shares of [BCo] and [ACo] issued on [mm/dd/yyyy], the Share Transfer Register for both companies indicates a transfer of shares occurred to [CCo] later the same day. Your letter of [mm/dd/yyyy] confirms that the [municipality] does not own any shares of [BCo] and [ACo] and that [CCo] is the sole shareholder of both companies.
In addition, the Shareholder's Register for [CCo] indicates that the [municipality] is the sole shareholder of the [#] Common Shares issued for [CCo]. Your letter of [mm/dd/yyyy] confirmed this fact.
It is our view that although the [municipality] owns all the shares in [CCo], which in turn owns all the shares in [BCo] and [ACo], the [municipality] does not directly own the shares in [BCo] and [ACo] by virtue of its ownership of shares in [CCo] because the [municipality], [CCo], [BCo] and [ACo] are separate legal entities. As [CCo] is the direct owner of the shares in [BCo] and [ACo], it is our view that [CCo] is the owner of shares in [BCo] and [ACo].
According to the definition of a "para-municipal organization", the [municipality] may have ownership of [BCo] and [ACo] if the [municipality] owns the assets or controls the disposition of the assets of [BCo] and [ACo] so that the assets are vested in the [municipality] in the event that [BCo] and [ACo] are wound-up or liquidated. According to the Articles of Incorporation of [BCo] and [ACo], the holders of the Common shares shall be entitled:
(c) to receive, subject to the rights of the holders of another class of shares, the remaining property of the Corporation on the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.
In addition, [...] of the [municipality's] Bylaw states that all the assets and assumed liability of the [municipality] associated with [...] [Y] and associated business would be transferred to and assumed by [BCo] and [ACo] based on their respective operations. Therefore, it is our view that the [municipality] does not own the assets of [BCo] and [ACo].
The definition of a "para-municipal organization" requires that the organization be owned or controlled by a municipality. Paragraph (d) of the definition outlines specific criteria to be used for purposes of determining whether an organization is "controlled" by a municipality for purposes of the ETA. The municipality itself must nominate a majority of the organization's governing body, such as its Board of Directors and must approve the operating, and if applicable, the capital budget of the organization.
The facsimile indicated that the [municipality] appoints the Board of Directors. However, your letter of [mm/dd/yyyy] indicates that [CCo] and not the [municipality] appoints the Boards of Directors and approves the capital budgets of [BCo] and [ACo]. The [municipality] may have had control of [BCo] and [ACo] at the time the [municipality] requested [BCo] and [ACo] be determined as municipalities but as the [municipality] itself does not currently perform these functions it is our view that [CCo] and not the [municipality] has control of [BCo] and [ACo]. Where the [municipality] approves the budgets and nominates the directors of [CCo] it cannot be said that the [municipality] approves the budgets and nominates the directors of [BCo] and [ACo] as the [municipality], [CCo], [BCo] and [ACo] are separate legal entities and direct control by the [municipality] is not possible. Therefore, it is our view that the [municipality] currently does not have control of [BCo] and [ACo].
Based on the information provided, [BCo] and [ACo] do not meet the requirements to be a "para-municipal organization" of a municipal body as defined in section 1 of Part VI of Schedule V. Supplies from the [municipality] to [BCo] and [ACo] do not meet the conditions outlined in paragraph 28(a) of Part VI of Schedule V to be exempt and are therefore subject to tax at a rate of [...]% unless another exemption or zero-rating provision is available.
[CCo] as a para-municipal organization
[CCo] is a corporation created by the [municipality] and is therefore a corporation established by a municipality. The Shareholders' Register for [CCo] indicates that the [municipality] is the sole shareholder of the [...] [#] Common Shares issued for [CCo]. Therefore, based on the requirements in the definition of a "para-municipal organization" the [municipality] is the owner of [CCo].
As [CCo] is a corporation established and owned by a municipality and has been determined by the CRA to be a municipality, [CCo] is a "para-municipal organization" of a municipal body as defined in section 1 of Part VI of Schedule V.
Therefore, supplies between the [municipality] and [CCo] would be exempt pursuant to paragraph 28(a) of Part VI of Schedule V as supplies between a municipal body and any of its para-municipal organizations provided the supplies are not excluded from the exemption by paragraphs 28(f) and (g) of Part VI of Schedule V.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-7952. 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. Please note, we will be communicating with you shortly under separate cover concerning [...].
Yours truly,
Alison Jones LLB
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
Email this Content