11 March 1998 GST/HST Interpretation HQR0000734 - Regional Municipality of Recycling Operations

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

Dear Sirs:

Thank you for your letter of June 11, 1997 (and subsequent documentation) concerning the application of the Goods and Services Tax (GST)Harmonized Sales Tax (HST) to the transaction(s) described below.

Our understanding of the facts is as follows.

Statement of Facts

the Regional Municipality of XXXXX (the "Region") and XXXXX are registered for GST purposes;

the Region is a "municipality" for GST purposes;

the Region has contracted XXXXX to operate and manage its blue box recycling program;

the elements of XXXXX service include the collection, sorting, processing and marketing of recyclable materials;

XXXXX operates a dedicated facility that is used to sort, process and store the materials;

the consideration for XXXXX service is based on a formula which takes into account amounts received upon the sale of the recycled materials to third parties;

ownership of the recycled materials remains with the Region until sold to third parties;

XXXXX had firm commitments from third parties for the purchase of the recyclable materials prior to entering into this arrangement with the Region the Region will collect applicable GST in respect of its sales of the recycled material; and, XXXXX will collect GST in respect of the service it provides to the Region.

Ruling Requested

You are requesting a ruling which would confirm your view that in addition to being eligible for input tax credits for the sorting, processing and marketing elements, the Region is also eligible for input tax credits in respect of the collection element of XXXXX Blue Box collection and recycling services.

Ruling Given

Based on the facts set out above, we rule that the supply of the service of collecting garbage including recyclable materials to residents by the Region is an exempt supply. No input tax credits are available to the Region in respect of the collection element of XXXXX collection and recycling services.

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 transaction(s) for which you requested a ruling.

Explanation

Paragraph (h) of section 20 of Part VI of Schedule V to the Excise Tax Act (the "ETA") exempts "a supply of a service of collecting garbage, including recyclable materials".

You submitted that the collection element of XXXXX service relates directly to the Region's provision of the GST taxable supplies of materials and that this element of the service does not relate to an exempt supply of garbage collection to the region. This view is not supported by subarticle 3.01 of the contract between XXXXX and XXXXX which reads as follows.

XXXXX and the Region acknowledge and agree that the intent of this Agreement is to assist the Region in achieving the Vision and Goals in the Region's Solid Waste Management Strategic Plan during the Term of this Agreement, which Vision and Goals are set below.

Vision

The Regional Municipality of XXXXX is committed to providing superior waste management services to the community in an environmentally sound and costeffective manner.

Goals

To provide waste management service for residential, commercial, institutional and industrial customers that are appropriate for each sector.

To continuously improve the waste management service provided with regard to the environmental, economic and social impacts.

To provide the service within a waste management hierarchy that gives highest priority to Pollution Prevention and waste reduction.

To maximize the life of the existing Regional Landfill Site.

To recognize the role and interests of the Area Municipalities as partners within the waste management system.

To work with and through the Waste Management Coordinating Committee toward a fully integrated waste management system.

To develop, encourage and support the contribution of every employee involved in the delivery of the service.

To engage private enterprises as an integral partner in delivering the service.

To provide information and education activities to promote the conserver [sic] ethic and the attitude that waste is a resource.

To encourage volunteer and community participation in a fully integrated waste management system.

The above section of the agreement also does not support the contention that the residents are "donating valuable commodities" to the Region, but rather that the Region is providing a service to residents of collection of garbage including recyclable materials.

Your letter also suggested that the separation of materials collection from the process that leads to the production of ready to sell materials is artificial. However, section 3.03 of the contract, which summarizes the work to be performed by XXXXX separates the services into two components:

(a) Collect Blue Box Material from Regional Approved Sources located in both the Urban Area and Rural Area, except for the XXXXX, and deliver the Blue Box Material to the Material Recovery Facility;

(b) Provide, operate and maintain a Material Recovery Facility to receive, store, process and market as required all Blue Box Material and Recyclable Material.

The services outlined in XXXXX of the contract clearly fall into the exempting provisions of paragraph (h) of section 20 of Part VI of Schedule V to the ETA.

The definition of "commercial activity" in subsection 123(1) of the ETA excludes the making of exempt supplies. As the supply by the Region to its residents of collecting recyclable materials is an exempt supply pursuant to paragraph (h) of section 20 of Part VI of Schedule V to the ETA, that supply is not considered to be a commercial activity.

As you noted in your letter, paragraph 169(1)(c) of the ETA limits input tax credits to the extent to which a person acquired the property or service for consumption, use, or supply in the course of commercial activities of the person. Therefore, no input tax credits are available to the Region in respect of XXXXX service of collection of collection of recyclable materials and the delivery of such materials to the recycling facility.

The sorting, processing and marketing of recyclable materials at material recycling facilities by a municipality is considered to be a commercial activity, and the subsequent sale of recyclable materials by that municipality is taxable. Input tax credits would generally be available in respect of such activities.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8531.

Yours truly,

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

Encl.:

NCS Subject Code(s)              R 111