27 May 1999 GST/HST Interpretation HQR0001635 - Municipal Allowances - Section 174 of the Excise Tax Act (ETA)

Dear XXXXX

This letter is in response to your letter of December 14, 1998, addressed to XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX apologize for the delay in responding to this matter.

Interpretation Requested

In your letter, you asked how a municipality was to determine if an allowance was paid for "taxable supplies" if the recipient (i.e., municipal officer) was not required to account for its use. This question was addressed by XXXXX of February 24, 1999.

Basically, you have suggested that municipalities state in their by-laws that allowances, which fall under subsection 81(3) of the Income Tax Act (ITA), are for "taxable supplies". XXXXX requested that GST/HST Rulings and Interpretations Headquarters respond and comment on this particular suggestion.

Interpretation Given

It is our position that the inclusion of the suggested statement into the by-laws of a municipality will normally establish that an allowance was paid for "supplies all or substantially all of which are taxable supplies" for the purposes of subparagraph 174(a)(iv) of the Excise Tax Act (ETA). However, the Department reserves the right to consider other factors to establish that the allowance qualifies for the purposes of section 174 of the ETA.

Additional Comments

With respect to your suggestion that municipalities state in their by-laws that the allowances are to be used for "taxable supplies", it may be more appropriate to clarify that for section 174 of the ETA to apply, allowances must be paid for "supplies all or substantially all (i.e., 90% or more) of which are taxable supplies."

By including in their by-laws the statement that the municipal allowances, which fall under subsection 81(3) of the ITA, are for supplies all or substantially all (i.e., 90% or more) of which are "taxable supplies", municipalities may by in a position to satisfy one of the conditions necessary for the purposes of section 174 of the ETA.

The suggested statement will help establish, in part, the "intent" of the allowance. However, the Department has other conditions, such as those discussed in XXXXX recent interpretation, that must be satisfied for section 174 of the ETA to apply.

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) 954-9699.

Yours truly,

Douglas Wood
A/Rulings Officer
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate