29 October 1996 GST/HST Interpretation 11895-1[2] - Entitlement to Claim Input Tax Credits

I refer to your April 18, 1996, E-mail requesting our assistance on the issue of whether the XXXXX (the Region) is entitled to claim input tax credits (ITC's) for GST charged by XXXXX, a separate and unrelated legal entity of the Region, to the Region for the operation of a waste processing and incineration facility.

XXXXX is making supplies of waste processing and incineration services to the Region and charges the Region for these services. The Region has claimed the municipal rebate of 57.14% for GST incurred on the invoiced amounts from XXXXX in respect of waste processing and incineration services supplied by XXXXX to the Region since XXXXX[.]

The Region is of the view that it is involved in the commercial activities of processing waste and incineration, and thus is eligible to claim ITC's for GST incurred in respect of purchases related to these supplies. The Region filed a general rebate claim for the amount of the difference between the rebate claimed and the amount of GST the Region feels qualifies as an ITC. The claims are in the amount of $XXXXX and $XXXXX for the processing and incineration services, respectively.

The issue to be resolved is whether the Region is engaged in the commercial activities of processing waste and incineration. By written agreement, XXXXX and the Region share in processing revenues from waste collected by XXXXX from outside the Region, and also share in the revenue from the supply of electricity created by the incineration of the outside waste.

Statement of Facts

1. On XXXXX, Region and XXXXX entered into an agreement (the Agreement) to process acceptable waste for the Region at a facility to be constructed by XXXXX at XXXXX expense.

2. "Acceptable waste" is defined in the agreement to mean all solid waste, garbage, trash, rubbish and refuse that is normally collected in accordance with municipal by-laws, but excludes oversized items, unbundled branches, tree trunks, construction materials and hazardous waste. (section XXXXX of the Agreement)

3. "Processing" is also defined in the Agreement to mean the activities of separating from the waste certain materials by the fuel enhancement system and burning all remaining materials in the facility's incinerators. (section XXXXX)

4. The Region is agreed to provide a minimum and maximum volume of waste/week to XXXXX (section XXXXX and subparagraph XXXXX)[.]

5. For annual deliveries up to XXXXX the fee is set at XXXXX as of XXXXX, and is subject to an annual inflationary index (section XXXXX[).]

6. For deliveries in excess of XXXXX tonnes, a current volume disposal fee is set at XXXXX as of XXXXX and is subject to an annual inflationary index. (section XXXXX[).]

7. In the event the Region is unable to deliver the specified minimum volume of waste to XXXXX a shortfall fee of XXXXX as of XXXXX and subject to annual inflationary index, shall be charged by XXXXX[.]

8. Waste delivered to the facility is the property of XXXXX[.]

9. XXXXX has the full benefit of any proceeds from the sale of materials separated by means of the fuel enhancement system from acceptable waste directed to the facility by the Region. XXXXX[.]

10. Schedule XXXXX attached to the Agreement is an agreement between XXXXX and XXXXX for the supply XXXXX generated by XXXXX at the facility to XXXXX. This agreement makes no reference to the Region. Payments for the supply XXXXX are made by XXXXX. (Note: Region does not share in this revenue.)

11. The Region has the first right to deliver additional waste beyond its annual commitment of XXXXX and in the event the Region chooses not to deliver additional waste to XXXXX may accept outside waste for processing. XXXXX Supplemental Agreement of XXXXX (amending XXXXX Agreement)

12. Effective XXXXX 9XXXXX, under Section XXXXX of the Supplemental Agreement, XXXXX shall pay the Region XXXXX of the proceeds received by XXXXX for the disposal and processing of the outsider waste.

Supplemental Agreement of XXXXX (amending XXXXX Agreements)

13. Effective XXXXX the formula for calculating the Region's share of the revenue from processing outsiders waste was revised. In addition, XXXXX shall pay to the Region a share of the revenue earned from the electricity generated from the outsiders waste.

14. XXXXX is an independent contractor of Region. XXXXX[.]

Our Comments

The supply of the processing and incineration service by XXXXX to the Region is an input acquired by the Region in its supply of a basic garbage collection service, and as such, the GST incurred by the Region on the purchase of the processing and incineration service does not qualify for ITC's.

In addition, the Region supplies a right to XXXXX which allows XXXXX to process waste from outside sources. The facility was constructed to handle Region's waste and that from outsiders; however, the Region has the "first right" to deliver additional waste, and only after the Region has decided not to deliver the additional waste, may XXXXX accept outside waste. On this basis, the Region has supplied a right to XXXXX i.e. a right to offer capacity to outsiders.

Commencing XXXXX, the Region receives a portion of XXXXX processing revenues and, commencing XXXXX a portion of the revenue earned by XXXXX from the supply of electricity generated by the incineration of the outsider's waste. It is our view that the payment of these amounts from XXXXX represents the consideration for the taxable supply of the right that the Region supplies to XXXXX[.] The Region would be entitled to claim ITC's for GST incurred in respect of related inputs such as legal and administration fees relating to the taxable supply of the right. However, the Region is not entitled to claim GST on inputs used to process and incinerate the waste because we view these as inputs into the exempt supply of a basic garbage collection service.

Because the Region only began to share in the processing revenues effective XXXXX, and the incremental electricity revenues from XXXXX we are of the opinion that the right is supplied for nil consideration from the date of the agreement, XXXXX, until XXXXX. Pursuant to section 10 of Part VI of Schedule V, supplies of intangible property are exempt. Therefore, the Region is making an exempt supply until May 30, 1993, and as a consequence is not entitled to claim ITC's with respect to related inputs, but is entitled to the municipal rebate.

Although a supply of right is exempt under paragraph 20(c) of [P]art VI of Schedule V to the Act when supplied by the Region, this exempting provision is only applicable in those situations where the Region is making a supply of a right similar to a licence, permit or quota. It is our view that the right being supplied by the Region is not similar to a permit, licence or quota, and thus paragraph 20(c) does not apply to exempt this supply.

Should you have any questions, please contact Ms. Enikö Vermes, Manager, Municipalities and Health Care Services at (613) 954-5127 or the undersigned at (613) 954-4280.

Yours truly,

O.W. Newell,
CGA Policy Officer
Municipalities and Health Care Services
GST Rulings and Interpretations