18 December 2006 GST/HST Interpretation 62355r - Supplies Made on Behalf of a Government or Municipality

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.

Dear XXXXX:

This refers to your letter XXXXX concerning the application of the Goods and Services Tax ("GST")/Harmonized Sales Tax ("HST") to the supplies made by XXXXX.

Your letter is further to the Canada Revenue Agency's ("CRA") letter XXXXX in which it was indicated that XXXXX are not exempt from the GST/HST. We understand that you would like the CRA to reconsider XXXXX request to de-register for GST/HST purposes, as it is your view that XXXXX is not involved in a commercial activity.

Please note that effective July 1, 2006, the rate of the GST has been reduced from 7% to 6% and the rate of the HST from 15% to 14%. The new rates apply to supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date.

After carefully reconsidering your request, this letter confirms that XXXXX is engaged in a commercial activity for purposes of the Excise Tax Act (the "ETA") and its supplies of XXXXX are subject to the GST/HST at the rate of 6%. In summary, the result is that XXXXX is involved in a "commercial activity", which is defined in subsection 123(1) of the ETA to include a business carried on by a person that involves making taxable supplies. Because XXXXX annual revenue from its business activities exceeds the small supplier threshold of $30,000, XXXXX is a registrant and it is required to be registered for GST/HST purposes pursuant to subsection 240(1) of the ETA.

The CRA's previous letter provided an interpretation of sections 21 and 22 of Part VI of Schedule V to the ETA. These exempting provisions apply to particular supplies of municipal services that satisfy the conditions described in those provisions. With respect to section 22, the exemption relates to the installation, repair, maintenance, and interruption of a water distribution, sewerage or drainage system and it applies only to a municipality or to an organization that operates a water distribution, sewerage or drainage system and that is designated by the Minister of National Revenue to be a municipality for purposes of this provision. As it is clear from the information provided in both your initial letter XXXXX and your recent letter that XXXXX does not operate a water distribution system and the supplies in question are not services described in section 22, XXXXX supplies are not exempt under this provision.

Please note that your letter refers to section 22 as it read before it was amended in 1993. This amendment, which was effective January 1, 1991, clarified that an organization must meet the condition of operating a water distribution, sewerage, or drainage system and it also removed the reference to a service made on behalf of a government or municipality.

As discussed in the CRA's previous letter, section 21 of Part VI of Schedule V to the ETA exempts a supply of a municipal service made by a government or a municipality, or on behalf of a government or a municipality, to a recipient that is an owner or occupant of real property situated in a particular geographic area in one of the following two situations:

(a) when the owners or occupants have no option but to receive the service; or

(b) the service is provided because of an owner or occupant's failure to comply with an obligation imposed under a law.

However, this exemption specifically excludes supplies made to the government or municipality (i.e., where the government or municipality is the recipient of the supplies) as well as services of testing or inspecting any property, such as equipment or a device, for the purpose of verifying or certifying that the equipment or device meets particular standards of quality or is suitable for consumption, use or supply in a particular manner.

As explained in the CRA's previous letter, the phrase "municipal service" is not defined in the ETA. However, the ETA does define "service" in subsection 123(1) and this definition excludes property, such as equipment or a device. As the XXXXX are property for purposes of the ETA, the supply of a XXXXX does not fall within the meaning of "service" and thus does not fall within the meaning of "municipal service".

Testing and inspection services performed on devices and equipment, such as XXXXX, even if these services are supplied on behalf of a government or municipality, are specifically excluded from the exemption described in section 21 of Part VI of Schedule V to the ETA. Accordingly, testing and inspecting XXXXX, which we understand are performed for the purpose of verifying or certifying that the XXXXX meet particular standards of quality or are suitable for use; i.e., are operating properly, are taxable supplies.

With respect to the CRA's interpretation of the criterion "on behalf of" a government or municipality for purposes of section 21, as noted in the CRA's previous letter, this criterion means a situation where a government or municipality has an agreement with another person pursuant to which the other person will provide a municipal service on behalf (other than as agent) of the government or municipality. This exempting provision requires that the municipal service be one which a government or municipality has the responsibility of providing to owners or occupants of real property in a local geographic area.

We understand that governments and municipalities have imposed certain plumbing code requirements for plumbing systems in buildings and facilities. These requirements are collectively imposed on the owners of buildings and facilities by municipalities (which may include the adoption of bylaws), the XXXXX (XXXXX Regulations, XXXXX Building Code) and the Canadian Commission on Building and Fire Codes (National Plumbing Code). Municipalities have delegated responsibilities with respect to these requirements. One of these requirements is the installation of properly operating XXXXX on water lines at the point where the water lines connect to a municipal water distribution system XXXXX. XXXXX.

However, generally speaking, compliance with bylaws and regulations is not itself indicative of a supplier making supplies to owners and occupants of real property on behalf of a municipality. Rather, additional factors, such as the government or municipality having the legal responsibility for the supplies in question and having a written agreement with a particular supplier for the provision of these supplies on its behalf, must also be evident. We understand that there is no agreement between XXXXX and a particular municipality. Rather, municipalities will provide a list XXXXX and the owners of buildings and facilities may choose any XXXXX on this list.

Should you have any questions regarding XXXXX obligations and entitlements under the GST/HST, we encourage you to contact the XXXXX GST/HST Ruling Centre, XXXXX telephone 1-800-959-8287.

Yours truly,

Susan Eastman
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

2006/12/19 — RITS 63389 — XXXXX Stent-graft