28 July 1998 GST/HST Ruling HQR1193 - Application of the GST/HST to a Development Agreement, a Lease Agreement, and Operating Agreement

                                                                        GST/HST Rulings and Interpretations
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, ON K1A 0L5

Dear Sir:

I refer to your letter of May 22, 1998, including finalized agreements, and our telephone call of July 22, 1998 in which you requested confirmation of our previous ruling issued on December 18, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions to be undertaken by your client XXXXX[.]

Statement of Facts

Our understanding of the facts as outlined in our letter of December 18, 1997 (File: 11892-2/Case HQR729) have not changed with the following exceptions:

1.  XXXXX is a registrant (BN XXXXX for the purposes of the HST/GST.

2. The Development Agreement, Lease Agreement, and Operating Agreement have been finalized and signed as of XXXXX[.]

3. XXXXX of the Development Agreement states that the facility price shall be $ XXXXX[.]

4. XXXXX of the Lease Agreement states that the rent for the XXXXX term shall be $ XXXXX which is payable in full on the Lease Commencement Date and no portion of the rent shall be payable by the City in any event including the termination of the lease.

5. XXXXX agrees to pay the City on the Lease Commencement Date the sum of $ XXXXX in consideration for the licences to acquire from the City all of its right, title, interest in and to such raw water from the XXXXX as XXXXX may require for the facility and an exclusive license to sell finished water from the facility exclusively to XXXXX to be delivered at XXXXX period commencing on the Lease Commencement Date and ending on the Reversion Date.

6. Under XXXXX of the Operating Agreement, the XXXXX shall pay the water price monthly to XXXXX[.] The water price as defined in XXXXX of the Operating Agreement means the price as calculated in accordance with XXXXX to the Operating Agreement.

Ruling Requested

1.  XXXXX is making a supply of potable water and can be designated as a municipality for the purposes of claiming the municipal rebate under subsection 259(4) of the Excise Tax Act (the Act) for GST/HST incurred on its acquisition of goods and services.

2.  XXXXX will be able to claim and receive a rebate equal to 57.14% of any GST and/or HST charged to and or paid by them on the consideration charged for property or services acquired in respect of their operation of the facility and Pumping Station and its subsequent sale of potable water to the City.

3. The sale of the newly constructed Facility by XXXXX to the City would be subject to GST/HST as a taxable supply of real property.

4. The subsequent lease of the Facility and the Pumping Station by the City to XXXXX would not attract GST/HST pursuant to section 25 of Part VI of Schedule V to the Act.

Ruling Given

Based on the facts set out above the following ruling is provided.

1.  XXXXX will be making a supply of potable water, an exempt supply of a municipal service under section 23 of Part VI of Schedule V to the Act. Municipality, as defined in subsection 259(1) of the Act for the purpose of claiming the municipal rebate under subsection 259(4) of the Act, includes a person designated by the Minister for section 259 but only in respect of its designated activities of making supplies of exempt municipal services. The supply of water is considered an exempt supply of a municipal service under section 23 of Part VI of Schedule V to the Act, therefore, XXXXX will qualify for the purposes of claiming the municipal rebate under subsection 259(4) of the Act.

2.  XXXXX as a designated municipality making exempt supplies of potable water will be entitled to claim the municipal rebate of 57.14% for GST/HST incurred on inputs of goods and services acquired to make exempt supplies of potable water.

3. XXXXX is making a taxable supply of real property to the XXXXX where the consideration for the supply is $ XXXXX subject to adjustments resulting from project risk events or change orders. XXXXX[.]

4. The lease of the Facility by the XXXXX is an exempt supply of real property by way of lease by a public service body under section 25 of Part VI of Schedule V to the Act.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST Memorandum Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

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

Yours truly,

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

Legislative References:           s. 259 & Schedule V/Part VI section 23