12 July 2000 GST/HST Ruling 30852 - Projects under the Canada- Infrastructure Works Program and the

Dear Sir:

Thank you for your letter of April 5, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the activities undertaken by your client, the XXXXX (the City).

Further to our telephone conversation of June 26, 2000, and my facsimile transmission of June 21, 2000, as we are not in receipt of the agreements for the projects under XXXXX), we are unable to provide you with a ruling on the tax status of the transfer of money from the Province of XXXXX to the City under these agreements and whether the City is entitled to input tax credits (ITCs) for the expenses incurred in carrying out these projects. As discussed, we will provide you with a ruling upon receipt of these agreements.

Statement of Facts

Our understanding of the facts is as follows:

1. The Government of Canada (Canada) and the Government of XXXXX (the Province) entered into the Canada-XXXXX Infrastructure Agreement, whereby a Program for cost-sharing assistance for the renewal, enhancement and creation of physical infrastructure in XXXXX was established.

2. The City submitted a proposed infrastructure project which was approved for cost-sharing assistance under the Program, subject to the City entering into an agreement with the Province.

3. On XXXXX, the City and the Province entered into the Canada-XXXXX Infrastructure Works Program Cost-Sharing Agreement (XXXXX ) (the Agreement).

4. "Project", as defined under the Agreement, means XXXXX which the City undertakes to carry out in accordance with the Agreement.

5. The XXXXX Under the Agreement, the City was responsible for the installation of XXXXX in the City.

6. The projects were to be completed by XXXXX. However, an extension was granted to XXXXX, due to the anticipated difficulties in obtaining the necessary substantial performance releases prior to XXXXX, for projects XXXXX.

7. There were several pre-conditions to the Agreement which had to be met before any payment of the contribution was to be provided by the Province under the Agreement. These included

(a) The City shall obtain and maintain all licences, permits and approvals required by statute, regulation, by-law or by governmental policy including all federal and provincial environmental approvals, licences and permits;

(b) The City has allocated and appropriated funding to enable it to pay all costs of carrying out and completing the projects comprising the XXXXX including its share of eligible costs; and

(c) The Projects shall be located on the land which is owned or controlled by the City or will be acquired and owned or controlled by the City prior to commencement of construction, free and clear or any mortgages, charges or encumbrances except those the Province may approve.

8. The City agrees and undertakes to be responsible for the comprehensive management of the XXXXX and of each project comprising the XXXXX and to ensure that each project is carried out, managed and completed in a professional, safe and prudent manner in accordance with the documents described or approved and the objectives, terms and conditions set out in the Agreement.

9. Upon completion of each Project, the City shall own, operate and manage the completed Project at its own cost.

10. Contribution, as defined in the Agreement, means the financial contribution that the Province on its own behalf and on behalf of Canada, agrees to make in accordance with the terms and conditions of their Agreement in respect of eligible costs incurred and paid by the City to carry out the projects comprising the XXXXX.

11. The Province shall provide the City, as contribution to the eligible costs incurred and paid by the City respecting the projects

(a) on behalf of the Province one-third of the eligible costs of the projects incurred and paid by the City, and

(b) on behalf of Canada one-third of the eligible costs of the projects incurred and paid by the City.

12. Any payment of the contribution made in excess of two-thirds of the actual eligible costs of the projects incurred and paid by the City is a debt due and owing by the City to the Province and is payable to the Province on demand.

13. The City agrees that all funds provided under the Agreement shall be used solely for the purposes of the XXXXX and the projects as described in the Agreement and for the payment of the eligible costs of the projects incurred in accordance with the Agreement.

14. Nothing in the Agreement creates any undertaking, commitment or obligation on the part of the Province or Canada respecting future or ongoing funding for the projects comprising the XXXXX[.]

15. The amount of GST and XXXXX provincial sales tax (PST) less the amount of any refund or credit of GST or PST that the City may be entitled to (whether received, applied for or for which an application could be made) is an eligible cost.

16. The Province's and Canada's responsibility with respect to the XXXXX and the projects is limited to the provision of financial assistance to the City in accordance with the terms and conditions of the Agreement. In providing financial assistance under the Agreement, the Province and Canada assume no proprietary rights, title or interest in or obligations respecting any project or its operations.

17. The City agrees and acknowledges that it shall retain full and sole responsibility for all phases of the implementation of the XXXXX and the projects and for the completed projects, including the operation, maintenance and repair of the projects and any activities related to the operation of the projects.

Ruling Requested

1. The City is making a taxable supply of construction services to the Province under the Agreement.

2. The City is entitled to ITCs in respect of the expenses incurred in carrying out the projects under the Agreement.

Ruling Given

Based on the facts set out above, we rule that 1. The City is not making a taxable supply of construction services to the Province under the Agreement; and 2. The City is not entitled to ITCs in respect of the expenses incurred in carrying out the projects under the Agreement.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST 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 our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Technical Information Bulletin B-067, Goods And Services Tax Treatment Of Grants And Subsidies, explains the application of the GST/HST to grants and subsidies. It provides guidelines to clarify when a particular transfer of money by a grantor may be regarded by the CCRA as consideration for a supply made by the grantee.

Four questions must be asked in reaching a determination of the tax status of the transfer of money. These questions are as follows:

•   Is the grantee making a supply in return for the transfer of money?

•   Is the grantor contracting out an obligation to the grantee?

•   Is the only supply provided by the grantee for accountability purposes only?

•   Is there a direct link between the transfer of money by the grantor and the supply provided to the grantee?

Although money is transferred from the Province to the City, the transfer of money is not in itself, a supply of property or service. The City is not involved in any activity that can be considered to be a supply. The Province does not receive any property or service in return for the money.

The XXXXX is carried out on land owned or controlled by the City. Where the property on which the infrastructure project is to be carried out is owned by the City, no supply is made to the Province and therefore the transfer of money is not consideration for a supply. Consequently, the installation of XXXXX are not construction services provided to the Province.

Section 141.01 of the ETA contains provisions that it is only the making of taxable supplies for consideration that is considered to be provided in the course of commercial activity and therefore gives rise to ITC entitlements under section 169 of the ETA.

Note, subsection 141.01(1.2) of the ETA deems a grant or subsidy that is not consideration for a supply and intended to fund an activity that involves the making of taxable supplies for no consideration, to be consideration for those supplies. Thus, the amounts the grantee receives from the grantor are deemed, in accordance with subsection 141.01(1.2), to be consideration for the grantee's taxable supplies. As a result, the grantee is entitled to claim ITCs for the GST paid on purchases related to the activities undertaken as a result of the funding received from the grantor.

However, the transfer of money by the Province to the City is not consideration for a supply made by the City. As the City is not making a supply as a result of the transfer of money from the Province, the City is not entitled to ITCs, as the property and/or service is not acquired for consumption or use in making a taxable supply for consideration.

However, since the City is a public service body (i.e., municipality), it is eligible, under section 259 of the ETA, to claim a partial rebate (i.e., 57.14%) of the GST paid on expenses incurred in carrying out the XXXXX Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4280.

Yours truly,

Shashi Fernando
Municipalities and Health Care Services Unit
Public Service Bodies & Governments Division
Excise and GST/HST Rulings Directorate