Telephone: (613) 954-8585
Fax: (613) 990-1233
11650-1 (pl)
Dear XXXXX
This is in reply to your memorandums dated July 14, 1995 and July 27, 1995 from XXXXX respectively of your office concerning the eligibility by XXXXX to claim input tax credits ("ITC's") on the GST paid on the construction costs of a waste water treatment plant. Please excuse the delay in replying.
Statement of Facts:
Our understanding of the relevant facts presented by XXXXX are as follows:
• XXXXX a GST registrant, is a wholly-owned subsidiary of XXXXX. XXXXX (also registered for the GST) XXXXX[.]
• In negotiating the Province - Schedule A of the Reciprocal Tax Agreement, XXXXX confirmed XXXXX status to be "commercial";
• XXXXX was incorporated for the purpose of providing environmental infrastructure for the treatment and disposal of waste water effluent on a self-sustaining cost recovery basis;
• To this end, XXXXX entered into a arms length Waste Water Treatment System Agreement (the "agreement") with XXXXX commencing on the XXXXX, where XXXXX agreed to design, construct own and operate an industrial waste water treatment and disposal system (the "system") which will treat and dispose of waste water effluent discharged from the food processing plant owned by XXXXX[.] In turn, XXXXX will have exclusive right to use the system and accordingly, will manage, maintain and operate the system on behalf of XXXXX[.] This agreement is to terminate on the XXXXX[.]
• Following the substantial completion of the system or the commencement of operation of the system (whichever comes first), XXXXX is responsible, pursuant to the agreement, for payment of any future capital improvements, additions or replacements due to changes in the environmental regulatory requirements, and is required to pay a user fee (invoiced annually) for the use of the system equal to the previous year's operating costs incurred by XXXXX in the system (as per the amendment to the agreement). The agreement also specifies that the operating cost calculation excludes any charges for amortization of the original capital cost of the system as set at the substantial completion date of all contracts involved in the construction of the system;
• All invoices related to expenses incurred to operate the system are forwarded directly by XXXXX for payment. In other words, the annual user fee is a compilation of the invoices (r.e., operating costs) which were received by XXXXX in the previous year and forwarded to XXXXX[.] Where XXXXX pays the invoice amount, XXXXX is deemed to have paid the user fee due to XXXXX for the use of the system;
• XXXXX has claimed ITCs on the GST paid on the supplies to construct the system until substantial completion. More specifically, as of the date of your submissions, XXXXX has claimed XXXXX in ITCs and reported XXXXX in GST collectible for a net tax refund for the period January 1, 1991 to March 31, 1995 of XXXXX[.]
Your questions are:
1. whether XXXXX is engaged in commercial activity (within its definition under subsection 123(1) of the ETA) since XXXXX has agreed to pay for all the operating expenses in the system; and if so,
2. whether XXXXX is precluded from claiming any ITCs on the GST paid on the original capital cost of the system (until substantial completion) because of the operation of subsection 170(2) of the ETA (i.e., ITC restriction).
The Department's Position
1. Is XXXXX engaged in commercial activity?
This issue was submitted to the Taxing Provisions Unit in my Division for review and response. In a memorandum dated March 5, 1996 to the A/Manager of the ITC and Co-ordination Unit (copy attached) the Taxing Provisions Unit concluded that:
"... it is our view that XXXXX is carrying on a business, i.e., construction and/or leasing (providing the exclusive right to use the plant), and, as a result, would be engaged in commercial activity." (page 2, fifth paragraph)
2. Is XXXXX precluded from claiming ITCs on the original capital cost of the system?
In general, subsection 170(2) of the ETA does not permit a registrant to claim an ITC on the GST payable on the supply of property or service or on goods imported by the registrant except where:
(a) the consumption or use of property, services or goods of such quality, nature or cost is reasonable in the circumstances, having regard to the nature of the commercial activities of the registrant; and
[(]b) the amount is calculated on consideration for the property or service or on a value of the goods that is reasonable in the circumstances.
In the case at hand, when referring to the nature of XXXXX commercial activity [i.e., the construction and/or leasing of the system (providing the exclusive right to use the plant)], there is no indication in the facts provided that the consumption or use of the property, services or goods to construct the system are of such quality, nature or cost that are unreasonable in the circumstances nor that the ITC claimed on the property, services or goods are calculated on consideration or on a value that is unreasonable in the circumstances. Accordingly, XXXXX is entitled to claim ITCs on the GST paid on the original capital cost of the system (until substantial completion) provided that all the conditions under subsection 169(1) of the ETA are satisfied.
If you require further information, please contact Michael Matthews, A/Manager, ITC and Co-ordination Unit at (613) 952-8806 or Paul Lafond, Policy Officer at (613) 954-9700.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Attachment
GAD #: 1355 (REG)
| c.c.: |
M. Matthews
P. Lafond
TIS Team Leader |
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