21 December 1999 GST/HST Interpretation 8276 - Application of GST/HST To Charges from Condominium Corporation

Dear XXXXX

Thank you for your letter of June 30, 1999 and subsequent telephone conversations concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain supplies made by a not-for-profit condominium corporation (Corporation).

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency.

Our interpretation provided on June 3, 1999 to your previous letter of May 12, 1999 (under our case number HQR0001806) has prompted this second letter in which the previous scenario has been altered in two ways: (1) the Corporation would segregate supplies obtained GST exempt from water and insurance companies for example, and (2) on such separated supplies (which you call Supply A) no contingency reserve fund levy would be charged, contrary to all other supplies (Supply B) which are subject to the levy.

All legislative references are to the Excise Tax Act (the Act) unless otherwise specified.

Statement of Facts

Based on your two letters of May 12 and June 30, 1999 and our telephone conversations, our understanding of your scenario is as follows:

1. You have indicated that, as a result of the current definition of "residential condominium unit" under subsection 123(1) of the Act, bare land strata lot corporations , which supply property and services to unit occupants, do not benefit from the tax exemption under section 13 of Part I of Schedule V to the Act. You have also made the representation that your current scenario aims at bringing supplies by bare land strata lot corporations to unit occupants within the ambit of section 6 of Part VI of Schedule V to the Act ("the direct cost exemption").

2. The Corporation supplies property and services to over XXXXX owners and lessees of units occupied as their place of residence, in a bare land strata lot development. ("horizontal condominium").

3. The owners and lessees pay an annual levy to the Corporation. You have represented verbally that the levy is intended to be an estimate of the expenses of the horizontal condominium for the following one-year period. The annual levies paid to the Corporation exceed XXXXX annually.

4. The Corporation would provide two types of supplies to the condominium residents:

•   Electricity, insurance, sewer and water (Supply A).

•   Repairs and maintenance, grounds keeping, garbage, management fees, snow removal and street cleaning (Supply B).

5. The Corporation would separately invoice for Supply A and for Supply B.

6. The invoice for Supply A would be for the direct cost of the inputs. There would be no additional services provided by the Corporation nor would the invoice include a contingency amount as there would be no need for a contingency fund.

7. The invoice for Supply B would include a contingency reserve fund amount of approximately XXXXX of the invoiced amount. The contingency reserve fund is meant to cover any cost overruns and any unanticipated expenses incurred by the Corporation. The fund balance is kept at about XXXXX[.]

1. The Corporation is currently not registered for the GST/HST. It would register for GST/HST purposes and charge GST only on Supply B invoices and claim ITCs relating thereto. The ITCs would offset the GST paid by the Corporation except for GST on the contingency amount. It would not charge GST on Supply A invoices.

2. The books and records of the Corporation would segregate Supply A matters from Supply B matters.

Interpretation Requested

Would the supplies of electricity, insurance, sewer and water (Supply A) by the Corporation to the owners and lessees of units in the horizontal condominium be exempt from GST under the direct cost exemption?

Interpretation Given

Based on the information provided, Supply A and Supply B are considered to form a single supply AB which is subject to GST under subsection 165(1) of the Act. Supply AB does not qualify for exemption from GST under section 6 of Part VI of Schedule V to the Act, or any other exempting provision in the Act. For purposes of the direct cost exemption under section 6 of Part I of Schedule V to the Act, the combined Supply AB is not considered to be "purchased by the body for the purpose of making a supply by way of sale of the service".

Analysis

As the direct cost exemption focuses on the cost of inputs to the supply whose GST status we are determining, we must examine first whether Supply A at issue is a single or multiple supply, and whether Supply A and Supply B are separate supplies or part of a single supply AB.

1. Single or Multiple Supply

This determination is made by considering the factors suggested in our Policy Statement P-077 "Single and Multiple Supply".

1.1. Terms of Agreement

1.1.1. Comprehensive Services in a Condominium

The Corporation usually provides a package of comprehensive services to its condominium residents. For example, the supply of electricity alone would not be of any use to a condominium resident if he(she) did not receive water, sewer, garbage, snow removal, and other services with it. Normally an owner or lessee would not buy or lease a unit which does not receive the entire package of Supply A and Supply B services (i.e. Supply AB).

