28 February 2003 GST/HST Ruling 39945 - Recovery of the Goods and Services Tax on Certain Road Construction Projects

Dear XXXXX:

Thank you for your letter XXXXX (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain road construction projects undertaken by the XXXXX[.]

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1) XXXXX

2) XXXXX

3) XXXXX

4) XXXXX XXXXX

·    XXXXX

·    XXXXX

·    XXXXX

-    XXXXX

-    XXXXX

·    XXXXX

·    XXXXX

·    XXXXX

·    XXXXX

·    XXXXX

·    XXXXX

5) XXXXX

6) XXXXX.

7) XXXXX.

8) XXXXX.

9) At XXXXX request, the XXXXX included the construction of XXXXX work in its contract for reconstruction of XXXXX.

10) The XXXXX agreed to do XXXXX work at XXXXX cost and expense.

11) XXXXX

·    XXXXX

-    XXXXX

-    XXXXX

·    XXXXX

·    Upon completion of XXXXX work by the XXXXX, XXXXX will, at its cost and expense maintain the work that has been constructed under the Agreement. XXXXX agreed that it would assume all responsibilities and liabilities for the work.

Ruling Requested

That the XXXXX may recover 100% of the GST paid to the XXXXX under cost sharing agreements for the XXXXX.

Ruling Given

Based on the facts set out above, we rule that XXXXX is not entitled to claim an input tax credit to recover 100% of the GST paid to the XXXXX for these projects. XXXXX may claim the rebate available to municipalities under the Excise Tax Act (the "ETA") to recover 57.14% of the tax paid under the agreements described above.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

You indicate in your letter that XXXXX participation in XXXXX should fall within the definition of commercial activity and therefore, it should be entitled to claim input tax credits for the tax paid on its payments to the XXXXX.

Section 169 of the ETA provides that an entitlement to an input tax credit is only available where property or service on which the GST/HST is paid is consumed, used or supplied in the course of a commercial activity.

Subsections 141.01(2) and (3) further clarify that a property or service is deemed to be for consumption, use or supply in the course of a commercial activity if the property or service is consumed, used or supplied in the course of making a taxable supply for consideration.

In the situation described above, XXXXX has incurred GST on the consideration paid for construction services undertaken by XXXXX. However, the information provided does not indicate that XXXXX has acquired these services for consumption use or supply in the course of making taxable supplies for consideration. Accordingly, the conditions for claiming an input tax credit have not been met.

In your letter, you referred to Regina v. Canada, a Tax Court of Canada decision (Regina v. Canada [2001] T.C.J No. 315) as an indication that the construction of connector routes is a commercial activity for GST purposes. However, the facts in that case and in the present situation are quite different.

In that case, the City provided construction services in respect of provincial highway connector routes. As you note, construction services provided by a municipality are not exempt of the GST/HST. However, the City was not entitled to claim input tax credits, as the court did not find that funding from the Province represented consideration for any particular projects undertaken by the City.

In the present situation, XXXXX is paying consideration for taxable construction services provided by the Province. However, there is no indication that XXXXX is itself making any taxable supplies in connection with these services.

While XXXXX is not entitled to claim input tax credits, it is eligible under subsection 259(3) of the ETA to recover 57.14% of the non-creditable tax charged in respect of its payments to the XXXXX.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9590.

Yours truly,

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