4 December 2002 GST/HST Interpretation 39435 - Construction Services for Real Property

Dear XXXXX:

Thank you for your facsimile transmission XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to construction services undertaken by one of your clients - a band-empowered entity - for the purpose of constructing a building on land (i.e. real property).

In your facsimile transmission, you indicated that the band-empowered entity undertook the construction of XXXXX-building XXXXX. The construction of the building was completed XXXXX. The building is located on land that received reserve status on XXXXX. At that time, the construction of the building was almost completed. The band-empowered entity was invoiced GST valued at XXXXX for construction-related costs.

You advised that since the majority of the construction costs were incurred before the land received reserve status, the band-empowered entity XXXXX. The band-empowered entity did not apply for XXXXX in relation to tax paid or payable on the purchase of these services as you had been advised that XXXXX As the building is being used by the band-empowered entity in various activities, you questioned whether tax relief could be afforded to this entity through the input tax credit mechanism. A response to this question was provided to you by XXXXX, GST/HST Ruling, XXXXX Tax Services Office on XXXXX. In that letter, you were advised that the issue regarding the tax status of construction services acquired for real property that was not a reserve but became a reserve during the time the construction services were preformed would be responded to under separate cover. That matter was referred to this office for reply.

Interpretation Requested

The band-empowered entity is entitled to GST/HST relief on construction services performed on real property that was not a reserve but became a reserve for purposes of the Indian Act during the performance of the construction services.

Interpretation Given

Based on the information provided, GST/HST relief is available to the band-empowered entity where construction services are completed on and material is delivered to land that is a reserve, as defined in the Indian Act. Consequently, where construction services are completed on or material is delivered to land that is not a reserve, GST/HST applies in the normal manner.

Explanation

The following does not apply to a taxable supply of real property by way of sale.

Generally, construction contracts provide for the regular submission of requests or applications by the contractor for payment covering a progress-billing period. Under the terms of the construction contract, the recipient of the supply is required to make payment within a specific number of days following certification, usually by a consultant, engineer or architect, of the value of work completed and material delivered. In such cases, the request or application for payment by the contractor will not be considered to be an invoice even if it may be referred to as such, so no tax is payable at that time pursuant to paragraph 152(1)(c) of the Excise Tax Act (ETA). However, once the amount is approved, in accordance with subsection 168(2) of the ETA, GST/HST is payable on earlier of the day that the recipient pays the amount approved, the day that the recipient is required to pay the amount approved pursuant to the contract, the day the supplier issues an actual invoice for that amount, or the date of such an invoice, if issued.

Technical Information Bulletin B-039R GST Administrative Policy - Application of GST to Indians (TIB-B-039R) sets out the Canada Customs and Revenue Agency's administrative policy with respect to Indians. Under TIB B-039R, services acquired on or off reserve by Indian bands or band-empowered entities for band management activities or for real property on reserve are not subject to GST/HST. Services acquired by Indian bands or band-empowered entities for real property off reserve do not meet the requirements of TIB B-039R and therefore tax relief is not available on these services.

Accordingly, if under the terms of a construction contract, an Indian band or band-empowered entity is required to pay an approved amount to a contractor covering a progress billing period for work completed and material delivered on a reserve, as defined in the Indian Act, GST/HST relief will apply.

The contractor will be required to maintain documentary evidence, such as the contract for construction services or other form of documentation (e.g., engineering plans) to support the non-collection of GST/HST in respect to its supply of construction services to the Indian band or band-empowered entity in these circumstances.

The following is an example of the application of GST/HST to the interpretation set out above.

A band acquires land on April 1, 2003. The land is not a reserve, as defined in the Indian Act. The band applies to the Department of Indian and Northern Affairs (DIAND) for reserve land status.

On May 1, 2003, the band enters into a 12-month contract to acquire the construction services of a contractor. The services are to be carried out on the land that has not yet received reserve status. In accordance with the terms of the contract, the contractor submits applications to the band for payment on a regular basis during the term of the contract.

On August 1, 2003, the contractor makes an application for payment to the band. A third party certifies the value of the work completed and material delivered. The amount approved is for work completed on and material delivered to the land for the period May 1, 2003 to July 31, 2003. The band pays the approved amount to the contractor.

On October 1, 2003, DIAND approves the application made by the band and the land receives reserve status effective that date.

On November 1, 2003, the contractor makes another application for payment to the band. Again, a third party certifies the value of the work completed and material delivered. The approved amount is for work completed on and material delivered to the land for the period August 1, 2003 to October 31, 2003.

Since the land in question did not receive reserve status until October 1, 2003, GST/HST is payable on the approved amount for work completed on and material delivered to the land prior to its designation as a reserve on October 1, 2003. As the land in question was not a reserve prior to that point in time, the conditions set out in Technical Information Bulletin B-039R Administrative Policy - Application of GST to Indians are not met.

Accordingly, GST/HST would apply to the approved amount for work completed on and material delivered to the land for the period May 1, 2003 to July 31, 2003 and August 1, 2003 to September 30, 2003.

However, because the land received reserve status on October 1, 2003, GST/HST would not apply to that portion of the approved amount for work completed on and material delivered to the land in the month of October. Any subsequent work completed on or material delivered to the reserve would also be tax relieved.

Since the land was designated a reserve on October 1, 2003, the engineering or site manager's report or some other acceptable form of documentation for the period covering the period August 1, 2003 to October 31, 2003, would have to be used to determine a reasonable apportionment of the approved amount between work actually completed on and material actually delivered to the reserve and work completed off and material delivered off reserve.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7952.

Yours truly,

Lynn Fournier Renner
Aboriginal Affairs Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

XXXXX
Lynn F. Renner
XXXXX
TIS