9 February 1999 GST/HST Ruling HQR0001067 - Application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the Agreement between the

GST/HST Rulings and Interpretations Place Vanier, Tower C, 9th Floor, 25 McArthur Ave., Vanier, Ontario, K1A 0L5XXXXX

HQR0001067February 9, 1999

Subject:

GST/HST APPLICATION RULING Application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the Agreement between the XXXXX

XXXXX

This is further to your letter of January 30, 1998, and previous facsimile transmissions sent to the Revenue Canada XXXXX. The case was transferred to this office for our direct response to you. Your letter concerns the application of the GST/HST to a contract which the City has entered into with XXXXX where XXXXX will operate the XXXXX a city-owned property. You supplied us with a copy of the contract.

Our understanding of the facts, the transactions and purposes of the transactions is as follows:

Statement of Facts

1. XXXXX[.]

2. Pursuant to a bylaw made under section XXXXX, the City has entered into an agreement with XXXXX who will lease and operate the XXXXX on behalf of the City for the duration of the Agreement.

3. The City's purposes in entering into the Agreement include:

a) to transfer the management, operation and development of the XXXXX to a private sector operator which it believes will contribute positively to the economic development of the City,

b) to transfer the operation and risk of the ongoing XXXXX operation, including all legal liability and the risk of operating losses,

c) to earn a financial return from the XXXXX,

d) to ensure a responsible and progressive management of the XXXXX consistent with best industry practices,

e) to recover an asset of enhanced value at the end of the term of the agreement.

4. Notwithstanding 3(b) above, the Agreement is intended to be mutually beneficial. Where the results do not reflect this intention the disadvantaged party has recourse via recalibration or remedial measures under the Agreement. The Agreement may also be terminated by the City where XXXXX does not satisfy its due diligence obligations.

Payments Pursuant to the Agreement

5. The Operator will pay the City an amount of XXXXX in respect of XXXXX as defined under the agreement.

6. The City has agreed to pay XXXXX pursuant to the Agreement the following "Fixed Firm Price" for all XXXXX operations and maintenance services:

1998: $XXXXX

1999: $XXXXX

2000: $XXXXX

2001: $XXXXX

2002: $XXXXX

2003: $XXXXX to be payable by the City upon invoice from XXXXX in equal monthly installments, with an adjustment for 1998 to exclude that part of the year prior to the transfer date.

7. XXXXX shall transfer to the City, throughout the term of the contract, the Gross Revenue from the operation of the XXXXX[.]

8. Gross Revenue means the entire amount of all rents, fees, charges, amounts, sales, service fees, concession fees and any other revenues generated through business conducted XXXXX whether wholesale or retail, direct or indirect, by the Operator in the management, operation and development of the XXXXX, and from all departments or divisions with respect to the Operator's business or activities XXXXX whether or not such rents, fees, charges, amounts, sales, service fees, concession fees, and any other revenues are generated through activities performed or services provided XXXXX XXXXX or elsewhere in respect of the management, operation and development of the XXXXX including without limitation of the foregoing:

(a) all XXXXX revenue;

(b) all XXXXX revenue;

(c) all XXXXX revenue XXXXX and

(d) all other XXXXX[.] Excluded from gross revenue are:

(i) all amounts, fees, profits and revenues received by the Operator with respect to contracting and/or construction activities and services provided by the Operator to occupants for the construction of new facilities or for renovations and/or construction of improvements to existing facilities; and

(ii) recoveries received by the Operator from occupants and other persons using the XXXXX on account of common area maintenance charges which may be charged in respect of or in relation to the XXXXX building.

XXXXX revenue is defined to mean the entire amount of all rents, fees, charges, maintenance fees, administrative fees, sales, service fees and charges relating directly or indirectly to the use or XXXXX or services provided by the operator or, subject to the provisions of article 24.01.01, by any affiliated or related corporation as that term is defined in the XXXXX by any other person not dealing at arms length with the operator. Article 24.01.01 allows occupants to XXXXX through contracting with persons other than the operator subject to meeting certain requirements.

XXXXX Revenue means all licence fees, rents, percentage rents, participation fees, fees, charges, maintenance fees, administration fees, sales, service fees and charges, relating directly to or indirectly to the use or provision of XXXXX and services including without limitation, all XXXXX generated through or related to XXXXX XXXXX and services provided by the Operator or, subject to the provisions of article 24.01.01, by any affiliated or related corporation within the meaning of the XXXXX or by any person not dealing at arm's length with the operator.

XXXXX revenue means all rents, licence fees, percentage rents, participation fees and rates, charges, maintenance fees, administration fees, sales, service fees and charges, concession fees, XXXXX XXXXX other XXXXX fee and service charges and other revenue arising from, directly or indirectly, any business, activities or services XXXXX building at the XXXXX by the operator or, subject to the provisions of article 24.01.01, by any affiliated or related corporation as that term is defined in the XXXXX XXXXX or by any other person not dealing at arms length with the operator.

Other revenue means any and all other revenue generated, directly or indirectly, or otherwise, from any occupant agreement, any existing revenue agreement or any other revenue agreement relating to any services, products, merchandise, goods, deliverables, rights, concessions, privileges, franchises, entitlements or benefits provided by the operator, in relation to the XXXXX or, subject to the provisions of article 24.01.01, by an affiliated or related corporation within the meaning of the XXXXX XXXXX or by any person not dealing at arm's length with the operator and the value in kind of any services provided to XXXXX by any third party in return for or arising from the use of XXXXX[.]

9. The amounts collected are not treated as revenues of XXXXX[.] They are treated as revenues of the City. The GST/HST collected by XXXXX and transferred to the City with the principal amounts is then remitted to the Receiver General by the City.

10. The City agrees to pay XXXXX of any profit or surplus by which the Gross Revenue exceeds the Fixed Firm Price as it relates to XXXXX[.]

11. XXXXX agrees that there shall be no operational deficit.

23. Under the agreement, a XXXXX is to be maintained by XXXXX[.] The XXXXX is intended to establish a new business to provide services in property management, heavy duty equipment maintenance, electrical maintenance and business planning to other entities. As per our telephone conversation of November 23, 1998, under the contract it was intended that the XXXXX be comprised of four employees of the XXXXX deemed to be surplus by XXXXX[.] The City agrees to pay for the XXXXX[.]

1998: $XXXXX

1999: $XXXXX (with an adjustment for 1998 to exclude that part of the year prior to the Date of Transfer). Provision has been made that the XXXXX payment will also be reduced by the amount of labour or salary costs by which the XXXXX labour or salary expenses of fewer than employees dedicated to the XXXXX under the contract.

13. As per our telephone discussion of November 23, 1998, no payments have yet been made to XXXXX in respect of the XXXXX[.] This is because two of the surplus employees who would have worked in the XXXXX resigned shortly after the agreement went into effect. Further, the XXXXX is not being operated as a separate division of the Operator which is the desire of the City.

11. All revenues generated by the XXXXX and the GST collected on the revenues are to be forwarded by the Operator to the City. These amounts remain separately identified by the City on its financial records. The City then remits the GST to the Department in the appropriate reporting period.

25. As per the contract, where the operation of the XXXXX realizes any profits, the profits are to be shared between the Operator and Owner as follows:

In the years 1998 and 1999	Operator XXXXX
In the years 2000, 2001 and 2002	Operator XXXXX

16. The division of the profit due XXXXX from the XXXXX operations would be effected by a payment of the amount being made by the City.

10. XXXXX agrees to pay an amount in respect of the GST where imposed by the appropriate taxing authority in respect of gross revenues, profit sharing and rent payable by XXXXX to the City under the agreement or in respect of any supply made by the City to the XXXXX[.]

16. As per our telephone conversation of June 23, 1998, no election under section 211 of the Excise Tax Act has been filed with Revenue Canada by the City. Notwithstanding the lack of an election under section 211, the XXXXX by XXXXX has been treated as a GST/HST taxable supply. This information was confirmed during our telephone conversation of November 2, 1998 and your subsequent letter of November 5, 1998.

19. Under the Agreement, the City is not responsible for any costs, charges etc. including those arising from the XXXXX the contents thereof; the use or occupancy thereof; any alterations, repairs etc. performed, the ongoing management, operation or maintenance of the premises or the provision of municipal services or utilities to the site. XXXXX shall pay all such costs whether foreseen or unforeseen.

20. XXXXX assumes any obligation of the City as landlord, tenant or owner of the premises which arises on or after the date of commencement. XXXXX assumes the same obligations of the City as XXXXX Operator which may arise on or after the date of commencement.

21. At such time as the owner concludes its acquisition of the XXXXX from XXXXX the City grants XXXXX for the term of the Agreement, the use of all its rights, title and interest in the property and assets comprising the XXXXX on the same terms as they were granted by XXXXX to the City.

22. XXXXX agrees to assume, recognize and comply with any covenant to perform any obligation of the City accruing on or after the Date of Commencement under any such Existing Revenue Agreement and to hold the City harmless with respect thereto. The City remains entitled to all revenues from all existing revenue agreements prior to the commencement date.

23. Under the Agreement, XXXXX shall have all the rights of the City, the XXXXX XXXXX and any other person representing the City under any existing agreement and that XXXXX shall assume, recognize and comply with any covenant to perform and any obligation of the City accruing on or after the date of commencement.

24. XXXXX agrees to consent to, upon written advice of the City, to easements, leases, rights of way or the sale of surplus lands, releases, waivers or privileges on, over, through or across the XXXXX provides that in no event will the exercise unduly interfere with the business or property of any Occupant or with the business or property of XXXXX[.]

25. It is agreed that any improvements to the premises performed by XXXXX are and shall become the absolute property of the City upon expiry or termination of the agreement.

26. The City maintains separate accounts for the revenue received from the operation of the XXXXX[.]

27. Under section 18.02 of the Agreement XXXXX may enter, with the consent of the City, into an occupant agreement in respect of a part of the XXXXX provided that:

(a) the land or space which is the subject matter of the Occupant Agreement is not:

(i) all or substantially all of XXXXX[;]

(ii) any part of XXXXX except if such part is used only for the purpose of XXXXX XXXXX[;]

(iii) the whole or any part of the XXXXX infrastructure;

(iv) all or substantially all of the concession area of any XXXXX building;

(v) all or substantially all of the XXXXX building[;]

(vi) all or substantially all XXXXX[;]

(b) the Occupant agreement contains a covenant whereby the parties hereto covenant that the XXXXX which is the subject matter of the Occupant Agreement shall not be used or occupied for the purpose of constructing or operating any XXXXX building unless such XXXXX building shall be used solely for XXXXX[;]

(c) the Occupant Agreement contains a covenant whereby the parties thereto covenant that the XXXXX which is the select matter of the Occupant Agreement is not used or occupied for any purpose other than a permitted use as set out in the approved land use plan or for a use that is inconsistent with the use clause.

(d) the term of the occupant agreement including any renewal terms is for less than the total remainder of the term;

(e) the occupant agreement does not create any privity of estate or privity of contract between the occupant and the owner or XXXXX means that part of the XXXXX XXXXX[.]

23. XXXXX obliged to pay all other taxes in respect of real property imposed by whichever relevant authority. XXXXX is obliged to pay any taxes characterized under the agreement as business taxes in respect of the XXXXX[.]

24. The City in its capacity as a municipal corporation and to the extent permitted under the XXXXX agrees that for the duration of the agreement, the XXXXX shall be operated as a XXXXX and that no real property taxes and business taxes will be imposed upon XXXXX with respect to the XXXXX Building which is not subject to an Occupant agreement.

25. In your letter dated June 25, 1998, you stated your intent to amend Article 3.02.03 of the agreement to clarify that all rents collected under Existing Revenue Agreements are the property of the City. Existing Revenue Agreements as defined in the Agreement include all occupant agreements, ground lease, agreement for lease, license, concession, franchise, permit, authorization, or any other agreement between the owner and any other person existing at the date of commencement of the agreement. This ruling is based upon that amendment to the agreement being concluded.

Ruling Requested

You would like to confirm the application of the GST in respect of the transactions under the agreement as follows:

1. The City is the operator of the XXXXX where XXXXX on behalf of the City is making taxable supplies of real property by way of licence to the tenants.

2. XXXXX is making a taxable supply of management services to the City. The GST incurred by the City is eligible as an ITC.

Ruling Given

1. Rents Collected by XXXXX From Third Parties

The City is making a taxable supply of real property by way of licence to its tenants through XXXXX who collects rents from third party tenants and subsequently transfers to the City the amounts collected including the GST. The payments from XXXXX to the City are considered to be merely a transfer of funds. The payment is not consideration for a supply made by the City to XXXXX[.] The City includes these amounts on its GST return. XXXXX does not remit any of the GST/HST collected. The procedure as described is acceptable and the GST is properly accounted for.

2. (a) Supply of Real Property by the City

The City is making a taxable supply of real property by way of lease to XXXXX[.] Although a supply of real property by way of lease is exempt when made by a public sector body i.e, the City, one of the exclusions to the exempting provision allows for a taxable supply where a section 211 election has been filed. As stated above (statement of facts - item #18) the City has not filed the section 211 election but has charged GST on the consideration for the supply of real property by way of lease. The Department is prepared to accept, on an administrative basis, that in those situations where the election has not been filed but the supplier has been charging GST, the election will be considered to be in effect from the date that the amounts on or account of tax became payable or were paid.

Attached is a copy of form GST 26 "Election by a Public Service Body to Have an Exempt Supply of Real Property Treated as a Taxable Supply" for your completion and submission to the Department.

In the circumstances described above where the City has elected to make the supply of real property by way of lease a taxable supply, the city is entitled to claim input tax credits on GST/HST incurred on inputs acquired to make the taxable supply of real property.

(b) Operation and Maintenance Services Supplied by XXXXX[.] The amount paid to XXXXX by the City in respect of the supply of XXXXX operation and maintenance services known as the "Fixed Firm Price" as discussed in the statement of facts (item #6) is consideration in respect of taxable services. The amounts paid or payable are subject to the GST/HST.

In addition, where the City recognizes a profit from the operation of the XXXXX the XXXXX portion of the profit payable to XXXXX as per Statement of Facts - item #8) is consideration for the supply of the taxable operation and maintenance services. The amounts when paid by the City will attract GST.

(c) XXXXX[.] The payments to be made in respect of the XXXXX are consideration in respect of a taxable supply of operational and management services in respect of the XXXXX GST at the rate of 7% will apply to the consideration paid by the City to XXXXX once the XXXXX becomes operational.

Where a profit is realized on the operation of the XXXXX and the City pays the agreed portion of the profits to XXXXX (as per Statement of Facts - item #12) this amount is considered to be further consideration in respect of the taxable supply of operational and management services in respect of the XXXXX and will attract GST at 7%.

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 interpretive policy; and that you have fully described all necessary facts and transaction(s) for which you have requested a ruling.

Should you have any further questions or require clarification on the above matter, please contact the undersigned at (613) 954-4280.

Yours truly,

Owen W. Newell, CGA
A/Manager
Municipalities and Health Care Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

Attach.

c.c.:

O. Newell D. Hooley M. Ezri XXXXX XXXXX XXXXX XXXXX XXXXX