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XXXXX
District I&S Manager
XXXXX
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File: 11849-1(dh)XXXXXMarch 1, 1995
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Dear XXXXX
We are writing in response to a memo we received from XXXXX of your office dated December 7, 1994. With his memo XXXXX has included an inquiry received by your office from XXXXX has requested an interpretation on the status of transfer payments from the XXXXX for "connecting link" construction performed under the terms of a "Connecting Link Agreement" for the XXXXX
XXXXX is of the opinion that the transfer payments constitute consideration for a supply and as such the XXXXX should be able to claim input tax credits thereon. In analyzing this particular case, he used the criteria set out in Technical Information Bulletin B-067.
To facilitate the preparation of our response we have reviewed the information forwarded by XXXXX , the Public Transportation and Highways Improvement Act (PTA), XXXXX
Statement of Facts:
1) Pursuant to subsection 29(4) of the PTA, the Lieutenant Governor in Council may direct the transfer of any part of the XXXXX...to any municipality in which it is situate, and it vests in and is under the jurisdiction and control of the municipality. This transfer is actioned through an Order-in-Council.
2) A copy of the Order-in-Council that originally transferred XXXXX has not been provided.
3) XXXXX "To facilitate the mobility of people and goods on the municipal road network; an essential component of the province's transportation system, by:
1) Distributing provincial transportation funds and technical assistance to all municipalities.
2) Allocating of subsidies in accordance with local needs and resources.
3) Supporting the growth of local industries by assisting with the financing and upgrading of the existing road systems."
4) As stated in the above-noted publication, "the program provides subsidies to municipalities for the construction and maintenance of their roads." Under this program, the Town of XXXXX is eligible for subsidies for the construction of the XXXXX.
5) Pursuant to subsection 21(1) of the PTA, where it is deemed by the Minister that a highway should be constructed as a connecting link ... the Lieutenant Governor in Council may designate such a highway as a connecting link ... to be constructed by the city.
6) A copy of the Order-in-Council designating XXXXX as a connecting link has not been provided. However, based on other documentation it is understood that the designation has occurred. (See item number 9.)
7) Pursuant to MTO's policy 9.5.2 "Connecting links are defined as:
• A route that connects the ends of a highway by the most direct, practical means from one municipal boundary to another.
• A route that connects the end of a highway to another highway entering a municipality.
• The extension of a highway from a municipal boundary to the central business district of the municipality or to connect with a Provincial or International boundary."
8) Pursuant to MTO policy 9.5.2 "Connecting Link Purpose", the Ministry enters into agreements with municipalities to assume certain costs of connecting link construction or maintenance. These agreements are known as "connecting link agreements" (CLA).
9) On March 10, 1960 the Town of XXXXX entered into a CLA with the MTO. Appendix Number 13 to that agreement, dated April 30, 1993, refers to XXXXX as being a portion of a highway heretofore designated as a connecting link.
10) Pursuant to clause 15 of the generic CLA, the agreement shall not be construed as vesting in the Ministry any proprietary interest in the street or streets comprising connecting links.
11) Pursuant to subsection 21(9) of the PTA, a highway does not, by reason of having been designated as a connecting link, become the property of the Crown, but every such highway remains under the jurisdiction and control of the city.
12) In a conversation on February 3, 1995, a representative of the MTO's Legal Services Branch confirmed that connecting links are, "de facto", owned by the municipality in which they are situate.
13) The CLA provides that the Minister and the council of a town may enter into an agreement for the construction therein, by the council, of a highway designated under section 21 of the Public Transportation and Highway Improvement Act as a connecting link, and that the cost of the work shall be paid out of monies appropriated therefor by the Legislature in accordance with the Act.
Analysis
As set out in Technical Information Bulletin B-067 if it is established that the recipient of a transfer payment is making a supply to the grantor or a third party, the funding may be regarded as consideration for that supply.
In this particular case, it must be established whether or not the XXXXX s making a supply to the XXXXX or a third party, such as XXXXX . If so, it must then be determined whether there is a direct link between the transfer payment and that supply. If there is a direct link the transfer payment will be regarded as consideration. Otherwise, it will be treated as a grant.
As stated above, to determine if the transfer payment given to XXXXX under the CLA is consideration for a supply, it must first be established whether or not they have made a supply as a result of having received the payment.
The word supply as defined in the Excise Tax Act (ETA), means the provision of property or service. However, the word "provision" is not defined in the ETA, the Interpretation Act nor through administrative policy. Both the words "supply" and "provision" imply that something must be given to someone other than the person who is the supplier. This means that XXXXX must provide something to either the XXXXX or a third party for a supply to take place.
In this particular case, the issue of supply hinges on the ownership of XXXXX . If it is owned by the XXXXX the XXXXX may be supplying construction services to the XXXXX and the payments under the CLA could be consideration for that supply. On the other hand, if XXXXX is owned by the XXXXX and they are receiving funding for its re-construction or upgrading, it must be determined whether or not they are making a supply to the XXXXX or to a third party XXXXX
As indicated in the Statement of Facts, it has been established that XXXXX is owned by the XXXXX Further, the documentation provided shows that XXXXX is responsible for the construction and maintenance of their own roads and that the XXXXX has agreed to pay XXXXX of the costs incurred for that construction. The generic CLA indicates that its purpose is to provide for the construction of the connecting link and the payment of a portion of the cost of construction out of monies appropriated by the legislature.
Although road construction does take place, based on the definition of supply and the fact that the XXXXX owns XXXXX they are not considered to be supplying that road construction to the XXXXX For a supply to take place the supplier must provide something to someone other than themselves.
In this case, the residents of XXXXX could be considered to be "unspecified third parties" as they are likely to be the most affected by the road construction. This activity is generally considered to be part of standard municipal services and the benefits arising therefrom rest with the municipality XXXXX and the users (i.e. the general public) of the road.
The road construction in question is being performed pursuant to a CLA. As stated in the XXXXX olicy 9.5.2, the purpose of CLAs is for the XXXXX to assume certain costs of connecting link construction and maintenance.
The purpose of CLAs, and the philosophy and objective as stated in the XXXXX indicate that CLAs have a public purpose. CLAs and the payments thereunder have been established to ensure "mobility of people on the municipal road network", and "to provide a fully integrated, adequate network of roads...in all municipalities.".
Opinion
Based on the Statement of Facts and the analysis set out above, it is our opinion that the XXXXX is making a transfer payment to the XXXXX and that there is no direct link between the payment and the provision of a supply to the grantor or a specified third party. Further, the payment has a public purpose as indicated in the XXXXX Therefore, the payment is not consideration for a supply and as such is not subject to tax.
As the transfer payment is not consideration, XXXXX entitlement to relief should be determined without reference to that payment. That is, relief should be based on the provision of standard municipal services, of which road construction is an integral part. These services are exempt under section 21 of Part VI of Schedule V to the ETA. Therefore, as the XXXXX incurred costs in providing these services, they are entitled to a municipal rebate.
It is suggested that prior to issuing an interpretation to XXXXX copies of the original CLA and the Orders-in-Council transferring XXXXX and subsequently designating it as a connecting link be obtained and maintained in file.
Should you have any questions please contact the undersigned at 613-954-3551 or Donna Harding at 613-952-8531.
Yours truly,
M. Viger
Manager - Tax Policy
Governmental Sector
| c.c.: |
J.A. Venne
Director
Tax Policy - Special Sectors |
M. Viger
Manager - Governmental Sectors
Donna Harding
Policy Officer
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