23 October 1998 GST/HST Interpretation HQR0001326[2] - ITC Entitlement Under the Special Quick Method for Public Service Bodies

                                                                        GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear Sir:

Thank you for your facsimile of September 10, 1998 concerning input tax credit (ITC) entitlement under the Special Quick Method for Public Service Bodies with respect to the construction of a building situated on, and other improvements to, leased land.

Statement of Facts

A municipality, as defined in subsection 123(1) of the Excise Tax Act (ETA) for purposes of Part IX and the related Schedules to the ETA and in subsection 259(1) for purposes of section 259 of the ETA, has acquired certain lands by way of lease for a term of XXXXX years.

The municipality has undertaken to construct buildings and other related improvements to the leased land for use as its capital real property.

In accordance with the terms of the lands lease, ownership of the buildings, exclusive of the lands, vests in the Municipalityat all times during the term of the lease notwithstanding any rule of law to the contrary.

Upon expiration of the lands lease, the buildings and related improvements will either be demolished and the lands returned to a green field state prior to surrender of the lands to the lessor or alternatively, ownership of the buildings and related improvements will be transferred to the lessor, at the lessor's option.

The municipality has elected to use Special Quick Method for Public Service Bodies (Special Quick Method) as a prescribed method for determining net tax in accordance with subsection 227(1) of the ETA and Part V of the Streamlined Accounting (GST) Regulations. The Special Quick Method has been in effect for all reporting periods of the municipality in which the GST has been paid or become payable on the construction costs of the buildings and other related improvements.

The municipality will either use the buildings and other related improvements as capital real property in the course of its commercial activities or it will supply this capital real property by way of lease to a third party.

In the event that the municipality supplies the buildings and other related improvements by way of lease, the municipality will file an election under section 211 of the ETA to make the lease a taxable supply.

The municipality is registered under subdivision d of Part IX of the ETA effective January 1, 1991.

Interpretation Requested

In accordance with the above facts you have requested an interpretation as to whether the municipality can claim ITCs under the Special Quick Method for the GST paid or payable with respect to the construction of the buildings and other related improvements.

Interpretation Given

It is our view that the municipality would not be eligible to claim ITCs for GST paid or payable on any goods and services acquired for the purpose of constructing the buildings situated on, and other related improvements to, the land acquired by way of lease.

Analysis

For those reporting periods of a registrant person where the Special Quick Method is or was in effect, the registrant is restricted from claiming ITCs in respect of GST which is paid or becomes payable in those periods other than ITCs which are permitted in accordance with subsection 21(1) of Part V of the Streamlined Accounting (GST) Regulations to the ETA.

Subsection 21(1) of Part V of the above Regulations provide that the calculation of net tax of the registrant is determined by the following formula:

A + B - C

where the description of "C" is the total of:

"(a) all amounts each of which is an input tax credit of the registrant

(i) for the particular reporting period or a preceding reporting period of the registrant during which the election was in effect in respect of real property acquired by way of purchase by the registrant or an improvement thereto where the cost to the registrant of the improvement is at least $10,000,

(ii) for the particular reporting period or a preceding reporting period of the registrant during which the election was in effect in respect of a supply by way of sale to, or importation by, the registrant of personal property that was acquired or imported by the registrant for use as specified property and the fair market value of which at the time of the supply, or the value of which determined under section 215 of the Act at the time of the importation, as the case may be, is at least $10,000,

(iii) for the particular reporting period or a preceding reporting period of the registrant during which the election was in effect in respect of an improvement to a specified property (other than real property) of the registrant, where the cost to the registrant of the improvement is at least $10,000 and the registrant has claimed, or is entitled to claim, an input tax credit in respect of the last supply to, or importation by, the registrant of the specified property".

In should be noted that pursuant to subsection 11(6) of the November 26, 1997 Draft Amendments to the Streamlined Accounting (GST) Regulations subparagraph (a)(i) of the description of "C" in subsection 21(1) of the Regulations is replaced by the following:

"[a](i) for the particular reporting period or a preceding reporting period of the registrant during which the election was in effect in respect of real property acquired by way of purchase by the registrant or an improvement thereto,"

for the purpose of determining net tax of a registrant for periods ending on or after April 1, 1997.

In addition "improvement", for purposes of Part IX of the ETA and the Regulations thereto is defined in subsection 123(1) as:

"in respect of property of a person, means any property or service supplied to, or goods imported by, the person for the purpose of improving the property, to the extent that the consideration paid or payable by the person for the property or service or the value of the goods is, or would be if the person were a taxpayer under the Income Tax Act, included in determining the cost or, in the case of property that is capital property of the person, the adjusted cost base to the person of the property for the purposes of that Act;"

Therefore, based upon the above Statement of Facts the municipality as a registrant would not be eligible to claim ITCs for GST that was paid or became payable in respect of the acquisition of improvements to real property (i.e. improvements to land) where the real property was acquired by the municipality by way of lease.

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/HST 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/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8852.

Yours truly,

Daryl J.A. Hooley, CGA
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

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