This factor supports the view that Supply A and Supply B combined constitute a single supply AB.

1.1.2. Contingency Reserve Fund for Any Unexpected Expenses:

We appreciate your argument that the purpose of the contingency reserve fund is to pay for expenses of the condominium in the following year and to be fair to new buyers and new lessees who might otherwise be faced with extra condominium fees. However, paragraph 35(b) of the XXXXX [i]ndicates that the fund serves to "pay unusual or extraordinary future expenses". Such unusual or extraordinary expenses could occur at any time, and could relate to any common expenses. In your scenario, this contingency fund charge is only collected on Supply B invoices, but under XXXXX "the strata corporation must hold the fund as a reserve fund to pay unusual or extraordinary future expenses". These expenses, in the case at hand, may be related to either Supply A or Supply B.

The fact that the Corporation is required by law to have such a contingency fund in order to ensure continuous services to the owners and lessees in cases of adversity or unexpected expenses, supports the view that the Supply A and Supply B form a single Supply AB.

1.2. Number of suppliers

Only one supplier, the Corporation is supplying all owners and lessees in the bare land strata development.

This factor points to Supply A and Supply B as parts of a single supply AB.

1.3 Additional Factors

The Corporation is not an electrical power company or a water supplier and it is not supplying water or electricity to anyone inside or outside its horizontal condominium. The Corporation is formed by all the condominium owners for the purpose of servicing their own condominium only (i.e. supplying a comprehensive package of services to the owners/lessees in the horizontal condominium).

In addition, for GST purposes, the single and comprehensive nature of a supply is not changed when the consideration for that supply is charged under multiple invoices instead of a single invoice. Form alone cannot change the substance of a transaction.

These two factors both support the view that Supply A forms part of a single Supply AB.

1.4 Conclusion

Supply A and Supply B are considered to be a single supply AB of property and services by the Corporation to the residents of the strata lot development.

2. Direct Cost Exemption (Section 6 of Part VI of Schedule V)

2.1 Is Each Service Purchased for Re-Supply?

We will first determine whether Supply AB meets the key requirement in the first paragraph of the exempting provision, namely AB must be "a service purchased by the body for the purpose of making a supply by way of sale of the service".

For reasons pointed out in the first part of the Analysis, the various services are considered to have been obtained by the Corporation for bundling into one single comprehensive Supply AB, and are not purchased for the purpose of making a sale of the same service. For this reason, if the charges for an item were invoiced separately by the Corporation, the nature of Supply AB would not change. Consequently, Supply AB is not considered to be "a service purchased by the body for the purpose of making a supply by way of sale of the service".

Once Supply AB has not met the requirements in the first paragraph of the direct cost exempting provision, it is not necessary to analyze the other conditions of the provision. As you are aware, this exempting provision is actually intended for public service bodies which make supplies for nominal consideration.

2.2 "Direct Cost" Definition

During one of our telephone conversations you raised the question as to how the Department interprets the phrase "total of all amounts ..." as used in the preamble of the definition of "direct cost" in subsection 123(1) of the Act.

It is your position that this phrase is indicative of the legislator's intent to allow multiple inputs of property or services to be combined to form a new supply, and that the direct cost of this new supply would then be calculated by totaling each of the amounts paid for each of the supplies of property or services.

Our interpretation is that the "total of all amounts ..." refers only to consideration which may be paid in several installments or portions. For example, assume that a supplier acquires 100 hours of radio advertising, makes four monthly payments of $250 each and then supplies the 100 hours of advertising to a client. In this case, the consideration is $1000. In other words, the "total of all amounts" payable by the supplier is $1000, and it is the total of four amounts of $250.

Further, it is our position that services that are combined to make a new supply are outside the scope of the direct cost provision. This position is supported by the terms of paragraph (a) of the definition, which provides that direct cost includes the amount paid for a service only "if it was purchased for the purpose of making a supply of ... the service."

2.3. Conclusion

Supply AB is not exempt from GST under section 6 of Part VI of Schedule V to the Act.

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 Canada Customs and Revenue Agency 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) 952-9587. Should you have questions or require information on other GST/HST matters, we invite you to contact your district Tax Services Office XXXXX[.]

Yours truly,

Bao Tran
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate