2 October 1998 GST/HST Interpretation HQR0000385 - REQUEST FOR INFORMATION Front-ending Agreements -

                                                                        GST/HST Rulings and Interpretations
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, ON K1A 0L5

                                                                        Leg. Ref: Sch V/VI/20(c) & Part VII;
ss. 123(1)

I refer to the October 21, 1996 memorandum from XXXXX and the supporting documentation received in this office on November 27, 1997 from the XXXXX Tax Services Office requesting a confirmation of the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the following transaction(s) currently under audit.

Statement of Facts

1. On October 13, 1994 XXXXX entered into a servicing agreement (the servicing agreement) with XXXXX[.]

2. XXXXX has identified specific infrastructure requirements which must be constructed in order for future development to proceed in an area proposed for development. The infrastructure requirements are as follows:

XXXXX

XXXXX

XXXXX

3. Under article 2 of the Servicing Agreement XXXXX agrees to construct the improvements to XXXXX at the entire cost of the developers subject to repayment by XXXXX of a portion of the costs.

4. The estimated costs of construction as specified at XXXXX to the Servicing Agreement is XXXXX consisting of XXXXX[.] The developers will provide the necessary funds to permit the construction of XXXXX Article XXXXX of the Servicing Agreement requires the developers to arrange and deliver to XXXXX a letter of credit, a certified cheque, or a combination of a letter of credit or certified cheque.

5. XXXXX pursuant to XXXXX which includes the growth related portion of the net capital costs of the construction project for XXXXX[.] The developers will only bear the non-growth related component of the construction costs with the growth related costs being repaid by XXXXX to the developers.

6. The servicing agreement provides that the Developers shall be entitled to a reimbursement of the growth related portion of these costs in the years the projects are scheduled in XXXXX[.] Under article XXXXX of the Servicing Agreement XXXXX agrees to repay the growth related portion of the cost of the improvements, including the design costs, either by way of phased repayment of the total growth related share of the improvements or by way of a repurchase of debt instruments calculated in accordance with XXXXX to the Servicing Agreement. Under XXXXX the Servicing Agreement the re-purchase amount shall be XXXXX obligations to the Developers at a discounted present value. The method of repayment is at the sole discretion of the developers.

7. The total amount to be repaid shall be pro-rated among the developers in accordance with the dollar value of the letter of credit delivered by each developer to XXXXX to the Service Agreement sets the cost sharing as follows:

XXXXX

XXXXX

XXXXX

XXXXX will repay the growth-related costs estimated at XXXXX from XXXXX allows XXXXX to create a reserve fund in accordance with XXXXX[.]

Funds for the reserve will be generated through development cost charges levied against developers proceeding with development in XXXXX Under XXXXX of the Servicing Agreement, as security for the obligation of XXXXX to repay the developers the growth related portion of the construction costs, a debt instrument in the form of a promissory note per XXXXX to the Servicing Agreement will be issued by XXXXX to each developer. The promissory notes mature on XXXXX[.] The notes will not be interest bearing but will be adjusted for inflation with the same construction index as used in XXXXX.

8. One of the developers did not enter the servicing agreement on the grounds that the developer's lands are for sale. The remaining developers have proposed to make up the funding shortfall created as result of the withdrawal of this developer. The remaining developers have requested XXXXX assistance through the servicing agreement in recovering these additional funds from successor owners of the property presently owned by the developer who has withdrawn from the participating group.

Information Requested

With respect to the loans made by the developers to XXXXX for the growth related costs, the developers are making exempt supplies of a financial service to XXXXX[.] The payments made by the developers for the non-growth related costs and for which XXXXX makes no repayment to the developers are consideration for an exempt supply of a plan of subdivision pursuant to section 20(c) of Part VI of Schedule V to the Excise Tax Act.

Information Provided

The developers have made an exempt supply of a financial service to XXXXX through the issuance of loans secured by non-interest bearing promissory notes for the growth-related portion of the infrastructure costs. XXXXX has made an exempt supply of a service in respect of an application for a plan of subdivision, the consideration for this supply being the payment of the non-growth related costs.

The developers making exempt supplies of a financial service will not be entitled to input tax credits for GST incurred in making these exempt supplies XXXXX a municipality incurring GST on construction costs to upgrade municipal infrastructures, will be entitled to claim 57.14% public service body rebate for GST incurred on the construction costs.

Should you have any further questions or require clarification on the above matter, please contact Ms. Enikö Vermes, Manager, Municipalities at (613) 954-5127 or the undersigned at (613) 954-4280.

Owen W. Newell, CGA
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate