29 March 2000 GST/HST Ruling 6415/HQR021 - Latecomer Fees

Dear XXXXX

I refer to your letters of October 12, 1993 and January 25, 1995, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the statement of facts regarding oversizing and latecomer fees as described below. This issue has been under extensive review.

On November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the CCRA).

Our understanding of the facts is as follows.

Statement of Facts

1. XXXXX as a municipal corporation under the XXXXX is a municipality pursuant to the definition of municipality in subsection 123(1) of the Excise Tax Act ("the Act"). XXXXX is registered for the purposes of the GST/HST.

2. XXXXX municipality may require the owner of land (frontender) that is subdivided or developed to provide excess or extended services.

3. XXXXX

•   a portion of a highway system that will provide access to land other than the land being subdivided or developed, and

•   a portion of a water, sewerage or drainage system that will serve land other than the land being subdivided or developed".

XXXXX provides that the term "highway" includes "a street, road, lane bridge, viaduct and any other way open to public use, but does not use include a private right of way on private property.)

4. The costs of providing the excess or extended services is paid for by either the municipality or the frontender.

XXXXX XXXXX where the municipality requires the frontender to assume the costs, the municipality must impose a charge on subsequent owners (latecomers) for connecting to or using the excess or extended services.

5. XXXXX and in particular paragraph XXXXX, approval for the development will not be granted XXXXX until all works and services have been constructed and installed to municipal standards to the satisfaction of the XXXXX unless the developer agrees to assign, transfer and convey the works and services, upon issuance of a XXXXX XXXXX together with all lands dedicated for roads upon or in which the works and services are located. Upon satisfactory completion of the excess or extended services, XXXXX acquires title to the infrastructure from the frontender and issues a XXXXX[.]

6. XXXXX must pay to the frontender all of the charges collected for latecomer connection or use, or an amount proportional to the amount of the total costs originally assumed by the frontender. The latecomer charges are subject to annual interest and can remain in effect for a period of not more than ten years.

7. XXXXX and the frontender enter into a written agreement (the "agreement") which establishes the amount to be collected from potential latecomers, completion dates for the extension work, duration of the agreement and other considerations.

8. XXXXX to collect latecomer charges from latecomers. XXXXX to collect the latecomer charge at the time the latecomer applies for a connection to the extended sanitary sewer system and highway system.

9. In addition to charging latecomer fees, XXXXX also imposes development cost charges on latecomers before a development permit will be issued. The development cost charges are imposed by XXXXX to cover the cost of maintaining XXXXX infrastructures as a result of additional usage. The infrastructures would include XXXXX water supply system, garbage collection services, water and sewage treatment systems, etc. XXXXX will issue a development permit once the latecomers charges and development cost charges have been paid.

10. XXXXX to remit to the frontender the funds collected from latecomers as latecomer charges.

Ruling Requested

1. Does GST apply to charges to latecomers for connecting to or using the excess or extended services?

2. Does GST apply to the payment by XXXXX to the frontender of the amount collected from the latecomer?

3. May XXXXX claim ITC's in respect of the GST paid on the acquisition of the real property?

4. Would GST apply to latecomer charges where the infrastructure was installed prior to the implementation of the GST?

5. When some latecomer charges are eventually collected, the original frontender (i.e. partnership, company, etc.) may no longer be registered for GST. Latecomer agreements can also be reassigned by a frontender to another entity which may not be registered for the GST. In these circumstances, would GST apply to XXXXX payments to the frontender, and if so, who would make the remittance of the GST?

6. If a municipality includes GST with a latecomer remittance to a frontender, it will be, in your opinion, very difficult to ensure that the GST is subsequently remitted to the Receiver General since no invoices are issued by the frontenders to the City. What are the implications to XXXXX in terms of claiming the rebate?

Ruling Given

1. Based on the facts set out above, we rule that pursuant to paragraph 20(c) of Part VI of Schedule V to the Act, a supply by a government or municipality or by a board, commission or other body established by a government or municipality of a licence, permit, quota or similar right (other than such a right supplied in respect of the importation of alcoholic beverages), and the supply of any service in respect of an application for such a right is an exempt supply.

Under the terms of the agreement between XXXXX and the frontender, XXXXX, having required the frontender to install the excess or extended services, agrees to collect from latecomers, latecomer charges for connecting to the infrastructure built by the frontender, title of which was transferred to XXXXX.

In addition to collecting the latecomer charge from the latecomer, XXXXX is also imposing and collecting development cost charges. All fees must be paid before XXXXX will issue a development permit to the latecomer.

The latecomer charges are made in respect of the supply of the permit. Pursuant to paragraph 20(c) of Part VI of Schedule V the supply of the permit is an exempt supply. Therefore, GST will not apply to the latecomer fees charged by XXXXX to the latecomers.

2. As stated in the facts, the frontender, upon completion of the excess or extended services, transfers title of the infrastructure to XXXXX. The supply of the infrastructure by the frontender to XXXXX is a taxable supply of real property.

Pursuant to subsection 168(5) of the Act, tax in respect of a taxable supply of real property by way of sale is payable on the earlier of the day ownership of the property is transferred to the recipient and the day possession of the property is transferred to the recipient under the agreement for the supply. However, where the value of consideration for the supply of real property is not ascertainable on the day the tax is payable in accordance with subsection 168(5), the tax is payable on the value of the consideration on the day the value becomes ascertainable, pursuant to subsection 168(6). The money collected from the latecomers and paid to the frontender is consideration for the supply of real property from the frontender to.

3. Pursuant to section 21 of Part VI of Schedule V, the supply of services made by or on behalf of a government or municipality to owners or occupants of real property situated in a particular geographic area where the owners or occupants have no option but to receive the service, such as road construction, is an exempt supply.

Pursuant to section 22 of Part VI of Schedule V, the supply of a service of installing, repairing or maintaining a water distribution, sewerage or drainage system that is for the use of an owner or occupant of real property is exempt when made by a municipality or organization designated as a municipality.

As a result of the use of the oversized infrastructure i.e., sewer, drainage or water distribution system in making an exempt supply under section 22 and the exempt supply of highway construction services under section 21, XXXXX is eligible for the municipal rebate of 57.14% for the GST incurred on inputs acquired to make these exempt supplies.

4. Pursuant to subsection 336(1) of the Act, no tax is payable in respect of a supply of real property where a taxable supply by way of sale is made to a person and ownership or possession of the property is transferred under an agreement for its supply to the person before 1991. In those situations where the infrastructure is transferred to XXXXX before 1991, GST will not apply to the supply made by the frontender to XXXXX.

5. As stated in the statement of facts, XXXXX is registered. As a recipient of real property, XXXXX, pursuant to subsections 221(2) and 228(4), shall remit the GST to the Receiver General. Therefore, XXXXX may remit the GST due on the consideration for the supply of real property received from the frontender by filing form GST 60. XXXXX must file form GST 60 (Goods and Services Tax Return for Acquisition of Real Property) on or before the last day of the month following the month in which the tax became payable. The tax becomes payable when the value of the consideration for the supply of real property becomes ascertainable, as explained above.

XXXXX where payments are returned to XXXXX unclaimed by the frontender, XXXXX is allowed to retain the funds. XXXXX XXXXX where the frontender voluntarily assigns his rights, or where rights are assigned by operation of law, XXXXX shall pay any benefits accruing hereunder, after notice, to such successor of the frontender as the XXXXX in his judgment deems entitled to such benefits.

Although the agreement allows XXXXX to retain the funds where the payment is returned unclaimed by the frontender, the GST must be remitted. It should be noted that XXXXX need not remit the GST to the frontender, but may remit the GST directly to the Receiver General. As explained above, XXXXX must file form GST 60.

In the event the frontender has gone bankrupt or placed in receivership, XXXXX shall remit the GST to the Receiver General with the filing of form GST 60.

6. As explained in the response to question 5, XXXXX shall remit the GST directly to the Receiver General. XXXXX is eligible for the municipal rebate. As an applicant for the municipal rebate, XXXXX is required to maintain adequate documentation to substantiate the claim. Although not exhaustive, the latecomer agreement indicating the amounts and terms under which the latecomer charges are payable is one source of documentary evidence.

In addition to maintaining the latecomer agreement which indicates the value of the consideration for the supply of real property, proper books and records and all related documentation issued pursuant to the governing contract must be maintained. The following information must be maintained:

•   sufficient information to identify the supplier' name or trading name[;]

•   the supplier's registration number[;]

•   sufficient information to identify the reporting period when the GST in respect of the supply was paid or became payable and the amount of GST paid or payable[;]

•   sufficient information to identify the name of the recipient of the supply (or that of the recipient's duly authorized agent or representative); and

•   sufficient information to identify the nature of the supply.

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

Should you have any further questions or require clarification on municipal services, please contact the undersigned at (613) 941-3268. Questions relating to real property should be directed to Mr. Costa Dimitrakopoulos, Manager, Real Property Unit at (613) 954-3772.

Yours truly,

Owen W. Newell, CGA
Manager
Municipalities and Health Care Services Unit