17 July 2002 GST/HST Ruling 35326 - Application of the GST/HST to the Supply of Services by Private Companies to Municipal Transit Services for the Physically Disabled

Dear XXXXX:

Thank you for your letter of XXXXX, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of services by private companies to the City XXXXX for operation of the XXXXX system.

Statement of Facts

1. As a result of a study carried out by the XXXXX Division of the City's XXXXX Department, the City operated transportation services for the physically handicapped XXXXX XXXXX.

2. XXXXX the Committee XXXXX recommended that XXXXX continue to operate as a permanent segment of the overall public transit service provided to citizens of the City.

3. On XXXXX, the City Council of the City approved the contracting out of 100% of the XXXXX service for the City.

4. A Request for Proposals Package XXXXX was issued on XXXXX for the provision of transportation service for all XXXXX users for the period covering XXXXX. The deadline for receipt of offers in respect of RFP XXXXX was XXXXX. A similar Request for Proposals Package (XXXXX) was issued for the period XXXXX. The two Request for Proposal Packages are, in all material essence, identical. As a result, this statement of facts will reference

RFP XXXXX only but the conclusions reached in this letter will be applicable to the contractual agreements resulting from both Request for Proposal Packages. XXXXX of the Bidding Instructions states,

"XXXXX"

5. Proposals were submitted by XXXXX companies. There was limited interest in the work item that required the largest vehicles and a second Request for Proposals XXXXX was issued on XXXXX covering this work item only. The terms and conditions of the work item in RFP XXXXX were identical to those listed for the specific work item in RFP XXXXX, with the added option of making an offer to purchase XXXXX of the fleet of XXXXX vehicles owned by the city and appropriate for the specific work item.

6. The City decided to enter into contracts with XXXXX companies for the various work items covered by RFP XXXXX. The City chose one company to enter into a contract with for the work item outlined in RFP XXXXX.

7. On XXXXX, the City entered into an Agreement with XXXXX, one of the successful bidders. The preamble to the Agreement states,

"XXXXX"

8. XXXXX to the Agreement states,

"XXXXX"

XXXXX, is identified in XXXXX of the Agreement as the Contract Administrator.

9. XXXXX to the Agreement states,

"XXXXX"

10. The supplemental conditions outlined in XXXXX provide a clause for third party liability insurance. XXXXX outlines the obligations of the contractor to obtain a third party liability insurance policy of at least XXXXX dollars, all inclusive and to include the City as an additional insured, with a cross-liability clause.

11. The "Specifications" outlined in XXXXX to the Agreement list the service specifications for work to be carried out under the Agreement. XXXXX refers to the scheduling of the service to be provided. XXXXX of XXXXX states,

"XXXXX"

12. XXXXX to the Agreement refers to the fares to be collected in respect of the transportation service. XXXXX

"TXXXXX" "TXXXXX"

13. XXXXX indicates that work under the contract will be measured on a unit basis (i.e. hourly rate and flat rate service) and that the Contractor will submit a monthly invoice showing the total number of vehicle hours provided during the month and the total number of passenger trips and no-shows provided in the month. Payment is made XXXXX days following the receipt and approval of the contractor's invoice.

14. XXXXX

"XXXXX"

15. XXXXX

"XXXXX"

16. In order for an individual to be registered to use the XXXXX system, an application form must be filed with the City.

17. XXXXX

Ruling Requested

You would like us to confirm that the payments made by the City to the contractors with respect to the XXXXX system are not taxable pursuant to subsection 165(1) of the Excise Tax Act.

Ruling Given

Based on the facts set out above, we rule that the payments made by the City to the contractors with respect to the XXXXX system are consideration for a taxable supply. Pursuant to subsection 165(1) of the ETA, the City as recipient of a taxable supply is required to pay tax in respect of the supply calculated at the rate of 7% on the value of consideration for the supply.

Explanation

Your submissions included a description of the application of GST legislation, as you understand it. References were made to the exemption for "municipal transit services" in section 24 of Part VI of Schedule V to the ETA. The exemption cited plays a role in the application of GST legislation to the XXXXX system, however your understanding is not in line with the Canada Customs and Revenue Agency's current policy on the issue.

Section 24 of Part VI of Schedule V to the ETA provides for an exempt supply of a municipal transit service (or a public passenger transportation service designated by the Minister to be a municipal transit service).

A "municipal transit service" is defined in section 1 of Part VI of Schedule V to the ETA as a public passenger transportation service (other than a charter service or a service that is part of a tour) that is supplied by a transit authority all or substantially all of whose supplies are of public passenger transportation services provided within a particular municipality and its environs.

An entity will only be considered a transit authority if it is a division, department, or agency of a government, municipality or school authority or if it is a specific type of non-profit organization (i.e. a non-profit organization that: (i) receives funding from a government, municipality or school authority to support the supply of public passenger transportation services, or (ii) is established and operated for the purpose of providing public passenger transportation services to individuals with a disability.). The contractors employed under the XXXXX system could only be providing a "municipal transit service" as defined in the ETA if they qualified as one of these types of entities or if they provided a public passenger transportation service designated by the Minister to be a municipal transit service.

It should be pointed out that the CCRA would only designate a public passenger transportation service to be a municipal transit service as defined in the ETA if the supply is made directly to the public. The CCRA does not consider the supply made by the contractors under the XXXXX system to be made directly to the public. It is our view that there are two supplies made with respect to the XXXXX system. The public passenger transportation service being provided to the public is a supply by the City's transit department, a transit authority, which is an exempt supply. The supply made by the contractors is a supply to the City. For this reason, the supply made by the contractors would not qualify for exemption under section 24 of Part VI of Schedule V to the ETA.

Your submission referred to the possibility that the payments made by the City to contractors under the XXXXX system were grants made in the public interest and not consideration for a taxable supply. The CCRA's administrative policy concerning the tax treatment of grants and subsidies determines a payment made by a grantor to be consideration for a supply where there is a "direct link" between the payment made and a supply to the grantor, or to a third party, by the recipient of the transfer payment. It is our view that the City's purpose in making the payment to the contractors is to "contract out" services that the City needs to perform in the course of providing their exempt municipal transit service to the public. We find a "direct link" between the payments made by the City and the services rendered by the contractors to the City.

Our view that the City is purchasing services from contractors as inputs to their exempt supply of a municipal transit service to the public is supported by a number of facts. An application form for registration in the XXXXX system must be filed with the City. The City issues and sells the tickets used in the XXXXX system, not the contractor. The contractor is required to obtain third party liability insurance naming the City as an insured. The City schedules all trip requests and receives customer complaints. The City's signage is displayed on vehicles used by the contractors in the provision of its services to handicapped individuals. These facts, coupled with direct language from the Agreement that names the contractors as contractors and explicitly states that the fares collected by the contractor are the property of the City, add weight to our view that the payments made by the City to the contractors in respect of the XXXXX system are consideration for a taxable supply.

XXXXX[.] Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-4157.

Yours truly,

Trent MacDonald
Government Sectors Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate