7 May 1998 GST/HST Interpretation HQR0000976 - Status of Water Purchases

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

Dear XXXXX

Thank you for your letter of December 31, 1997 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the reimbursement for water charges incurred by a contractor in providing water main construction and related pressure testing services to XXXXX contracted with XXXXX for the construction of a watermain;

•   As a condition of the contract, it is the responsibility of XXXXX to test the completed watermain, which involves filling it with water, and ensuring that the pipe maintains a minimum pressure level for a set period of time;

•   Once a successful pressure test is completed, it is the responsibility of the contractor to drain the water main so final inspection and cleaning may be carried out by XXXXX staff;

•   Most of the charges relating to the pressure test are the responsibility of the contractor. However, XXXXX is responsible for the reimbursement of the contractor for the actual cost of the water required to fill the water main; and

•   XXXXX billing to XXXXX for the water used to fill the watermain is for the same amount that was charged to XXXXX by the XXXXX plus an additional charge for the GST calculated on that amount.

Interpretation Requested

You are requesting us to confirm your view that the reimbursement by XXXXX for water charges incurred by XXXXX in providing water main construction and related pressure testing services to XXXXX is exempt from GST pursuant to section 23 of Part VI of Schedule V to the Excise Tax Act (the "ETA").

Interpretation Given

Suppliers often incur out-of-pocket expenses in the course of rendering a service for which they are reimbursed by their clients. These disbursements form part of the fee for the supply of the services rendered unless they are incurred as agent for the client.

Many construction contracts contain a "cost-plus" provision. Where a contractor who is not acting as agent invoices a customer for reimbursement of an amount, the reimbursement is treated as being part of the consideration for the service supplied by the contractor to that customer. If this service is determined to be a supply of a service that is taxable at seven percent or fifteen percent, as part of the consideration for the service, the reimbursement will also be taxable at seven or fifteen percent, as the case may be.

In the case at hand, XXXXX purchased the water from XXXXX for its use in testing the watermain. There is no evidence that at any time the possession or ownership of that water was transferred to XXXXX The water was used by XXXXX for pressure testing as a part of its services, and subsequently disposed of at the conclusion of the testing procedure.

As described in the documentation provided, XXXXX was providing a supply of watermain construction and related pressure testing services to XXXXX The water purchased by XXXXX was an input into that supply by XXXXX Even though the invoice by XXXXX to XXXXX included an amount in respect of an item described as XXXXX , that amount was part of the total consideration for the supply of water main construction and related pressure testing services by XXXXX to XXXXX Consequently, as that supply was not exempt, tax was properly charged on that consideration.

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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8531.

Yours truly,

Joseph Levstik
Municipalities and Health Care Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

Legislative References: 165(1)

NCS Subject Code(s): I 11725-8, 11735-1