5 December 2001 GST/HST Interpretation 33398 - Eligibility for Input Tax Credits on Arena Construction

We refer to your memorandums of September 14, 2000, to XXXXX and of October 11, 2000, to XXXXX, concerning the eligibility of a municipality to claim input tax credits (ITCs) on the construction of a recreational facility. Your correspondence has been forwarded to us for our response.

All legislative references are to the Excise Tax Act (the Act).

Our understanding of the situation is as follows.

1. XXXXX of the XXXXX (the District), that is a municipality as that term is defined in subsection 123(1) and that is registered for the Goods and Services Tax (GST)/Harmonized Sales Tax (HST).

2. You have submitted two agreements into which the District has entered with the XXXXX (the Society), which is a charity as that term is defined in subsection 123(1) and that is registered for the GST/HST. The agreements are called the XXXXX (the Construction Agreement) and the XXXXX (the Operating Agreement).

3. The Construction Agreement includes the following provisions:

XXXXX

4. The Operating Agreement includes the following provisions:

XXXXX

(a) A document entitled, XXXXX (the Rental Rates document), which was attached to the agreement, sets out the rates to be charged for admissions to and supplies of the Facility.

5. You indicated that the Society charges GST on its supply of goods and services.

6. The District filed an election under section 211 in respect of the Facility. The election became effective prior to the date on which the Construction Agreement came into effect. The election has remained in effect since it became effective.

7. You indicated that the District and the Society are operating at arm's length.

Issue

You have asked whether the District is entitled to ITCs on the construction of the Facility given that the Society would be paying GST on the nominal XXXXX consideration payable annually to the District for the lease of the Facility.

Response

Section 169 provides that, in order for a person to be eligible to claim an input tax credit for the tax payable in respect of property or a service, the following conditions must be met:

1. the property or service must be supplied to or imported by the person;

2. the person must be a GST/HST registrant during the reporting period in which the supply or importation is made;

3. tax must be payable by the person in respect of the supply or importation, or be paid by the person prior to its becoming payable;

4. the property or service must be acquired or imported by the person for the purpose of consumption, use or supply in the course of commercial activities of the person (Pursuant to the formula in subsection 169(1), the extent of use in commercial activities will determine the amount of ITCs that the District is entitled to claim.), and

5. the person must have obtained sufficient documentary evidence, including any prescribed information as set out in the Input Tax Credit Information (GST/HST) Regulations, to establish the eligibility for the input tax credit before the claim is made.

We will now examine each of these conditions in further detail.

Condition 1

A claim for an ITC may only be made by the person to whom the supply was made or who imported the goods. The person to whom a supply is made may, in general terms, be considered to be the recipient of the supply. (It should be noted that no reference appears in subsection 169(1) of the ETA to the term "recipient". However, under that subsection, an ITC eligibility arises only where tax is paid or becomes payable by a person. Subsection 165(1) makes the recipient of a supply the person who is liable to pay tax.)

Subsection 123(1) defines "recipient", where consideration is payable for a supply under an agreement for the supply, to be the person who is liable to pay the consideration under the agreement for the supply. The preamble to the Construction Agreement, in conjunction with XXXXX of that agreement, make the District liable to pay consideration for the supply of services and property acquired in the construction of the Facility.

However, such terms in the Construction Agreement between the District and the Society are not sufficient, on their own, to make the District the recipient of a supply made by a subcontractor. In order for the District to be a recipient of a subcontractor's supply, the District must be liable to pay consideration under the agreement for the supply by the particular subcontractor. It is only when such is the case that the first condition is satisfied.

Condition 2

The District was a registrant at all relevant times and therefore the second condition is met.

Condition 3

An ITC eligibility arises only where the District pays tax that it has a liability to pay, or tax becomes payable by the District under the District's liability to pay tax. Where such is the case, the third condition is met.

Condition 4

The District is making a supply of real property by way of lease to the Society. The management services to be performed by the Society and the XXXXX payable per annum, in accordance with the Operating Agreement, are both consideration for the lease of the Facility by the District. As the District is making a lease of the Facility and has filed an election under section 211 to effectively exclude the supply from exemption, the District is making a taxable supply of the Facility in the course of a commercial activity of the District. As such, the fourth condition is met.

Condition 5

We are not in a position to determine whether this condition has been satisfied, however your review of the books and records will allow you to make that determination.

Where all of the foregoing conditions are met, the District will be entitled to ITCs on the construction of the Facility.

As mentioned in Condition 4, we consider the management services performed by the Society to be consideration for the lease of the Facility made by the District. It is our view that such a valuation should be made in the context of the entire agreement between the District and the Society.

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 954-4393.