19 June 1997 GST/HST Interpretation HQR 0000335 - Application of the GST on the Purchase of Materials and Services for the Construction of a Gaming Faciility, and the Subsequent Lease of Such Facility to a Non-profit Organization

XXXXX

Rits #: HQR 0000335

XXXXX

File #: 11872-2, 11872-12

                                                                        June 19, 1997

Dear XXXXX

Thank you for your letter of April 30, 1996 (with attachments) concerning the Goods and Services Tax (GST) implications to the XXXXX ("the Band") vis-à-vis its purchase of materials and services for the construction of a gaming facility, the subsequent lease of such facility to a non-profit organization ("the NPO") incorporated by members of the Band, and the ongoing gaming activities to be conducted by the NPO.

Our understanding of the facts is as follows:

Statement of Facts:

1) Based on the XXXXX (the Code), gaming activities must be conducted and managed by a licensed charitable organization (as defined in the Code) and only one organization may be licensed.

2) Accordingly, the XXXXX (Corporation) have applied for incorporation under Part II of the Canada Corporations Act.

3) Based on the view that the definition of an NPO is essentially equivalent between the Income Tax Act and the Excise Tax Act (ETA), you assume, that the corporation qualifies as an NPO for GST purposes. (Hereinafter "the Corporation" will be referred to as "the NPO").

4) The NPO, as the only designated licensee under the Code, will operate and be fully responsible for gaming activities carried out at the casino facility.

5) The directors of the NPO are to be elected yearly by the individual members of XXXXX at an annual meeting and membership in the NPO is limited to individuals who are members of the Band.

6) An operating agreement is currently being drafted by the Band's legal counsel with the objective of stipulating that the NPO must submit its operating budget to the Band for review and approval.

7) In order to erect the gaming facilities, it is the intention of the Band to enter into a contract for the construction of a casino on reserve land. To that end, the Band will contract directly with various suppliers of both materials and services to construct the gaming facility.

8) Once construction of the facility has been completed, the Band will lease the structure to the NPO.

9) In order to facilitate the carrying out of its responsibilities as licensee, the NPO will contract with an Operator, who as authorized by the NPO, will assume various responsibilities with respect to the day-to-day management activities and operation of the casino.

10) Notwithstanding the fact that certain supervisory and administrative responsibilities will be granted to the Operator under the agreement when finalized, the NPO will at all times remain the owner and purveyor of gaming activities in the casino.

11) The various sources of revenue to be generated by the casino include the various gaming activities (e.g. bingo, monte carlo, raffle and break-open tickets), gift shop sales and food and beverage outlets.

Questions:

You have asked that we provide a written ruling on the following GST issues. However, as assumptions have to be made in order to answer your questions, the Department cannot provide you with a ruling. Instead we are providing a general interpretation of the ETA based on the assumption that the corporation may be an NPO and that the operating agreement currently being drafted by the Band's legal counsel with the objective of stipulating that the NPO must submit its operating budget to the Band for review and approval will be concluded.

For simplicity we have restated your issues as presented and are providing the response to each immediately thereafter.

Question 1 - Gaming activities undertaken by the NPO will be tax exempt pursuant to sections 5.1 and 5.2 of Schedule V, Part VI of the ETA (and sections 5.1 and 5.2 of Schedule V, Part VI of the ETA as amended under the Notice of Ways and Means Motion ("the Motion") released on April 23, 1996)

Response 1 - Section 5.1 of Part VI of Schedule V to the ETA exempts a supply of a right, other than an admission, to play or participate in a game of chance (other than a prescribed game of chance) made by a public institution or an NPO except where the public institution or NPO is a prescribed person. Section 5.2 of Part VI of Schedule V to the ETA exempts a supply of a service that is deemed under section 187 to have been supplied by a public institution or an NPO except where the public institution or NPO is a prescribed person.

Question 2 - Subsection 177(1) will not apply to supplies entered into by the Operator on behalf of the NPO, relating to gaming. Subsection 177(1.1) will not apply to supplies entered into by the Operator on behalf of the NPO, relating to any gaming which involves the placing of bets. Subsection 177(1.1) will not apply to supplies entered into by the Operator on behalf of the NPO, relating to bingo, raffle and break-open tickets, provided the Operator informs patrons in writing, that the NPO is making the supply and is not required to collect the tax. Finally, new section 177(1) of the Motion will not apply to any of the gaming activities entered into by the Operator on behalf of the NPO, including the placing of bets, bingo, raffle and break-open tickets.

Response 2 - Old Subsection 177(1) (effective until April 23, 1996) will not apply to exempt supplies of gaming, made by an agent on behalf of a principal.

Old Subsection 177(1.1) will not apply to supplies, made by an agent on behalf of a principal, that relate to gaming which involves the placing of bets as the supply in question is deemed to be the supply of a service.

Old Subsection 177(1.1) will not apply to the supply of raffle and break-open tickets and bingo where an agent discloses in writing to the recipient that a principal is making the supply and is not required to collect the tax.

New subsection 177(1) (introduced by Bill C-70 assented March 20, 1997) will not apply to exempt gaming activities.

Question 3 - The supply, by the NPO, of food and beverage and sales of taxable goods through an on-site gift shop, will be taxable provided the goods are sold at an amount exceeding direct cost as defined in section 1 of Schedule V, Part VI of the ETA.

Response 3 - The supply of food and beverages and sales of taxable goods by an NPO will be taxable if they are sold at an amount exceeding direct cost. For your information the amended definition of direct cost is now found in subsection 123(1) of the ETA, rather then in section 1 of Part VI of Schedule V to the ETA.

After 1996, the direct cost exemption will apply to goods an NPO makes itself or acquires for resale and to services that an NPO acquires for resale. Direct cost will include any GST/HST, provincial sales tax, or other prescribed provincial tax, duty or fee payable on the good or service an NPO provides. Also, in calculating the direct cost, an NPO no longer has to deduct any amounts that it claims as an input tax credit or rebate.

If an NPO normally sells goods or services for an amount in excess of direct cost, these sales are taxable unless some other special exemption applies.

If an NPO normally sells goods or services for less than its cost, it will not charge the tax.

However, if an NPO sells its goods and services on a cost recovery basis, the tax status of these supplies as taxable or exempt, depends on whether it indicates on its invoice or agreement for the supply that it is charging the purchaser an amount as GST/HST on that sale.

Question 4 - The NPO qualifies as a band-empowered entity as defined in the Bulletin, by virtue of its being "controlled", as defined by the Band.

Response 4 - According to by-law No. 1, the NPO's head office is located on the XXXXX[.] The governing body of the corporation is elected by the members, and the membership is limited to members of the XXXXX. A corporation that is required by legislation, by-laws, or an operating agreement, to submit to the band its operating budget and where applicable, its capital budget for review and approval will be considered to be a band-empowered entity, by virtue of contract.

Question 5 - The gaming supplies of the Band will be classified as band management activities.

Response 5 - The information provided indicates that the NPO will make supplies of gaming not the Band. Therefore, our response has been based on that assumption. Band management activities are activities or programs undertaken by a band or a band-empowered entity that are not commercial activities for which they would otherwise be entitled to an input tax credit. If the gaming supplies being made by a band-empowered entity are exempt, the gaming supplies will be considered to be band management activities.

However, where a corporation that is not an NPO supplies the gaming, the supply will be taxable and will not meet the definition of band management activities.

Question 6 - The Band may purchase all property acquired on Reserve without paying the GST; this will include construction materials as well as any supply and install contract relating to the construction of the casino building and fixtures. If the Band ultimately decides to enter into a turn-key contact for the construction of the casino building and fixtures on Reserve land, GST would not be payable on the contract as it would qualify as property "purchased" on Reserve.

Response 6 - We agree that a Band may acquire property on reserve without paying the GST, provided it has appropriate documentation to show vendors. If a Band enters into a turn-key contract for the construction of a casino building and fixtures on reserve land, the supply will not be subject to the GST.

Question 7 - The Band may purchase all property acquired off-reserve without paying GST provided the property is delivered to a reserve by a vendor or a vendor's agent and appropriate documentation is supplied by the Band to the vendor.

Response 7 - We agree that a Band may purchase all property acquired off-reserve without paying GST provided the property is delivered to a reserve by a vendor or a vendor's agent and appropriate documentation is supplied by the Band to the vendor. However, if the purchaser uses his or her own vehicle to transport the property to a reserve, the acquisition is subject to the normal GST rules.

Question 8 - The Band may purchase services, whether on or off-reserve, without paying the GST as long as the services relate to real property on reserve i.e. the construction of the building fixtures and related land improvements.

Response 8 - Services acquired on or off-reserve by a band for band management activities or for real property on reserve are not subject to the GST.

Question 9 - The Band will charge GST to the NPO on the lease payments for the casino building and fixtures, but only on that portion reasonably allocable to the portion of the casino used for gift shop and any food and beverage outlets run by the NPO. GST will not apply to the portion of the lease payments reasonably allocable to the portion of the casino used for gaming activities.

Response 9 - Lease payments made by an NPO that is a band empowered entity will not be subject to GST. A band-empowered entity is entitled to tax relief on the acquisition of an interest in real property on reserve, consistent with the Indian Act under which personal property of an Indian or an Indian band situated on a reserve and their interests in reserves or designated lands are not subject to tax.

Question 10 - The NPO may purchase goods or services on-Reserve without paying GST provided the goods or services relate to the NPO's Band management activities (e.g. gaming). GST payable by the NPO on any goods and services relating exclusively to its taxable activities will be recoverable, by the NPO, by way of claiming an ITC.

Response 10 - A band-empowered entity may purchase goods or services on reserve without paying GST provided the goods or services relate to its band management activities. A band-empowered entity may claim input tax credits for the GST paid or payable on any goods or services relating to its taxable activities provided the band-empowered entity is a GST registrant.

Question 11 - The NPO may purchase property off-reserve relating to its band management activities, without paying the GST, provided the property is "delivered" to a reserve by the vendor or the vendor's agent and appropriate documentation is provided to the vendor.

Response 11 - A band-empowered entity may purchase property off-reserve relating to its band management activities, without paying the GST, provided the property is "delivered" to a reserve by the vendor or the vendor's agent and appropriate documentation is provided to the vendor.

Question 12 - Services acquired on or off-reserve will not be subject to GST as long as the services are for band-management activities or for real property on reserve.

Response 12 - Services acquired on or off-reserve by an Indian band or a band empowered-entity will not be subject to GST as long as the services are for band-management activities or for real property on reserve.

Question 13 - Any imported taxable supplies as outlined in subsections 217(a) and 217(c) (and as amended in the Motion), will not be subject to GST when acquired by the NPO for use in its band management activities.

Response 13 - Importations by Indians, Indian bands or band-empowered entities are subject to the normal import rules, that is, they are taxable at seven per cent unless they are specifically zero-rated. GST on imported goods is collected by Canada Customs under the authority of the Customs Act at the time of importation.

Importations of property are subject to the GST even in those instances where, after importation, the property is delivered to a reserve by the vendor's agent or by Canada Post.

The acquisition of a service, which includes an imported service, by a band-empowered entity is not subject to the GST when the service is acquired for band management activities or for real property on reserve.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.

For your convenience, find enclosed, copy of GST Memoranda Series (1.4). If you need additional information, please feel free to contact us again.

Yours truly,

Anny Roy LL.B. D.D.N.
Rulings Officer
Public Services Bodies and Government
GST Rulings and Interpretations

c.c.:

D. Harding Anny Roy ATIP