15 August 2002 GST/HST Interpretation 35136 - Supplies by a Designated Municipality

Dear XXXXX:

Thank you for your letter of XXXXX, with attachments (Attachments included "XXXXX Agreement between the Town of XXXXX and XXXXX", a corporate information sheet and a copy of a by-law to authorize a XXXXX agreement between XXXXX and the XXXXX the Town XXXXX.), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by a designated municipality.

Our XXXXX letter to you addressed a portion of the subjects raised in your letter (as described below). Please accept our apology for the delay in replying to the remainder of your concerns. All legislative references are to the Excise Tax Act.

Based on a review of our records as well as your letter and its attachments, our understanding of the background to your queries is as follows:

You represent XXXXX, also referred to as XXXXX, (the Corporation), XXXXX.

In XXXXX the Corporation entered into a contract with the Town of XXXXX (the Town) to

(a) provide a service of maintaining the operation of the Town's water distribution, sewerage and drainage system; and

(b) operate the Town's entire water distribution, sewerage and drainage system.

In our XXXXX letter, we advised you of the designation of the Corporation as a municipality pursuant to section 22 of Part VI of Schedule V with respect to its supply of a service of installing, repairing, maintaining or interrupting the operation of a water distribution, sewerage or drainage system that it operates.

At the same time, we also designated the Corporation to be a municipality, pursuant to subsection 259(1) of the Act, only in respect to its supply of installing, repairing, maintaining or interrupting the operation of a water distribution, sewerage or drainage system that it operates which is exempt under section 22 of Part VI of Schedule V.

Rulings Requested

In your letter, you asked our office to provide application rulings on several topics related to the impact of designation on your client. These topics include the tax status of the Corporation's supply of services to the Town, the Corporation's entitlement to rebates under subsection 259(4) and the requirement of subcontractors to charge tax on services supplied to the Corporation.

As noted in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, in order to issue a ruling we require a clearly defined fact situation. Due to the broad nature of some of your queries, we are unable to issue rulings in response. As well, some of your queries have already been appropriately addressed in our designation letter. We would be pleased to provide a ruling on a particular transaction if provided with sufficient facts.

In the meantime, we trust that the following comments regarding obligations and entitlements of a designated municipality will be of assistance to you.

Interpretations Given

The Corporation has been designated to be a municipality for purposes of section 22 of Part VI of Schedule V. Accordingly, its supplies of services of installing, repairing, maintaining or interrupting the operation of a water distribution, sewerage or drainage system that it operates will be exempt supplies. This would include the Corporation's supply of the aforementioned services in relation to the water and wastewaters systems that it operates under the agreement with the Town.

A designation as a municipality under subsection 259(1) entitles the Corporation to claim a public service body (PSB) rebate at the prescribed percentage of 57.14% in connection with its eligible purchases. The rebate is calculated using the formula provided at subsection 259(4), subject to the provisions of subsections 259(4.1), (4.2), (4.3) and (5).

It will be a question of fact whether the Corporation is entitled to claim and receive a PSB rebate in connection with the GST/HST paid or payable by it on any particular input. As indicated in our earlier letter, the Corporation is entitled to claim a rebate of 57.14% of the GST/HST paid on inputs acquired for use in making the supplies for which it has received designation.

Given that the Corporation is registered for the GST/HST, we presume that it makes some taxable supplies in the course of commercial activities. Some of its purchases may be used by the Corporation in both exempt and taxable activities. In these circumstances, the Corporation must determine the percentage of the use of the purchase in commercial and exempt activities, in order to calculate and claim the appropriate input tax credits and/or rebate. As indicated in subsection 141.01(5), the apportionment method chosen must be fair and reasonable and used consistently by the person throughout the fiscal year. In addition to section 259, relevant provisions of the Excise Tax Act regarding the calculation of input tax credits and the PSB rebate may include sections 169, 170, 199 and 209.

Regarding supplies made by subcontractors to the Corporation, it will be a question of fact whether or not tax is due on a particular supply. Variables such as the registration status or the nature of the supplier could affect the tax status of a particular supply. For example, a small supplier who is not a registrant is not required to charge GST/HST on its taxable supplies (other than taxable sales of real property). Similarly, if the supplier is a charity or other PSB, the supply to the Corporation might be exempt under one of the provisions of either Part V.[1] or Part VI of Schedule V.

In short, the fact that the recipient of a particular supply has been designated as a municipality does not affect the obligations of the supplier under the ETA. Designation as a municipality does not impact on the status of supplies made to the person (as opposed to the status of certain supplies made by the person).

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you require clarification on the preceding, please do not hesitate to contact me at (613) 954-4280.

If you have any further questions concerning your client's entitlements and obligations under the GST/HST, we encourage you to contact XXXXX at GST/HST Rulings, located at XXXXX. We have forwarded a copy of this letter to XXXXX for his information.

Yours truly,

(Mrs.) S.C. Cahill
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate