17 November 2000 GST/HST Interpretation 32078 - Request for Input Tax Credit Adjustments on the Supply of Administrative Services and Infrastructure Improvements

Thank you for your memorandum dated October 19, 2000, providing this office with your outline and analysis concerning a request for ITC adjustments made by XXXXX the Village of XXXXX (i.e., the "Village") in respect of expenses incurred under XXXXX.

The Village claimed a public service body rebate for the GST paid on expenses relating to road construction. It now wishes to claim ITCs to recover the balance of the tax paid as it believes its expenses were incurred in the course of providing taxable supplies of "administrative services" and of "creating employment and improving infrastructures" to XXXXX. You ask for our comments on your proposed response to the Village.

We understand the facts are as follows:

•   The Corporation of the Village of XXXXX (the Village) is a municipality for GST purposes [per para (a) of that definition in ss. 123(1)], but not a public institution.

•   The Village signed an agreement with XXXXX[.]

•   The roads' original subbase was shallow and rested on clay, which had retained moisture beneath the roadways. The roadways and subbase were then subject to frost heaves during the winter months, resulting in damaged, uneven road surfaces.

•   The work under the Agreement involved the creation of a thicker subbase, the laying of Geotextile (a fabric-like medium that allows water, but not clay, to pass through it), and the installation of perforated drain pipe at intervals across the roadway to drain away any accumulated moisture. The original road base had neither Geotextile nor drain pipe.

•   The work was completed by March 31, 1999, at which time the Village submitted its claim to XXXXX for payment under the Agreement. The claim included amounts for Village employee salaries and benefits, in addition to direct contract expenditures.

•   XXXXX confirm that while the soil and freehold of every highway are vested in XXXXX, and while the control of the construction and maintenance of every arterial highway is vested in XXXXX has limited responsibility to actually construct and maintain highways. In particular, while XXXXX is responsible for particular costs associated with an Arterial Highway, and may choose to make a contribution to offset costs incurred by XXXXX in relation to a Secondary Highway, it is not responsible legislatively or under agreement for the construction or maintenance of a highway that is not classified as Arterial or Secondary.

XXXXX.

We agree with the analysis provided in your memoranda. While "ownership" of improvements made to the roads in question may lie with the XXXXX, the responsibility for ensuring that these roads are properly constructed, serviced and maintained lies with the Village.

The XXXXX is not contracting out an obligation to the Village. The Village is required to account to the XXXXX for the use of the funds but any supplies (e.g., status reports) made in this connection are for accountability purposes only. There is no direct link between the funding and supplies made to the XXXXX or to a specified third party. In our view, the funds are provided for a public purpose and are not consideration for a supply.

The Village is not entitled to claim ITCs for the GST paid on purchases related to the road construction as these supplies were not acquired for consumption or use in the course of commercial activities.

XXXXX Rather, it is incurring road construction expenses in the course of operating as a municipality. As the GST paid or payable in respect of the road construction is non-creditable tax charged, the Village is entitled to claim the 57.14% public service body rebate for municipalities.

If you would like to discuss this matter further, please contact me at (613) 946-3268, or Elaine Bonnah at (613) 952-9590.