25 July 1997 GST/HST Interpretation HQR0000266 - The Application of the Goods and Services Tax (GST) to Supplies Between the (the Club) (the Town)

                                                                        25 McArthur Road
Place Vanier, 10th Floor, Tower C
Vanier, ON
 XXXXX                                                                                K1A 0L5

This letter is in response to correspondence dated February 20, 1997 from XXXXX Tax Services Office, concerning the application of the Goods and Services Tax (GST) to supplies between XXXXX (the Club) and XXXXX (the Town).

Statement of Facts

Our understanding of the facts from XXXXX letters and facsimiles of January 26, 1996, February 20, 1997, and June 13, 1997, and his conversation with Don Dawson of this office on February 19, 1997, as well as from my conversation with XXXXX on June 13, 1997, is as follows:

1. The Club is a non-profit athletic organization that operates separately from the Town XXXXX the Club built a new facility on land owned by the Town. The Club contracted out the construction of the facility.

3. For daily operations, the Club receives no government funding at all. However, approximately 50% of the cost of building the facility was government funded XXXXX XXXXX

4. The Club raised the remaining funds to build the facility.

5. The Town offered its own land for the site of the Club.

6. Upon completion, the Town rents the facility to the Club for a fee of $1.00 per year.

7. There was no written agency agreement between the Club and the Town.

8. No GST has been recovered by any party on any of the transactions described above.

9. The Town owns the building and the land, leases the land to the Club and never reimbursed the Club in any way for the building (other than offering a lease that has an option to renew).

10. The Town has not filed an election pursuant to section 211 of the Act.

11. Pursuant to XXXXX , passed on

•   ... the Town and the Club have reached an agreement to permit the Club to operate a gymnastics facility in a building donated to the Town in accordance with a lease agreement dated XXXXX 19 XXXXX

12.       Pursuant to Schedule XXXXX of the agreement dated XXXXX :

•   In consideration of the premises and the sum of XXXXX and other good and valuable consideration passing between them, the Town has entered into a lease with the Club for the use of the demised premises upon which the XXXXX and facilities are located.

•   The club shall develop the said lands and premises in accordance with a Site Plan Agreement to be entered into with the Town

•   The Club shall pay all utility charges including water, Bel xx Telephone, sewage, cable T.V., light and gas.

•   The Club shall use the property primarily for the purposes usual to the operation of a gymnastics club .... The Club shall be entitled to conduct other athletic and recreational activities on the property.

•   Membership to the Club shall remain open to anyone in the community who may wish to join and participate in the facilities of the Club.

•   The Club agrees to keep all gymnastics related structures in a good state of repair and to maintain the grounds.

•   The Club agrees that it will not sell or offer for sale the building or any part thereof without prior approval from the Town.

•   Upon termination of this Agreement by the Town ... the building and all facilities constructed on the Town's lands by the Club shall automatically become the sole property of the Town. .... All contents of the building including ... all fixtures used specifically in the operation of the Club which shall include ... special needs equipment, athletic equipment, bleachers, mirrors and cable systems shall be and remain the property of the Club.

13. Pursuant to the Schedule "A" indenture of XXXXX 19 xx , written in pursuance of the Short Forms of Leases Act:

•   The Lessor (the Town) offers the Lessee (the Club) "to have and to hold the said demised premises for and during the term for XXXXX to be computed from the XXXXX 19 xx and from thenceforth next ensuing and fully to be completed and ended."

•   The Lessee will pay yearly the sum of one dollar.

•   The Lessee shall have the option to renew this Lease for a further term of XXXXX upon terms satisfactory to the Lessor.

Interpretation Requested

 XXXXX wishes to know if the GST paid out in respect of the building built by the NPO on municipal property can be reclaimed pursuant to an election made by the Town under section 211 of the Excise Tax Act (the Act).

In XXXXX previous memos to Mr. Don Dawson of this office, he has proposed several alternatives for the GST recovery. He has suggested that the Club might qualify for the NPO rebate, however he thought that the grants received from the government may not have been received in the period of construction. Another suggested alternative was that the Town is actually constructing a building and the Club is simply an agent. This would allow the Town, pursuant to an election filed under section 211 of the Act, to have claimed full input tax credits on the construction cost and in turn enter into a taxable lease with the Club. However, he has obtained a copy of the lease and several by-laws that make it quite clear that the building was constructed by the Club and was subsequently handed over to the Town after construction.

His third proposal is that there is a cross supply wherein the Town is supplying a lease of land and building to the Club and the Club is supplying the building to the Town. While the lease value may not be the exact value of the building, he feels it is a good starting point to assume that the value of all supplies equals the approximate XXXXX cost of the building. The Town would be making a supply of rent to the Club with a value of XXXXX . Because this is a long-term lease of real property by a municipality, no GST will be charged on this supply and accordingly the Club will not be paying any GST on the acquisition of this lease. The Club will be making a supply to the Town of a XXXXX building. This will be a taxable supply by the Club to the Town and accordingly the Town will be charged the GST of about XXXXX on this amount. The Town will then be eligible for a municipal rebate against this GST. Because the supply by the Club to the Town was a taxable supply of real property, the Club is entitled to an input tax credit (ITC) of all the GST incurred during the construction of the building. The net result is that the Club has recovered all the GST that it has paid on the construction of the building and the Town will have paid the GST on the acquisition of the building and receive a municipal rebate on that amount.

In this last scenario, XXXXX feels that an election filed under section 211 of the Act would not be beneficial because although the Town would be entitled to a full ITC rather than the municipal rebate on the acquisition of the building, it would in turn cause the Town to charge the GST on the full discounted rent which the Club would be in no position to recover.

Interpretation Given

Please note that the purpose of our service is not to provide tax planning advice which appears to be the original intention of the client in this case. GST rulings and interpretations are provided for the convenience and guidance of registrants and other person in applying the related provision of the Act according to the guidelines set out in GST Memoranda Series (1.4).

As insufficient facts are available in regards to this case, I will supply a general explanation of how the legislation would apply taking into consideration the contemplated and the completed transactions between the Town and the Club. As per his request in my discussion with XXXXX on June 13, 1997, I am only responding to the feasibility of his third proposal and the possible application of an election under section 211 of the Act. This interpretation is being supplied on the basis that this transaction is a barter transaction as per XXXXX direction, however, this information in no way substantiates or defines the transaction as being a barter transaction. A determination of the transaction in a different manner may have different GST legislative implications. Further information and analysis may determine the actual transaction to in fact be a donation by the Club to the Town, a supply of construction services by the Club to the Town, or a supply of a different nature all together. Further, there is a question as to whether the estimated fair market value of XXXXX over the term of the lease from the Town to the Club is of reasonable value. No other tax implications or interpretations of the transaction itself and the agreement between the Club and the Town are being analyzed in this information being provided.

Pursuant to subsection 165(1) of the Act, every recipient of a taxable supply made in Canada is required to pay tax in respect of the supply equal to 7% of the value of the consideration for the supply. The definition of "supply", pursuant to subsection 123(1) of the Act, means the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. Therefore, if the property or supply does not qualify for an exemption under the legislation, the GST is payable on the value of the consideration. Section 153 of the Act provides that where the consideration, or part of it, is other than money, the GST is levied on the fair market value of the property.

Based on the fact that there is no purchase and sale agreement or any further agreements to which we may refer, and based on the assumption that the transaction is in fact a barter agreement, provided the building was used in commercial activities prior to the supply, the Club will be making a taxable supply of the commercial building to the Town of an approximate value of XXXXX . Accordingly, the Town will be required to pay approximately XXXXX GST in regard to the transaction as the Town is a GST registrant, subsection 221(2) and 228(4) of the Act would apply. Pursuant to subsection 259(4) of the Act, will be entitled to claim a municipal rebate of 57.14% of the tax payable. Further to this, the Club will be entitled to a rebate under section 257 of the Act which provides a rebate of tax paid, that was not recovered by way of an ITC or a rebate, to a non-registrant who makes or is deemed to make a taxable supply of real property by way of sale.

The Town will be making a supply of the building by way of lease to the Club for the duration of XXXXX As the supply of long term leases is not listed in the exclusions to exempt supplies by a public service body in Part VI of Schedule V to the Act, this supply is exempt for GST purposes. As it is exempt, there would be no GST implications on the bartered value of the lease.

Under these circumstances, the Town has the option of filing an election pursuant to subsection 211(1) of the Act in which case the subsequent commercial rental of the property would not be exempt of the GST while the election is in effect. This election would also allow the Town to claim ITCs in respect of the property, pro-rated according to its actual use in commercial activities.

If the Club was not involved in commercial activities (i.e. its activities were exempt pursuant to Part VI of Schedule V to the Act) and the building was not used in the course of a commercial activity, the supply of the building would be exempt pursuant to section 25 of Part VI of Schedule V to the Act. In such a case the Town would not be required to pay the GST and neither the Town nor the Club would be entitled to claim a rebate.

In this case the Town also has the option of filing an election pursuant to subsection 211(1) of the Act, the effect of which will make the subsequent lease of the building taxable at a rate of 7% for GST purposes. If the election were filed, the Town would again be eligible to claim ITCs in respect of the ongoing expenses related to the property, pro-rated according to its actual use in commercial activities.

As per my conversation with XXXXX on June 13, 1997, it is not the nature of our service to provide tax advice. We cannot advise the client as to whether filing the election under section 211 of the Act is more or less beneficial. We can explain in general terms the nature and implications of the transaction.

This election is generally advantageous where a public service body owns real property that is leased to a person for use in commercial activity and that person could obtain an ITC for the GST on their rental payments. If the Town were to file an election pursuant to section 211 of the Act, the Town would be entitled to claim an ITC in respect of the acquisition of the building and any ongoing expenses, and would be required to charge the GST on the rent of the building to the Club. The Club would only be entitled to an ITC in respect of the rental if they were registered for GST purposes and using the property primarily in commercial activities.

According to paragraph 211(5)(c), an election made under this section must be filed with the Minister in the prescribed form, specifying the real property covered by the election, within one month after the end of the reporting period of the person in which the election becomes effective.

If you require any further information concerning this matter, please contact me at (613) 952-9214.

Yours truly,

Doris Rist
A/Rulings Officer
Financial Institutions and Real Property
GST/HST Rulings and Interpretations

 XXXXX

Authority: ETA

Reference: ss. 123(1), 165(1), 211(1), (5), 259(2), (4), 209(1), 153(1), (2)

QA: 2f.22, 2g.62, 4j.23, 6d.23, 2e.210.

cases: 961125, 960529