24 June 2003 GST/HST Interpretation 43421 - Request for Municipal Designation -

Dear XXXXX:

Thank you for your letter XXXXX requesting municipal designation in respect of various para-municipal services provided by XXXXX to the City XXXXX. You also request municipal designation pursuant to section 259 of the Excise Tax Act (i.e., the "ETA") for XXXXX supplies of services in connection withXXXXX.

This letter will first address whether XXXXX is eligible for municipal determination as a para-municipal organization and also whether it qualifies for municipal designation in respect of certain services it provides. Unless otherwise indicated, legislative references in this letter are to the ETA.

Paragraph (b) of the definition of "municipality" in subsection 123(1) permits the Minister of National Revenue to determine an organization to be a municipality for all purposes of the ETA if certain conditions are met. The administrative criteria that XXXXX must meet in order to be determined to be a municipality under the category of para-municipal organization are that it must have been created by one or more municipalities and it must also be owned or controlled by one or more municipalities.

XXXXX

Based on this information, we have concluded that XXXXX does not meet the first criterion for municipal determination, as it was not created by the City but rather by XXXXX. As such, XXXXX will not qualify for municipal determination.

Had XXXXX been created by the City, it still would not qualify for municipal determination, as we do not consider that it meets the "owned" or "controlled" criteria.

An entity will be considered to be owned by a municipality if the municipality owns all or substantially all (90 per cent) of the shares or capital of the entity, or if the municipality holds title to the assets of the entity or controls their disposition such that in the event of wind-up or liquidation, these assets are vested in the municipality.

XXXXX Based on the foregoing, it is not possible to state that the City owns all or substantially all of XXXXX shares or capital.

The City does not hold title to all the assets of the entity XXXXX Further, the City does not control the disposition of XXXXX assets such that they are vested in the City upon XXXXX winding up or liquidation. XXXXX On this basis, we believe the "ownership" criterion is not met.

We consider an entity to be controlled by a municipality if the municipality appoints a majority of the members of the governing body of the entity (directors, governors, commissioners, etc.) and the entity is required by virtue of legislation, by-laws or an operating agreement to submit to the municipality its operating and, where applicable, capital budget for review and approval.

XXXXX As the City has budget approval, one part of this criterion is met; however, the City must also appoint the majority of the directors.

XXXXX On this basis, the "controlled" criterion is not met.

It is our view therefore, that XXXXX is not eligible for municipal determination as a para-municipal organization. Accordingly, the exemption in section 28 of Part VI of Schedule V will not apply to supplies between this organization and the City.

We also considered whether XXXXX might qualify for designation as a municipality under subsection 259(1). To qualify for designation as a municipality under this subsection, an organization must demonstrate that it makes supplies of municipal services. When we designate an organization to be a municipality, the designation only applies to those municipal services for which it has been designated. Rebates may be claimed by a designated municipality under subsection 259(4) for purchases that are related to its designated activities.

We note that XXXXX is responsible for XXXXX. Supplies of this kind may fall under the exemptions in section 21.1 of Part VI of Schedule V when made by a municipality or by a board, commission or other body established by a municipality. However, as XXXXX is not itself a municipality or a board, commission, or other body established by a municipality, its services XXXXX are not exempt under this section. Therefore, it is not eligible for municipal designation under subsection 259(1) in respect of these services.

An organization that operates a water distribution, sewerage or drainage system may qualify for designation as a municipality under section 22 of Part VI of Schedule V. To be eligible for this designation, the applicant must operate an entire water distribution, sewerage or drainage system. This exemption does not apply to the operation of these systems but to separate supplies of installing, repairing, maintaining or interrupting the operation of the water distribution, sewerage or drainage system.

From the information you have provided, we understand that XXXXX However, we will need to be provided with additional information in order to establish if XXXXX is eligible for designation under section 22 of Part VI. Based on the information provided, it is not clear what specific supplies XXXXX makes and to whom XXXXX.

A request for designation under this section must be supported by documentary evidence showing that XXXXX operates a water distribution, sewerage or drainage system and that it makes supplies of installing, repairing, maintaining or interrupting the system that it operates. Supporting documentation may include a complete description of the systems in question, information on XXXXX responsibilities for the operation and maintenance of these systems, copies of signed contracts or agreements with the City or by laws passed by the City in respect of the operation of the systems, copies of invoices from suppliers for repairs to the systems or to residents of the City for the supply of maintaining the system, etc.

Finally, it is not clear whether XXXXX supplies water to City residents or whether it is only responsible for the operation of the water distribution and sewerage systems. If XXXXX makes supplies of unbottled water, then it may be eligible for designation under subsection 259(1) in respect of supplies exempted by section 23 of Part VI of Schedule V.

If XXXXX wishes to be designated in respect of exempt supplies of unbottled water, then we will need to be provided with a complete description of its services, evidence that it has the right to supply the water, copies of paid customer invoices, etc.

Once we have this additional information, we will be pleased to expedite your request on behalf of XXXXX for municipal designation. Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9590 or Tim Krawchuk at (613) 941-3268.

Yours truly,

Elaine Bonnah
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate