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.
TO: [Client]
FROM: Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Case Number: 135932
Date: September 28, 2011
Subject:
GST/HST Interpretation
[...] [Supplies of design, construction, financing and management services of a facility]
Thank you for your memorandum received in our office on May 31, 2011, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain aspects of the construction of [...] [a facility] in [...] [City 1, Participating Province X].
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder unless otherwise specified.
We understand as follows:
Background
1. The [...] is a hospital authority as that term is defined in subsection 123(1).
2. The [...] (Hospital Authority) entered into an agreement (the Agreement) with [...] (Project Co). Project Co is not a public service body as that term is defined in subsection 123(1).
3. The Agreement called for Project Co to design, construct and finance a [facility] for Hospital Authority, as well as to provide certain facility management services once the [facility] became operational.
4. Once construction of the [facility] was complete and Hospital Authority received an occupancy permit, two things happened:
• Project Co invoiced Hospital Authority for the cost of the [facility] as well as for additional services supplied by Project Co by the time the invoice was issued. Further details of the invoice are set out below.
• Certain other service aspects of the Agreement came into effect which, in general terms, require Project Co to provide certain facility management services to Hospital Authority for a period of [...] years.
5. You indicated that once construction of the [facility] was complete, the "lease/finance" portion of the project began and Project Co began invoicing Hospital Authority a monthly amount for the capital cost of the project plus interest and an administration fee. Our review of the information submitted indicates the monthly billing is also in respect of the facility management services provided by Project Co to Hospital Authority.
The Agreement and other pertinent information
6. There are a number of schedules to the Agreement. Schedule [...] includes the following definitions for terms and phrases used in the Agreement: [...]
7. The Agreement includes the following provisions: [...]
8. You indicated that Project Co did not issue any invoices to Hospital Authority during the construction of the [...] [facility] prior to the issuance of Invoice # [...] (the First Invoice). Hospital Authority did not pay any amount to Project Co under the Agreement prior to the issuing of this invoice.
9. The First Invoice is dated [mm/dd/yyyy]. We will assume that the invoice was also issued on that date. This invoice shows the amount of $[...] for [...] (Construction price), the amount of $[...] for [...] (Procurement fee), and the amount of $[...] for [...] (Transition fee). [...]. The amounts for the Construction price, the Procurement fee and the Transition fee are broken down on the invoice as follows:
Period of expenditure
Total
Total
[mm/dd/yyyy] to [mm/dd/yyyy]
to [mm/dd/yyyy] to [mm/dd/yyyy]
[mm/dd/yyyy] to completion
Construction price
$[...]
$[...]
$[...]
$[...]
Procurement fee
$[...]
$[...]
$[...]
-
Transition fee
$[...]
-
$[...]
$[...]
Total
$[...]
$[...]
$[...]
$[...]
GST/HST (%)
6%
5%
[...]%
GST/HST ($)
$[...]
$[...]
$[...]
TOTAL DUE
$[...]
While the invoice shows a "Total due" of what appears to be only the GST/HST, the invoice also shows a [Construction price]. Given the provisions of paragraph [XXX] of the Agreement, which requires Hospital Authority to pay all the GST/HST payable in respect of the construction of the [facility], it is our view that this is the consideration that Project Co believes is reasonably attributable to the construction of the [facility]. You are not aware of whether this invoice was paid by Hospital Authority.
10. Invoices are issued monthly (the Monthly Invoices) in respect of the [...] Payment. The first such invoice, #[...], was issued by Project Co to Hospital Authority and is dated [mm/dd/yyyy].
11. Schedule [...] indicates that the schedule itself is contained in [...]. You did not submit that [...] for our review and as such, we are not able to comment on how the financing charges apply. It is possible that the financing details for the [...] are set out in that Schedule. While we are able to address your specific questions without having to review this schedule, it may be helpful to you in determining the extent to which the [...] Payment can be allocated to consideration for taxable supplies and financing charges.
ISSUES
You are enquiring as to:
1. whether the HST at [...]% applies to the full value of the Project when Project Co issued the First Invoice to Hospital Authority on [mm/dd/yyyy], and
2. whether Project Co should be charging HST on the invoices issued in respect of each [...] Payment to the extent that the amount on the invoice is in respect of the capital financing/lease or whether Project Co should be charging HST on the full amount of the invoice on the basis that the whole amount represents consideration for a single taxable supply.
RESPONSE
Issue 1
The GST/HST applies to that part of the consideration payable under the Agreement that can reasonably be attributed to the construction of the [facility]. Pursuant to paragraph [XXX] of the Agreement and the amount showing on the First Invoice, Project Co has concluded that the consideration that can reasonably be attributed to the construction of the [facility] is $[...]. The tax became payable on that consideration when the First Invoice was issued unless there was an undue delay in issuing an invoice. In that case, the tax became payable on any part of the consideration that can reasonably be attributed to the construction of the [facility] on the day Project Co would have issued an invoice for that consideration.
If Project Co's allocation of the consideration attributable to the construction of the [facility] is unreasonable (i.e., such consideration is understated) and the understated amount has not been paid or become payable by [mm/dd/yyyy], the tax payable on such consideration will become payable on that day.
The GST applies at the rate of 5% on the consideration that can reasonably be attributed to the construction of the [facility] to the extent that tax became payable on or after January 1, 2008 except that the HST at [...]% applies to any consideration that can reasonably be attributed to property delivered and services performed under the Agreement after June 30, 2010. To the extent that any consideration become payable before January 1, 2008, the GST at 6% applies to that consideration.
Issue 2
Project Co is required to charge and collect tax on the [...] Payment to the extent that the consideration is in respect of a taxable supply and the tax has not previously become payable under section 168. To the extent that the amount payable in respect of the [...] Payment includes the payment of interest by Hospital Authority to Project Co, that amount is in respect of an exempt supply and is not subject to the GST/HST.
We note that other supplies are being made under the Agreement, two of which are reflected in the First Invoice, i.e., equipment procurement management services and services related to the transition and commissioning of the new [facility]. (iFootnote 1) However, you have not asked any questions with respect to the application of the GST/HST to these other supplies and we have therefore restricted our comments to the questions set out in your memo. In any event, there are no obvious indications to suggest that Project Co has incorrectly applied the GST/HST to these other services.
Explanation
The financing charge/lease
Project Co is not making a supply by way of lease of the [...] [site] or the [facility] to Hospital Authority. As set out in paragraph [X] of the Agreement, Hospital Authority is the registered owner in fee simple of the [site], subject to the title encumbrances set out in Schedule [...] to the agreement. Further, section [XX] provides that Project Co does not acquire an [...] interest in the [site] or the [facility] under the agreement or otherwise. As such, Project Co is not making a supply by way of lease (or licence or similar arrangement) of real property to Hospital Authority under the Agreement.
While we were not presented with any documents that establish the manner in which financing charges apply under the Agreement, our response is predicated on the basis that such charges do apply.
Issue 1
When tax becomes payable - application of section 168
Subsection 168(1) provides that the GST/HST in respect of a taxable supply is payable by the recipient of the supply on the earlier of the day the consideration for the supply is paid and the day the consideration becomes due. Subsection 168(2) provides that, notwithstanding subsection 168(1), where consideration for a taxable supply becomes due on more than one day, tax is payable on the day any part of the consideration becomes due and is based on the consideration that becomes due on that day. As the consideration for the construction of the [facility] was not paid by Hospital Authority at any time before consideration for the supply became due, it must be determined when consideration for the supply became due.
Subsection 152(1) provides that the consideration, or part thereof, for a taxable supply is deemed to become due on the earliest of the following:
(a) the earlier of the day the supplier first issues an invoice in respect of the supply for the consideration or part and the date of that invoice, ([mm/dd/yyyy] in this case)
(b) the day the supplier would have, but for an undue delay, issued an invoice in respect of the supply for the consideration or part, and
(c) the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing (within [...] weeks of [mm/dd/yyyy] in this case, pursuant to paragraph [XXX] of the Agreement).
As it applies to this scenario, tax will become payable on the consideration that is attributable to the construction of the [facility] that becomes payable on the earlier of [mm/dd/yyyy], and the day Project Co would have issued an invoice for that consideration or part but for an undue delay. Further, if any part of the consideration that is reasonably attributable to the construction of the [facility] has not been paid or become payable by [mm/dd/yyyy], in accordance with paragraph 168(3)(c), tax will become payable on any such consideration on that date. (iiFootnote 2)
With respect to whether there was an undue delay in Project Co's issuing an invoice in respect of the supply, we would normally consider the normal business practice of Project Co in the circumstances in determining if there was an undue delay. If Project Co's normal practice is not to issue an invoice until construction of the real property is substantially complete, then tax will become payable on [mm/dd/yyyy], i.e., the date the First Invoice was issued. If Project Co's normal business practice in the circumstances is to issue invoices for some of the consideration payable as construction progresses, then tax will have become payable on the date any such invoices would have been issued. And if any part of the consideration that is reasonably attributable to the construction of the [facility] has not been paid or become payable by [mm/dd/yyyy], tax on such consideration will become payable on that date.
There is a further provision that may apply that would affect when some of the tax on the supply becomes payable. As it applies to this case, subsection 168(7) provides that, notwithstanding subsections 168(1), (2) and (3), where, pursuant to the Agreement, Hospital Authority retains a part of the consideration for the construction of the [facility] pending full and satisfactory performance of the supply, tax is payable on the amount retained on the earlier of the day that retained amount is paid and the day it becomes payable. While it is not apparent from the Agreement that Hospital Authority is entitled to retain a portion of the consideration pending satisfactory performance of the construction of the [facility], we wanted to make you aware of this provision.
The tax rate that applies to the tax payable
Under the transitional rules for the reduction in the GST rate from 6% to 5%, the GST at 5% applies to services supplied before 2008 in respect of any portion of the tax that becomes payable on or after January 1, 2008 provided the tax has not been paid before that date.
Under section 133, where an agreement is entered into to provide property or a service, the entering into of the agreement is considered to be a supply of the property or service made at the time the agreement is entered into. In this case, the Agreement was entered into before 2008 and the services are therefore considered to be supplied before 2008. Nonetheless, tax may not become payable until after 2007.
Hospital Authority did not pay tax in respect of the construction services at any time before the First Invoice was issued in [mm/yyyy]. In accordance with the foregoing discussion on when tax becomes payable, if tax has not become payable with respect to the services performed before January 1, 2008, the GST at 5% will apply to those services. The only situation in which the GST at 6% would become payable with respect to services performed before January 1, 2008 is if there was an undue delay in issuing an invoice in respect of such services and such an invoice would have been issued before January 1, 2008.
Under paragraph 51(b) of the New Harmonized Value-added Tax System Regulations, if a supply is made in [Participating Province X] under a contract to construct real property, the provincial portion of the HST is not payable in respect of any part of the consideration for the supply that can reasonably be attributed to property delivered or services performed under the contract before July 1, 2010. If the allocation of the consideration, as represented by the [...] [Construction price] shown on the First Invoice, reasonably represents the extent to which property was delivered and services were performed after June 2010, then the HST at [...]% would apply only to the $[...], i.e., the amount that is attributable to property delivered and services performed after June 2010.
Issue 2
Project Co is required to charge and collect tax on the [...] Payment to the extent that the consideration is in respect of a taxable supply and the tax has not previously become payable under section 168. To the extent that the amount payable in respect of the [...] Payment includes the payment of interest by Hospital Authority to Project Co, such a payment is a financial service and is an exempt supply that is not subject to the GST/HST.
If you require clarification with respect to any of the issues discussed in this memo, please call me at 613-954-8852.
i 1 We note that section [...] of the Agreement also calls for Project Co to provide certain services at [...].
ii 2 Paragraph 168(3)(c) provides that, notwithstanding subsections 168(1) and (2), where a supply is made under a written agreement for the construction of real property and the consideration or any part thereof for the supply has not been paid or become due by the last day of the month immediately following the month in which the construction of the real property is substantially complete, tax will become payable on that day.
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UNCLASSIFIED
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