19 December 2007 GST/HST Ruling 86672 - Tax Status of Sewer Services Supplied by a Private Developer

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:

Thank you for your letter XXXXX in which you asked whether the XXXXX ("Association") would qualify to be designated as a municipality for purposes of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) in respect of its activities related to its water system.

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.

Effective January 1, 2008, the rate of the GST will be reduced from 6% to 5% and the rate of the HST from 14% to 13%. The new rates will apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules will apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

Interpretation Requested

We understand that the Association is comprised of the owners of XXXXX residential lots and that each also owns the XXXXX lot that has a well from which the owners obtain water. The Association is in the process of replacing the water system with a new concrete storage tank, a new pumping system, a new pump house and an up to date system that will provide the owners with a safer and more secure method of receiving water.

You would like to know whether the Association would qualify to be designated a municipality for purposes of the GST/HST and be able to claim GST/HST rebates. Further, you are asking about the required documents to support municipal designation.

Interpretation Given

Pursuant to paragraph 23(a) of Part VI of Schedule V, the supply of unbottled water is exempt when made by a person other than a government or by a government designated by the Minister of National Revenue to be a municipality for the purposes of this section. Further, the supply made by the owner of the water of a service of delivering that water is exempt under paragraph 23(b). These suppliers do not collect tax on these supplies and they cannot claim input tax credits on their purchases related to making these supplies.

The Minister of National Revenue is empowered by the definition of "municipality" in subsection 259(1) to extend that definition for purposes of section 259 by designating a person to be a municipality, but only in respect of activities specified in the designation that involve the making of supplies (other than taxable supplies) by the person of municipal services. To qualify for this designation, a person must demonstrate that it is making a supply of a municipal service that is not a taxable supply directly to consumers. A person designated to be a municipality for purposes of this section will be entitled to claim a municipal rebate of the GST/HST paid on inputs acquired for use in making these supplies.

Municipal designation is an exercise of statutory discretion guided by administrative policy and eligibility criteria describing factors that will be considered for situations where persons other than municipalities supply municipal services. These factors consider whether the service in question is within the scope of authority and responsibility of a municipality as set out by the provincial or territorial legislation governing the activities of municipalities. They also consider whether exempt supplies are made directly to consumers.

Generally, a municipal service cannot be defined solely by the service itself but instead by evaluating a combination of factors that include the nature of the service, the manner in which it is provided, and documentary evidence of the supply of a municipal service by the person. Whether any service is a municipal service will be a question of fact, where an evaluation of the pertinent facts and documentary evidence is made on a case-by-case basis.

The administrative policy and eligibility criteria include situations where a person is engaged in the activity of making exempt supplies of unbottled water to consumers. Factors that demonstrate that the person is making such supplies include documentary evidence that the person has ownership of the unbottled water and is engaged in the business of supplying unbottled water to consumers, such as:

•   the person's incorporating documents or if unincorporated, such as a proprietorship, a business registration certificate or any other satisfactory evidence identifying the person as a supplier of unbottled water;

•   a copy of a water supply agreement between the person and consumers or an invoice issued by the person to consumers for the supply of unbottled water; and

•   if the person purchases water to sell, purchase invoices for the acquisition of unbottled water for purposes of supplying that unbottled water. Where the person takes water from a government resource such as a lake or river, a copy of a permit or other evidence allowing the person to take such water to sell or other satisfactory evidence that the person has ownership of the water, such as a letter from a municipality describing how the water is made available to the person free of charge.

Residential landowners' associations and other similar organizations, e.g., condominium corporations, would not be granted the status of municipality for purposes of the ETA. These associations are established by the owners of residential property in a private community to manage and maintain the common property and assets of that community, which belong collectively to the landowners. The landowners may be shareholders of a corporation or members of an association. Landowners' associations are organized solely for the benefit of owners of private property; e.g., their membership, and their activities are carried out on behalf of their membership.

Each landowner has an interest in the common property and assets and is obligated to contribute a proportionate amount for the common expenses related to maintaining the common property and assets of their private community. The association manages and pays these expenses on their behalf. For instance, the association would prepare a budget in respect of the common expenses for approval by the landowners. The budget may include an operating fund for common expenses that regularly occur throughout the year as well as a contingency reserve fund for other expenses. It may also establish a special assessment for extraordinary expenses. The association determines the monthly or annual contribution of each lot's share of the total contributions budgeted for the various funds, collect these amounts from the landowners, and hires contractors to perform the work.

The common property and assets of the private community may include facilities for the provision of water, sewage, drainage, electricity, etc. However, landowners' associations are not engaged in the business of supplying unbottled water to consumers nor do they make separate supplies of unbottled water to consumers. Rather their activities involve the maintenance and management of the common property and assets of a private community in relation to the occupancy or use of residential lots in that community. These activities would generally be characterized as a supply of property management for GST/HST purposes. The maintenance of the private community's water facilities would form a component of this supply.

That a landowners' association collects the financial contributions from a group of landowners in a private community to manage and pay the expenses of maintaining the common property and assets of that community is not determinative of the association making a supply of a municipal service to the landowners. Under the administrative policy and eligibility criteria applied for purposes of municipal designation, activities relating to the maintenance of the common property and assets of private property on behalf of landowners are not considered to involve a supply of a municipal service.

In conclusion, the activities of the Association would not fall within the administrative policy and eligibility criteria for municipal designation under the ETA. The water system in question belongs to a private community and as such is not comparable to a municipal water system. Therefore, the Association would not qualify to be designated a municipality.

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 on the application of the GST/HST to the activities of the Association, please contact the XXXXX GST/HST Rulings 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

2007/12/10 — RITS 100391 — 24 x XXXXX ml XXXXX Green Tea XXXXX - XXXXX