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GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
K1A 0L5Case: HQR0000079File: 11894-04
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Subject:
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GST/HST INTERPRETATION
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Dear Sirs:
Interpretation Requested
Thank you for your letter of XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST) to construction and operation of Community Centres on lands owned by the City XXXXX[.]
In your letter of XXXXX you indicate that the following circumstances are applicable to construction and operation of Community Centres:
1. The City XXXXX owns XXXXX Community Centres in locations across the City.
2. These Centres are operated by area residents with each Community Centre having its own executive which is accountable to the area residents for programs operated out of the facilities.
3. Various fund raising activities are carried out to assist in the running of the programs and for special projects.
4. The Community Centres have funds available to them from a number of sources. These funds would not be available to the City but are available to local organizations. The Community Centres are aware of this and are applying to the various levels of government for these grants. These monies must be used for projects that will provide benefits to the community:
XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX
5. Before Community Centre executives can undertake any capital project they must receive permission from the City. Because significant funding is available from other levels of government a number of projects have been approved. These projects, which are improvements to the Community Centres and newly constructed facilities, such as arenas, come under a number of terms and conditions.
6. The City must approve the design of the renovations or construction of the facility to ensure that the tender conditions comply with the City's own policies (i.e. insurance warranties, holdbacks etc.) Blueprints must be provided to the City as well as operating and maintenance manuals. No change order can be authorized without the permission of the City.
7. After the City has given permission for the renovation or the construction of the new facility, the Community Centre Executive will enter into the construction contract with the contractor. The contractor will invoice the Community Centre Executive for all work completed.
8. All available funds are given to the City who pays the Contractor on a project estimate basis. This is done to ensure that the funds to pay the contractor are available upon completion of the work. Also, if the funds were not available the City would be ultimately liable to pay the contractor.
9. Because the facility being built or renovated is on City owned land title will rest with the City.
10. When an arena is constructed, the City wants the Community Centre Executive to sign a form of agreement XXXXX. No community centre has in fact entered into such an agreement.
You have provided copies of the following documents to serve as examples of the forms of agreement governing the relationships outlined above:
XXXXX XXXXX
We have requested an example of a written agreement between the City XXXXX and a Community Association governing construction of a recreation facility on land owned by the City. We have been informed during a telephone conversation between XXXXX Sylvest on XXXXX that there is not yet any written agreement or draft agreement between the City and Community Associations concerning construction of recreation facilities.
We assume, for the purposes of this interpretation, that the Community Associations which operate the facilities are non-profit organizations as defined in subsection 123(1) of the Excise Tax Act (ETA). We understand that the construction and management agreements are separate agreements negotiated and entered into at different times.
You have requested our interpretation with respect to the following issues:
1. Is the construction of a recreation facility considered to be two supplies? First, from the contractor to the Community Centre, and then another from the Community Centre to the City. If so, would the Community Centre be entitled to an ITC while the City claimed an appropriate rebate?
2. Or would either the City or the Community Centre claim an ITC or rebate on the construction of these facilities and no further action being necessary? If so, who is entitled?
Interpretation Given
Since we are providing an opinion with respect to a number of proposed transactions on the basis of draft or generic agreements which, although similar in content, may vary in form for each particular transaction, we are unable to provide a ruling. Rather, we are providing an interpretation.
We have divided our analysis into two parts; the first dealing with the construction of a recreation facility and the second dealing with the operation of the facility after construction has been completed.
Construction Phase
The sample agreement of XXXXX (the Construction Agreement) provides for XXXXX XXXXX including demolition of the existing facility located on that site. Under the terms of the agreement XXXXX (the Project Manager) agrees to provide construction and project management services (the Construction Services) which are summarized in the second paragraph of the Agreement as follows:
2. The Project Manager will provide the XXXXX with XXXXX XXXXX for a total cost XXXXX plus G.S.T. This amount shall include all management fees, material, equipment, labour, and miscellaneous costs required to provide the facility, unless noted otherwise below.
XXXXX of the Construction Agreement provides that XXXXX (the Club), in consideration of the Construction Services being performed by the Project Manager, agrees to pay the contract price in progress billings based upon percentage of completion of the Facility during the billing period as follows:
XXXXX
For payment of the construction work, on or about the first day of every month, the Project Manager shall furnish the Club with a statement of the amount due under this agreement for the preceding month. The amount due shall be the estimated portion of the construction work accomplished in that period, plus the portion of the design and construction management fee, based pro rata on the XXXXX. Payment is to be within XXXXX days of receipt of invoice.
The City XXXXX although not a signatory, is given certain rights in common with the Club by the Agreement. These rights include the following:
XXXXX
We understand that the City XXXXX may have a secondary obligation to pay all or part of the contract price to subcontractors in the event of a default in payment by the Project Manager. However, such an obligation would arise as a result of liens filed pursuant to XXXXX and only upon default in payment of sub-contractors. However, the Construction Agreement does not impose a contractual obligation upon the City XXXXX to pay the contract price to the Project Manager. Rather, this obligation rests upon the Club.The procedure, XXXXX, whereby the City XXXXX receives and holds funds necessary for payment of the project from the Club and pays them to the Project Manager, is consistent with the City's XXXXX interest in preventing the filing of liens against the property by ensuring that payments are made as required.
In our opinion the Construction Agreement is an agreement for a taxable supply of construction services for which the Project Manager is the supplier and the Club is the recipient. Subsection 123(1) of the Excise Tax Act (ETA) defines the recipient of a taxable supply as follows:
"recipient" of a supply of property or a service means
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and
(c) where no consideration is payable for the supply,
(i) in the case of a supply of property by way of sale, the person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise than by way of sale, the person to whom possession or use of the property is given or made available, and
(iii) in the case of a supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply;
The Construction Agreement is an agreement for the supply of a service of constructing the Facility. Consideration for the taxable supply of the construction service under that agreement is payable by the Club, therefore paragraph 123(1)(a) applies to define the Club as the recipient of the supply of the construction service under the Construction Agreement.
The City XXXXX is at all times the owner of the lands upon which the Facility is constructed. We agree with your conclusion, XXXXX, that, since the Facility being built is on City owned land, title will rest with the City. There is therefore a re-supply of construction services from the Club to the City XXXXX as those construction services are performed and result in the construction of an improvement which is permanently affixed to the real property owned by the City XXXXX[.]
XXXXX
We understand from your letter that the City XXXXX in addition to guaranteeing a loan for part of the construction costs, also pays an amount of money to the Club for construction of the Facility. In your letter this funding is called a XXXXX[.] Grant, however, based upon our understanding of the circumstances governing construction of the facility, we do not consider that the monies paid by the City XXXXX fall within the definition of a grant as outlined in GST Technical [Information] Bulletin B-067 "Goods and Services Tax Treatment of Grants and Subsidies." The City XXXXX receives exclusive ownership of the Facility as a result of the payment it makes and the loan guarantee it provides. XXXXX as noted above clearly indicates that the option of having the Club construct the Facility was chosen as an alternative to the City XXXXX constructing the facility itself. The City XXXXX receives both a direct and an indirect benefit from operation of the Facility. The City XXXXX receives a direct benefit to the extent that the Facility is being used for City XXXXX purposes and an indirect benefit when the Club uses the facility to carry out Club sponsored activities which benefit City XXXXX[.] These factors are strongly indicative of there being a purchase purpose for payment of the monies and giving of the guarantee.
The City XXXXX receives sole ownership of the Facility, however, its payment satisfies only part of the construction costs as other sources of funding, including its own funds, are obtained by the Club and used to pay for the Facility. It therefore appears that the supply by the Club to the City XXXXX is one which is made for less than the direct cost of the construction service which is purchased by the Club from the Project Manager. A supply of a service which is made by a Non-profit organization for less than direct cost is a GST exempt supply by reason of section 6 of Part VI of Schedule V to the Excise Tax Act (ETA). The Club would therefore neither be required to collect GST from the City XXXXX for the amounts which the City XXXXX pays for the supply, nor would it be able to claim an input tax credit for the GST paid by the Club to the Project Manager. If the Club meets the definition of Qualifying Non-profit organization in subsection 259(2) of the ETA and otherwise meets the requirements for claiming a rebate under section 259 then it would be eligible for a rebate of 50% of the GST paid to the Project Manager.
Operation Phase
As noted in your letter of XXXXX, once a facility is completed the City XXXXX would like the Community Centre Executive to enter into an agreement XXXXX in the form of the draft example agreement between the City XXXXX and XXXXX (The Club). We have based our interpretation upon the assumption that an agreement is concluded on the same terms as the XXXXX Agreement after construction of the Facility under circumstances similar to those described under the heading Construction Phase in this letter.
At XXXXX the XXXXX Agreement, the City XXXXX grants the Club possession and use of the Facility for a specified period:
9. XXXXX
We consider the nature of the interest in the Facility provided by the City XXXXX to the Club in the XXXXX Agreement to be that of a tenant's interest under a lease. Although the City XXXXX reserves some right to use the Facility for its own purposes, this reservation is strictly limited by the fact that the City XXXXX must advise the Club in advance of the dates and times on which it wishes to use the Facility and can only do so to the extent that the City's XXXXX use does not interfere with the Club's use.
XXXXX
The City XXXXX also reserves the right to enter the Facility in order to make inspections, repairs and in emergency situations. Apart from these reservations the Club is granted a right to possession and use of the Facility during the period of the XXXXX Agreement and renewals for its own purposes, subject to the grounds for termination, (such as bankruptcy), outlined in XXXXX of the XXXXX Agreement. We do not consider that the reservations for uses required by the City XXXXX remove the supply of the Facility from the City XXXXX XXXXX to the Club from being a leasehold interest.
The granting of a leasehold interest in real property by a municipality for a period of continuous possession of one month or more is an exempt supply by reason of Section 25 of Part VI of Schedule V to the ETA, unless the municipality makes an election under section 211 of the ETA to have the supply treated as a GST taxable supply. In the event that the election is made the lease would be excluded from exemption by reason of paragraph 25(g) of Part VI of Schedule V. The making of an election under section 211 would also trigger a deemed sale of the property and require the municipality to self assess for GST equal to the basic tax content of the property as defined in subsection 123(1) of the ETA.
XXXXX the XXXXX Agreement XXXXX indicates that the consideration for the City's XXXXX granting the Club a right to use the Facility is the management services to be provided by the Club to the City XXXXX[.] The first page of the agreement summarizes the mutual exchange of consideration contemplated by the XXXXX Agreement as follows:
XXXXX
The consideration given by both parties under the XXXXX Agreement is a non-monetary exchange, (apart from the nominal payment of XXXXX). Paragraph 153(1)(b) of the ETA provides that, where consideration for a supply is expressed in terms other than money, the value of that consideration for the purposes of calculating GST/HST shall be deemed to be the fair market value of that non-monetary consideration. Thus, the value for GST/HST purposes of the consideration agreed to be given by the Club to the City XXXXX in exchange for the lease of the Facility is the fair market value of the service to be provided by the Club to the City XXXXX under the terms of the XXXXX Agreement and the value of the consideration agreed to be given by the City XXXXX to the Club in exchange for the management service to be provided by the Club is the fair market value of the lease of the Facility.
The consideration to be provided by the Club is described at XXXXX of the XXXXX Agreement as follows:
XXXXX
In essence paragraph 4 is an agreement by the Club to operate the Facility in the manner and for the uses contemplated by the XXXXX Agreement. The service of operating the Facility is not exempt from GST, therefore the Club is required to collect GST from the City XXXXX calculated on the fair market value of the lease of the Facility which it receives in consideration for that service.
The City XXXXX is not required to collect GST with respect to its supply of the Facility to the Club because the supply by a municipality of a lease of real property for a continuous period of one month or more is an exempt supply. If the City XXXXX makes an election pursuant to section 211 of the ETA, then the supply by way of lease from it to the Club becomes a taxable supply, and the City XXXXX is then required to collect GST based upon the fair market value of the service of operating the Facility that it receives in exchange for the lease.
Conclusion
The analysis provided in this letter can be summarized briefly as follows:
1. The construction of the Facility is a taxable supply of a construction service made by Project Manager to the Club. GST is applicable to the consideration payable by the Club for that construction Service.
2. The Club is in turn making a supply of a construction service to the City XXXXX as a result of the fact that the Facility is being constructed on land owned by the City XXXXX and becomes the property of the City XXXXX as a result. The supply by the Club to the City XXXXX is an exempt supply as it is made for less than the direct cost of the construction service when purchased by the Club from the Project Manager.
3. The Club would not be entitled to claim an input tax credit for the GST paid by it to the Project Manager because the Club is in turn making an exempt supply of the facility to the City XXXXX[.] The Club may qualify under section 259 of the ETA for a 50% rebate of the GST paid to the Project Manager provided that it meets the definition of qualifying non-profit organization and otherwise fulfills the requirements of section 259.
4. Under the XXXXX Agreement, the City XXXXX is making an exempt supply of a leasehold interest in the Facility to the Club. This supply is an exempt supply unless the City XXXXX files an election under section 211 of the ETA to make it taxable.
5. Under the XXXXX Agreement, the Club is making a supply of managing the Facility. This supply is a taxable supply.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.
For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST Memoranda Series.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8531.
Yours truly,
Mark Sylvest BA LL.B.
MUSH Unit
GST/HST Public Service Bodies & Government Division
GST/HST Rulings and Interpretations Directorate
Casework Number HQR0000079
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