26 June 1997 GST/HST Interpretation HQR38 - Tax Status of Recreational Services

Gentlemen:

I refer to your letters of XXXXX on the subject of cost sharing arrangements between municipalities. As explained in your letter, you are representing the XXXXX in its request for clarification of the tax status under the Excise Tax Act (the Act) of payments made by XXXXX relating to the costs associated with the XXXXX[.] On XXXXX requested a GST Application Ruling from the XXXXX Tax Services Office on the subject of cost sharing arrangements between municipalities. The cost sharing arrangements pertained to a leisure services agreement (the Agreement) between XXXXX. XXXXX provided the factual information as outlined below.

Facts

1. Pursuant to XXXXX, a municipality may, by bylaw, establish a joint parks and recreation commission subject to section XXXXX of the same Act. Section XXXXX pertains to parks commissions and section XXXXX relates to recreation commissions. In accordance with section XXXXX in the bylaw establishing the parks commission, there shall be set out the procedures governing the conduct of the commission and the duties and powers delegated to the commission. In accordance with section XXXXX the municipality may, by bylaw, empower the recreation commission to organize and conduct a recreation program and empower the commission to incur liabilities for the purposes of running the recreation program.

2. XXXXX[.]

3. XXXXX

•   function as an independent policy making body;

•   have operating authority for the provision of parks and leisure services and for entering into agreements and contractual obligations within the limitations of approved budgets;

•   submit to the municipalities the estimated annual budget for operating costs and capital costs;

•   submit to the municipalities each year a recommendation of long-term capital expenditures for consideration by each municipality in the development of each municipality's long term capital budget; and

•   enter into an agreement of cooperation with XXXXX to address such issues as the reciprocal use of facilities, the joint maintenance and development of combined sites and coordination of program services.

•   have authority to spend money within a budget approved by XXXXX[.]

•   contract with XXXXX for the provision of parks and leisure services.

4. On XXXXX entered into the Agreement as stipulated in their respective bylaws. XXXXX of the agreement states the responsibilities of the XXXXX and includes all points discussed in XXXXX[.] The parks and leisure services to be delivered by the XXXXX are defined in the Agreement under XXXXX to mean those functional areas of service consisting of:

•   Public open space (planning, development, maintenance and scheduling/coordination)

•   Recreational facilities (planning, development, maintenance and scheduling/coordination)

•   Organizational services (program development and delivery, support to community groups, marketing, fund-raising and policy development)

Operating costs and capital costs are defined in XXXXX of the Agreement. Operating costs are the total of net actual expenses (calculated in accordance with sound accounting principles and practice certified annually by the auditors for XXXXX for managing, operating, maintaining and repairing the facilities and for providing leisure services generally including direct departmental administration plus overhead calculated at XXXXX of the net operating costs for indirect support, such as liability insurance, office space, computer services, financial services, works yard support and personnel services.

Capital costs are those costs related to the purchase and replacement of equipment for which both municipalities agree to provide funding and will share ownership; and those expenditures which exceed XXXXX for new facilities or for improvements to existing facilities or for equipment and facility infrastructure which is replaced on a cycle of XXXXX[.]

5. Pursuant to the XXXXX letter from XXXXX neither municipality has its own parks and recreation department. The Councils of the two municipalities review the budgets as presented by the XXXXX and review proposals presented for the construction of new parks and facilities, but the rest is up to the XXXXX[.]

6. Under XXXXX of the Agreement, each municipality is responsible for reviewing all budgets submitted by the XXXXX and approve in principle the level of operating funds for the current calendar year. Each municipality is required to review and indicate preliminary approval or disapproval of additional operating funds for all proposals by the XXXXX for new parks and facilities constructed in either municipality in advance of the construction.

Also, the municipalities are required to enact bylaws as may be required to implement the XXXXX with respect to fees and charges and other operational issues. This is in accordance with XXXXX which states

"The powers delegated to the commission do not extend to or include any power of council which is exercisable by bylaw only."

Under XXXXX of the Agreement, XXXXX agrees to pay to XXXXX its share of the operating and agreed upon sharable capital costs for each calendar year. At the date of the agreement, XXXXX will share in approximately XXXXX of the total costs. This percentage may vary from year to year.

Under XXXXX of the Agreement, XXXXX will remit to XXXXX payments on a semi-annual basis for its share of the costs based on the approved budget subject to adjustment for variances in spending.

7. The XXXXX is not registered for the GST.

8. In the XXXXX letter from XXXXX, she stated that there is presently no formal contract for the supply of parks and leisure services between the XXXXX and XXXXX[.]

