21 February 1997 GST/HST Interpretation HQR77 - Request for Assistance Related to Supplies Made Between Municipalities

I refer to the memorandum dated March 8, 1995, from XXXXX addressed to the interpretations and services division of your office. The memorandum and subsequent request for our assistance related to supplies made between municipalities.

Based on the information provided, certain assumptions had to be made in order to respond to the request. In light of the complex nature of the subject transactions involving supplies of real property and the structure of the response which is heavily reliant on the assumptions, it is recommended that your office undertake the task of ascertaining factual information surrounding the transactions in order that a more definitive response be issued to the client.

Statement of Facts

1. XXXXX and XXXXX (XXXXX) are towns continued under XXXXX[.] Both XXXXX and XXXXX are registrants.

2. The towns which are in close proximity to each other desire to continue to provide certain services to their respective inhabitants, including the provision of sewage treatment and disposal facilities.

3. A joint venture agreement dated XXXXX, was entered into between XXXXX and XXXXX for the purpose of jointly purchasing and owning land for aerated sewage lagoons for treatment and disposal of sewage produced from XXXXX and XXXXX.

4. Each town was to hold an XXXXX interest in the land as tenants in common.

5. The joint venture was managed by a committee called the XXXXX (the Authority). The Authority was a a subcommittee of the town councils of XXXXX and XXXXX.

6. The actual construction and operation of the sewage lagoons was to be carried out by the XXXXX (the Commission) which was to be formed at a later date. The Commission was created by XXXXX[.] The Commission became a registrant on XXXXX[.]

7. The joint venture was to terminate when the land was transferred to the Commission.

8. XXXXX independently pursued funding for the purchase of the land and was granted funding in XXXXX. The land purchase (referred to as Phase I) was closed in XXXXX[.] The land is physically located in XXXXX.

9. The formation of the Commission was delayed until XXXXX, and as a consequence of the delay, XXXXX pursued funding for the construction of the lagoons. Funding for the construction of the lagoons was approved by XXXXX XXXXX in XXXXX and paid to XXXXX by the Province.

10. Construction of the lagoons began in XXXXX.

11. XXXXX arranged for all contracts and paid all contractors. XXXXX was initially invoiced by the contractors and accounting records for the construction costs were recorded in XXXXX accounts. At a subsequent date, the contractors invoiced the Authority.

12. XXXXX paid XXXXX for its share of the land costs and the construction costs.

13. XXXXX claimed the municipal rebate on all GST paid to the contractors for the construction of the lagoon.

14. The Commission became a registrant on XXXXX.

15. XXXXX filed a section 211 election on XXXXX, for the supply of land located at XXXXX and XXXXX, an election was filed with respect to the supply of real property that it had acquired for a period of XXXXX years.

Questions:

1. Are the payments received by XXXXX from XXXXX consideration for an exempt supply of a service of installing a sewerage system supplied by XXXXX to XXXXX, pursuant to section 22 of Part VI of Schedule V to the Excise Tax Act (the Act)?

2. If the supplies are considered exempt, is XXXXX entitled to claim the municipal rebate on all the GST paid regarding the project prior to the formation of the Commission?

3. If XXXXX is not eligible for the rebate on the GST paid up to XXXXX when the Commission was created, is XXXXX eligible to claim a municipal rebate?

4. If the construction is commercial activity, would XXXXX and XXXXX be eligible to file a joint venture election with XXXXX acting as the operator?

Responses:

1. It is not clear from the information provided whether XXXXX is making a supply of construction services on real property owned by XXXXX or supplies of real property and subsequent supplies of construction services.

Supply of construction services on real property owned by XXXXX - Based on the assumption that construction services are being supplied, where the services are made on real property owned by XXXXX, the supply of construction services made by XXXXX to XXXXX will be exempt under section 6 of Part VI of Schedule V, if supplied at direct cost as defined in section 1 of Part VI. In those situations where the supplies were not made at direct cost,0 the services would be taxable when made by XXXXX to XXXXX.

Supplies of real property and construction services - However, if XXXXX is making a supply of real property and subsequent supplies of construction services to XXXXX, the supply of the real property is taxable pursuant to paragraph 25(g) of Part VI of Schedule V to the Act, assuming that the elections filed by XXXXX pertain to the land being supplied to XXXXX.

The tax status of the services will depend on whether the services are supplied at direct cost as explained above.

With respect to the question of whether section 22 of Part VI of Schedule V would apply in this situation, XXXXX must be supplying a service of installing, repairing or maintaining a sewerage system which it is operating. According to the information provided, the Commission was to be the operator of a sewerage lagoon, therefore, the exempting provision in section 22 of Part VI of Schedule V will not apply to the construction services supplied by XXXXX to XXXXX.

2. If XXXXX is considered to be making an exempt supply of construction services under the direct cost provision on real property owned by XXXXX, it would be eligible for a rebate under subsection 259(3) of the Act for the non-creditable tax charged on inputs acquired to make the exempt supply. However, if it is determined that separate supplies of real property and subsequent supplies of construction services were being made by XXXXX to XXXXX eligibility to claim input tax credits will depend on whether the section 211 election pertained to the supply of the land, and secondly, whether the construction services were exempt supplies under the direct cost rule, or taxable. XXXXX would only be eligible for the municipal rebate under subsection 259(3) of the Act for non-creditable GST charged on inputs acquired to make exempt supplies.

3. If XXXXX is making an exempt supply of construction services to XXXXX, pursuant to section 6 of Part VI of Schedule V to the Act, XXXXX is not entitled to claim ITC's in respect of this supply since GST would not apply to the supply. If the supply is, however, a taxable supply of construction services on which GST is exigible, XXXXX, as the recipient of a taxable supply would entitled to a rebate or input tax credits depending upon the extent of use in commercial activity.

4. In order for XXXXX and XXXXX to file the joint venture election, with XXXXX as the operator and XXXXX as the co-venturer, the joint venture agreement must have been entered into for the purposes of commercial activity. As stated in fact # 3 above, the purpose of the joint venture is to purchase and own land for sewage disposal lagoons. There is no indication that XXXXX, the co-venturer, is acquiring the land for the purposes of using the land in commercial activity. As stated in fact # 4, each town is to hold an undivided interest in the land as tenants in common. Once construction of the lagoon was completed, the land and the facilities were to be transferred to the Commission.

Should you have any questions, please contact Mr. Ken Syer, A/Manager, Municipalities at (613) 952-9590 or Mr. Owen Newell, Policy Officer, Municipalities at (613) 954-4280.

E. Vermes
A/Director
Public Service Bodies and Governments