8 March 2000 GST/HST Ruling 8221/HQR0001827 - Construction of a Secondary Highway by a Municipality

Dear XXXXX

Thank you for your letter of November 3, 1998, to the XXXXX Office wherein you requested a review of the Goods and Services Tax (GST) Application Ruling, issued to you by that office. XXXXX [O]ffice has asked us to review your request and to reply to you directly.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX permits the XXXXX to enter into agreements with rural municipalities for the construction of secondary highways within their boundaries.

2. XXXXX of XXXXX entered into an agreement for the grading reconstruction of a XXXXX XXXXX[.]

3. XXXXX[.]

4. As part of the agreement, the XXXXX was responsible for hiring an engineering consultant for the design, including preparation of plans and specifications, and for the quality control and supervision of the work during the grading reconstruction.

5. The "grading reconstruction" of XXXXX involved the removal and replacement of the fill material, and the widening and heightening of the Highway to meet the standards for paving.

6. Grading reconstruction on XXXXX was undertaken by the Municipality using its own equipment and personnel. XXXXX[.]

7. Pursuant to the agreement, the XXXXX received, as compensation for this project, a credit towards the XXXXX[.]

8. The XXXXX is an agreement between the Province and its municipalities to share costs for the construction and maintenance of roadways. The municipalities develop a multi-year plan in conjunction with the Province for work to be performed on the roadways. Generally, XXXXX of the cost of construction and maintenance is borne by the Province.

9. The Province maintains a credit ledger to record expenditures made by a municipality in respect of which the Province will compensate the municipality. In the present case, since the XXXXX bore the full cost of a project, it received a credit for the amount of the contribution (approximately 75% of the costs) that the Province was required to make to the project. The XXXXX did not receive any other monetary compensation for that project. The credit will be used by the XXXXX to offset its financial obligations related to future joint projects.

10. The XXXXX received the credit for the grading reconstruction project prior to January 1, 1997.

11. In its letter of October 15, 1998, our XXXXX office ruled that the XXXXX XXXXX was not entitled to claim input tax credits (ITCs) for the construction of a secondary highway because the construction was undertaken as part of exempt municipal activities and not as part of the municipality's commercial activities.

Ruling Requested

The XXXXX is entitled to claim ITCs with respect to the construction services provided to the XXXXX on the grading reconstruction of XXXXX[.]

Ruling Given

Based on the facts set out above, we rule that the supply made by the XXXXX XXXXX to the XXXXX is a taxable supply. As a result, the XXXXX may claim ITCs on property and services acquired for consumption or use in the course of making its supply to the XXXXX. The XXXXX is not required to collect GST on the consideration payable by the Province for that supply, since the provinces have constitutional immunity from paying the tax.

As you are aware, the above ruling is contrary to the one you received dated October 15, 1998. We understand from your letter of November 3, 1998 that, in effect, you wish to have that prior ruling revoked from the date of its issue. In order to accede to your request, the effective date of this revised ruling is October 15, 1998, thereby rendering the prior ruling null and void.

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

Under subsection 123(1) of the Excise Tax Act (ETA), a supply means "... the provision of property or a service in any manner ..." and a taxable supply means "a supply that is made in the course of a commercial activity."

As indicated in the background facts, the XXXXX was engaged by the Province to provide a service of "grading reconstruction" on a secondary highway, ownership of which was vested in the Province. Based on the above definition, the provision of the service by the XXXXX to the Province constitutes a supply, and since no exemption applies to it, this service is taxable.

There is insufficient information on hand for us to determine conclusively whether the supply by the XXXXX s one of construction (i.e., would be a capital outlay by the Province) or a maintenance service (i.e., would represent a current expenditure by the Province). However, since a supply of either construction services or maintenance services was taxable before 1997, it is not necessary to make this determination in order to rule on the tax status of the XXXXX XXXXX supply. Accordingly, we have provided the ruling that the supply by the XXXXX, whether construction or maintenance, is taxable.

Please note that pursuant to Bill C-70, the ETA has been amended to provide that a supply by a municipality of "a service of maintaining roads, streets, sidewalks, or similar or adjacent property," for which "consideration becomes due after 1996 or is paid after 1996 without becoming due," is an exempt supply.

To explain why the above exemption does not apply in this case, please note that the provision of the "credit" by the Province to the XXXXX is consideration for the supply of the service provided by the Municipality. Pursuant to subsection 152(3) of the ETA, where consideration that is not money (e.g. the credit) is given, that consideration is deemed to be paid. Accordingly, since the credit was received prior to 1997, the above-noted exemption (which applies only when consideration is paid after 1996) does not apply.

For your future reference, we are enclosing a copy of Interpretation Bulletin IT-128R "Capital Cost Allowance - Depreciable Property". While this bulletin is generally used for income tax purposes, it does contain guidelines that we use in distinguishing repairs (i.e., "maintenance) from capital expenditures (i.e., construction). You may find this information useful in determining the tax status of construction projects after 1996 since, as described above, those that involve maintenance services fall under the new exempting provision.

To reiterate our position concerning the previous ruling of October 15, 1998, please note that, contrary to what that ruling indicated, there is no exemption for the supply made by the XXXXX to the Province based on the legislation as it applied at that time. Therefore, the ruling of October 15, 1998, is revoked.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4206.

Yours truly,

Dwayne Moore
Charities, NPOs and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

Encl.:

***This letter should not be used as a reference; it does not reflect our current position.