9. In an application of XXXXX the XXXXX has applied or municipal determination as a para-municipal organization pursuant to paragraph (b) of the definition of municipality in subsection 123(1). On June 27, 1996, the XXXXX was determined to be a municipality with an effective date of XXXXX[.]

10. In your letter of XXXXX, you stated that the function of the XXXXX is to recommend policy direction and the related budget for the provision of the services. Control over the provision of the joint services rests with each respective municipality as set out under XXXXX of the Agreement.

11. In the XXXXX letter from XXXXX she stated that XXXXX is acting as an agent of XXXXX in the provision of parks and leisure services.

12. In your letter of XXXXX, you stated that XXXXX have jointly authorized and retained on file for audit purposes a Joint Venture Election pursuant to section 273 of the Act under which XXXXX has been elected as the operator.

Application Ruling Requested

GST does not apply to payments made between XXXXX[.]

Application Ruling Provided

In accordance with XXXXX has been given the authority by XXXXX to provide parks and leisure services (as defined in XXXXX. The XXXXX has chosen to contract out the supply of these services to XXXXX as specified in XXXXX of the Agreement. The supply of the contracted service by XXXXX to the XXXXX is an exempt supply of a service pursuant to paragraph 28(a) of Part VI of Schedule V to the Act. The consideration for the supply of this service consists of the operating and agreed upon sharable capital costs for each calendar year.

Payment for the service is made by both XXXXX Partial payment for this supply is directly made to XXXXX by XXXXX pursuant to XXXXX of the Agreement. The remainder which is not directly paid by XXXXX to the XXXXX is absorbed by XXXXX in accordance with its contract for services with the XXXXX GST does not apply to the supply of the service.

Analysis

We maintain that the XXXXX has been given the authority by XXXXX to provide parks and leisure services. It is your view that the XXXXX has been given restricted operating authority, effectively limited in scope to a property management function. Control over the provision of parks and leisure services by XXXXX exists from the standpoint of budgetary approval and the passage of bylaws to set fees, charges and other operational issues. However, as stated in XXXXX has the operating authority for the provision of parks and leisure services. Parks and leisure services are defined to include program development and delivery. The agreement entered into by XXXXX indicates that the authority of the XXXXX is not merely that of property management.

We maintain that the XXXXX has contracted out its operating authority to provide parks and leisure services. As stipulated in XXXXX of the Agreement, the XXXXX has the obligation to provide parks and leisure services. Paragraph XXXXX of the Agreement states that the XXXXX shall contract with XXXXX for the provision of parks and leisure services. The obligations of XXXXX are outlined above in XXXXX. The requirement by XXXXX to establish a commission, and the stipulated obligations of the XXXXX clearly indicates that the XXXXX has the obligation to provide parks and leisure services.

In conclusion, we maintain that XXXXX is supplying a service to the XXXXX[.] With respect to the statement that XXXXX and the XXXXX have jointly authorized and retained on file for audit purposes, a Joint Venture Election pursuant to subsection 273(1), the supply of parks and leisure services is not a prescribed activity for the purposes of subsection 273(1) of the Act and has not been proposed for inclusion in any amendment to the Regulations for prescribed activities.

Finally, in response to your assertion that capital costs are not consideration for a supply by or to the XXXXX because at all times the underlying property remains beneficially and/or legally owned by each respective contributing municipality, XXXXX of the Agreement outlines how the assets will be distributed in the event of withdrawal of a municipality from the XXXXX[.] The existence of this provision specifying how the assets will be distributed in the event of withdrawal is an indication that the assets, the acquisition of which was jointly funded, are the assets of the XXXXX[.] This is further reinforced by the definition of capital costs in paragraph XXXXX of the Agreement. The definition states that the Councils agree to provide funding for the purchase and replacement of equipment. According to the definition, the acquisition of the capital assets by the XXXXX requires Council funding. Paragraph XXXXX further states that the functional areas of parks and leisure services to be provided by the XXXXX include the recreational facilities.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series Section 1.4. We are bound by this ruling provided that none of the above issues are presently under audit, objection or appeal, there are no relevant changes in the future to the Act, and provided that you have fully described al necessary facts and transactions for which you requested a ruling.

Should you have any questions, please contact Ms. Enikö Vermes, Manager, Municipalities at (613) 954-5127, or Mr. Owen Newell, Policy Officer, Municipalities, Public Service Bodies at (613) 954-4280.

Yours truly,

J.A. Venne
Director
Public Service Bodies and Governments
GST/HST Rulings and Interpretations