1 August 1996 GST/HST Interpretation 11895-1[7] - Eligibility for a Municipality to Claim Input Tax Credits

I refer to the August 16, 1993, E-Mail message from XXXXX sent to Mr. Neil Minken of Special Sectors, and subsequent telephone conversations between XXXXX and Mr. Owen Newell. I apologize for the delay in replying to your letter. XXXXX has sought our assistance on an issue concerning a municipality's eligibility to claim input tax credits (ITC's) under the Excise Tax Act (the Act).

The facts are as follows:

1. XXXXX is a municipality within the meaning of municipality in subsection 123(1) of the Act.

2. XXXXX acquired services, such as consultants studies, feasibility studies and architectural services (the services) relating to the proposed construction of an arena.

3. XXXXX and three other municipalities (the other municipalities) agreed to share in the cost of the construction of the arena, including the services referred to above. In the event that the proposed arena was not constructed, XXXXX and the other municipalities would share in the costs incurred to date.

4. The other municipalities decided not to continue with the arena's construction and a result of their withdrawal from the proposed construction, the arena was not constructed.

5. XXXXX was not registered when it acquired the services, but became a registrant on XXXXX[.]

Question:

1. Is XXXXX entitled to claim ITC's for the GST incurred on the services? What criteria would be used to determine whether or not the costs should be attributable to general municipal operations or arena operations?

Our response:

Our response to this question is based solely upon the information contained in the E-mail message. I understand that your office has encountered difficulty in obtaining proper documentation from the municipality. As a result of this, our response will be based strictly upon the information which you have made available. Should adequate documentation become available at a later date, this issue may need to be revisited.

With respect to your question of XXXXX claiming ITC's, certain criteria must be met by XXXXX in order for it to claim ITC's. First, XXXXX must be a registrant and secondly, the services must have been acquired by XXXXX for consumption, use or supply in the course of commercial activities of the registrant.

As stated in the facts, the municipality was not a registrant at the time the GST was incurred but intended to register once the arena was constructed. Subsection 171(1) of the Act contains a provision which allows a person who subsequently becomes a registrant to claim ITC's on costs incurred prior to registration. Subsection 171(1) provides that where a person becomes a registrant, the person is deemed to have received by way of sale each property that was held immediately before the date of registration for consumption, use or supply in the course of commercial activities and to have paid tax on the property based on the lesser of the tax paid or tax calculated on the fair market value of the property. In those situations, where the person claimed a rebate in respect of the property prior to becoming a registrant, the percentage of the deemed tax available as an ITC shall reflect the percentage of the rebate claimed. If the municipality had claimed the municipal rebate of 57.14% for GST incurred on the expenses, it would still be entitled to claim, as an ITC, the difference of 42.86% of the GST.

Subsection 171(2) contains a similar provision for services on which GST became payable by the person before becoming registered for the GST. However, only the GST attributable to services to be supplied after registration will be allowed for the purposes of claiming ITC's if the municipality consumes, uses or supplies the service in commercial activities.

Therefore, the treatment of the GST incurred on the expenses under subsections 171(1) and 171(2) will depend upon whether the costs are property or services.

XXXXX did not continue with the proposed construction of the arena, therefore the services were not capitalized as part of the arena. The services retain their status as services, and subsection 171(2) pertaining to services, is applicable. However, as stated above, only the GST attributable to services to be supplied after registration will be eligible as ITC's and must be supplied to XXXXX for consumption, use or supply in the course of commercial activities.

XXXXX invoiced the other municipalities for their respective share of the services i.e. fifty percent of the actual cost of the services. Pursuant to paragraph 6(a) of Part VI of Schedule V, the supplies would be exempt supplies. Paragraph 6(a) provides for exempt supplies of a service made by a public service body, which includes a municipality, where the supply of the service is made in the course of a business of making supplies of the service. Paragraph 1(c) of Part VI of Schedule V defines direct cost in the case of a service that was previously purchased by the supplier, as the value of the consideration paid or payable by the supplier for the service and the tax payable in respect of the service less any ITC's or rebates that the supplier is entitled to claim. Therefore, the supply of the services by XXXXX to the other municipalities is exempt since XXXXX invoiced the other municipalities for the actual cost of the services it acquired.

Should you have any questions, please contact Ms. Joanne Houlahan, Manager, Public Service Bodies at (613) 954-7945 or Mr. Owen Newell, Policy Officer, Public Service Bodies at (613) 954-4280.

J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations