16 June 2000 GST/HST Ruling 8335/HQR0001941 - Application of GST/HST to a Cost Sharing Agreement

Dear XXXXX

Thank you for your letter of August 19, 1999 and your letter of January 31, 2000, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the cost sharing agreement entered into by the Town XXXXX and XXXXX[.]

Statement of Facts

Our understanding of the facts is as follows:

1. The Corporation of the Town XXXXX entered into a cost sharing agreement XXXXX XXXXX XXXXX in order to facilitate the future connection of XXXXX two Town roads.

2. The Letter of Agreement between the Town and XXXXX includes the following conditions.

•   The Town's work, XXXXX, includes all XXXXX super-structure, sub-structure and grading work required for the Town's proposed XXXXX[.]

•   XXXXX At the cost and expense of the Town, XXXXX will tender and construct the Town's work.

•   The Town shall pay XXXXX the following surcharges in respect to the total actual cost and expense for the Town's work:

1. Construction, Administration and Supervision XXXXX

2. Administration and Overhead XXXXX

•   Upon award of the contract, XXXXX will provide the Town with the recommended bid prices for the Town's work and a summary of the submitted tenders XXXXX, and the Town shall accept its actual share in writing prior to commencement of construction.

•   Prior to commencement of construction, the Town shall obtain all federal, provincial and other necessary approvals and clearances required for the Town's work.

•   The Town shall indemnify and save harmless XXXXX from and against any claim, action, cause of action or liability for loss, damage, accident or injury in any manner arising due to, out of, from or in connection with the Town's design for the Town's work.

•   The Town shall be responsible for any increased expenses of the Town's work incurred by XXXXX, including applicable surcharges and tax, which are attributed to any request of the Town to delete or add work, delays for which XXXXX is not responsible, or errors and/or discrepancies made in the design or contract documentation prepared by the Town.

•   From time to time, XXXXX shall invoice the Town for the Town's share of the unpaid actual cost for the Town's work completed, including applicable surcharges. The Town shall pay to XXXXX the amount of each invoice within sixty days of the date of receipt.

3. Schedule C to the Letter of Agreement between the Town and XXXXX sets out the preliminary estimated cost for the Town. Under this Schedule, the work required is broken down into the following cost categories: total cost to construct the structure; grading work; and surcharges for construction management and supervision, and administration overheads. Under the categories, cost to construct the structure and grading work, there are itemized lists of the exact property and services which are required.

4. XXXXX[.]

5. XXXXX.

Ruling Requested

1. Does the GST/HST apply to the payment by the Town XXXXX XXXXX under the cost sharing agreement.

2. If GST/HST applies to the payment to XXXXX, is the Town XXXXX eligible to receive full input tax credits (ITCs) in respect of the tax paid.

Rulings Given

Based on the facts set out above,

1. The payment by the Town XXXXX to XXXXX under the cost sharing agreement is subject to the GST/HST.

2. The Town XXXXX is not eligible to receive full ITCs in respect of the GST/HST paid XXXXX[.] 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 departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

XXXXX[.] Under subsection 123(1) of the Excise Tax Act (ETA), a "supply" is defined as "... the provision of property or service in any manner ...", where "property" is defined as "... any property, whether real or personal, moveable or immovable, tangible or intangible, corporeal or incorporeal ..." and "service" is defined as "... anything other than property ..." XXXXX is billing the Town based on itemized supplies associated with the grading and construction XXXXX as well as a percentage surcharge. Using policy number P-077R, Single and Multiple Supplies, it is our view that the property and services provided constitute a single supply of a construction service. As this service is a taxable supply, the consideration paid for this service would be subject to tax at a rate of 7% pursuant to subsection 165(1) of the ETA.

You have referenced TIB-067, Goods and Services Treatment of Grants and Subsidies in support of the argument that the payment from the Town to XXXXX is not consideration for a supply and is a grant or a subsidy. However, for a payment to be viewed as a grant there can be no direct link between the payment from the grantor and a supply to grantor. In this case, the payment from the Town is directly linked to a supply of a construction service to the Town. Therefore, it is our view that the payment is consideration for a supply.

Concerning the Town's eligibility for ITCs, section 169 of the ETA provides that an entitlement to ITCs is available only where property or service on which tax is paid is consumed, used or supplied in the course of commercial activities. Pursuant to subsections 141.01(2) and (3) of the ETA, a property or service is deemed to be for consumption, use or supply in the course of a commercial activity of a person if the property or service is consumed, used or supplied in the course of making a taxable supply for consideration. As the Town does not consume, use or supply the construction service in the course of making a taxable supply for consideration, it would not be eligible for ITCs. However, pursuant to section 259 of the ETA, the Town is entitled to claim the municipal rebate of 57.14% on the tax paid.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0370.

Yours truly,

Brent Fleming
Governments Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate