16 July 1998 GST/HST Ruling HRQ0000192 - ITCs for Expressway Construction and Maintenance Services

Dear Sir:

Thank you for your letter of August 29, 1996, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below. We apologize for the delay in responding.

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows.

Statement of Facts

1) On XXXXX (the City) and XXXXX (the province), entered into a Memorandum of Agreement (MOA) related to a cost sharing agreement re XXXXX[.]

2) You have advised that XXXXX identified in the MOA is the same roadway currently identified as XXXXX[.]

3) As part of the MOA, the province agreed to enter into a further agreement to share the cost of construction, maintenance, and operation of such parts of the freeway that lie within the boundaries of the City.

4) The MOA as presented does not address actual construction projects.

5) You have advised that no further agreement for construction, maintenance and operation was entered into between the province and the City. Rather, the ongoing construction is cost shared as explained in a series of letters and construction programs spanning the years 1974 to the present. These letters make continual reference to the "subsidy" from the province with respect to the project. Phases for construction have been identified in correspondence included in your request.

6) The MOA was assumed by XXXXX (the municipality) upon its' formation.

7) In addition to the agreed upon cost sharing, the province has agreed to pay the municipality an additional XXXXX overhead allowance on construction costs. Assurances that this allowance would be recognized were given by (then) XXXXX[.] Therefore it would appear this XXXXX allowance is not in relation to GST issues.

8) In order to receive payment, the municipality must provide to the province detailed documentation relating to specific work that has been performed on the expressway.

9) Construction of and cost sharing arrangements for the expressway or freeway are subject to t XXXXX[.]

10) XXXXX provides tha[t] x

"The Minister and any Municipality may enter into agreement for the acquisition of land required for and for the construction, maintenance and operation of an expressway or freeway that has been or is proposed to be designated as a controlled-access road or as a controlled-access highway under this Act, and any land acquired by a municipality under such an agreement shall be deemed to be land required for the purposes of the municipality."

11) XXXXX provides that XXXXX applies to XXXXX[.]

12) XXXXX t provides that the regional corporation is subject to the powers and liabilities of a council or corporation of a city per XXXXX[.]

13) XXXXX provides that "unless expressly provided, the soil and freehold of every highway is vested in the corporation or corporations of the municipality or municipalities, the council or councils of which for the time being have jurisdiction over it under this or any other Act."

14) XXXXX indicates that "except where jurisdiction over them is expressly conferred upon another council, the council of every municipality has jurisdiction over all highways and bridges within the municipality."

15) To date, no evidence has been provided to indicate a transfer of this highway to the province. Therefore ownership and jurisdiction over the highway must still vest with the municipality.

Transactions

The financial transactions between the municipality and the province relate to application by the municipality for payments of the agreed upon subsidy related to highway construction. The province has continually refused to enter into an 'expressway agreement' for the duration of this project. Based on the correspondence provided, the province has confirmed its position that subsidy funding applications for construction will be evaluated by the province as submitted by the municipality.

Ruling Requested

The municipality is providing taxable services for consideration to the province in respect of the MOA between the parties relating to the construction and maintenance of such parts of the freeway that lie within the boundaries of the municipality.

Ruling Given

Based on the facts set out above, we rule that the municipality is not making a supply to the province. Therefore, the payment made by the province is not consideration for a supply.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST Memoranda 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.

Explanation

Based on the definition of supply and the fact that the municipality owns the highway, the municipality is not considered to be making a supply of road construction or maintenance to the province. For a supply to take place the supplier must provide something to someone other than himself. The municipality is constructing a roadway for itself. Any funding from the province may help to make such construction possible, or more feasible, but the province is not receiving any property or service in return.

Under the Department's administrative policy respecting grants and subsidy, a payment received by a person is viewed as not being consideration for a supply where neither the person making the payment nor a specified third party receives a supply in return for the payment. It is our opinion that the payment made by the province to the municipality is a grant rather than consideration for a supply.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9589.

Yours truly

Béatrice Mulinda
Governments Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

NCS Subject Code(s)              R-1