2 March 2004 GST/HST Interpretation 50269 - Re: 44516

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Hi XXXXX

Sorry for taking so long to reply. I had a chance to review your draft letter this morning. I have the following comments.

The GST Obligations and Entitlements of the XXXXX Charity

In order to develop a sufficiently complete understanding of the XXXXX Charity's role involving this property and the activities carried on there, I feel we need to be able to answer a few additional questions, as follows:

1) What is the expressed purpose of the XXXXX Charity's financial contribution? Is it for its share of the construction costs of the Complex? (note there is a discrepancy between the amount of $XXXXX given at the bottom of pg 3 and the $XXXXX mentioned on pg 4.)

2) While I agree that the facts provided concerning the XXXXX Charity's role in the day-to-day management of the Complex seems to support that the XXXXX Charity is a contract manager providing services to the City, more info is required to confirm this. For instance, while the XXXXX Charity reports to the XXXXX Board, its my understanding that the XXXXX Charity is part of the XXXXX Board and, from time to time, would actually chair the XXXXX Board. If this is so, it becomes less clear who (as a separate entity) the XXXXX Charity is providing management services to? Please clarify if the XXXXX Charity is a member of the XXXXX Board and what impact this may have on your view that the XXXXX Charity is merely a contract manager of the Complex.

For the XXXXX Charity to be providing contract management services to the City, the business of making supplies to the public using the Complex would be carried on by the City. To better support this position, there would ordinarily be terms in the agreement (i.e. Operating Agreement or another agreement) that spell out the consideration the XXXXX Charity is entitled to receive for its management services. Typically, the XXXXX Charity would not be at financial risk in operating the complex as all expenses, including its own management fees, in excess of the revenues would be covered by the City. Please clarify whether this is the case.

Note, if it is found that the XXXXX Charity is nothing more than a contract manager of the Complex, this would be a factor in support of the view that the XXXXX Charity is not an owner or lessee of the Complex. Rather the XXXXX Charity is more likely to have a licence right to use or occupy the complex for operational/management purposes only.

3) You have proposed that the XXXXX Charity is a recipient of its share of the construction inputs (materials and/or services) to construct the Complex. You have stated (hereafter referred to as Option (1)) that the XXXXX Charity's (along with the City) eligibility for claiming ITCs is determined under subsection 209(1) and 199(4).

However, these provisions apply only to real property acquired by the PSB for use as capital property of the PSB or to the acquisition of improvements to real property that is capital property of the PSB. At issue here is whether the XXXXX Charity does in fact have any capital real property of its own. CRA normally interprets these provisions as referring to capital property owned by the particular person. In the case of real property, this generally means ownership of the freehold (either legal or equitable) as opposed to ownership of the leasehold or similar interest. Therefore, unless it can be found that the XXXXX Charity owns the real property that forms the Complex, these rules would not apply.

This leaves two other options for ITCs purposes - Option (2): the XXXXX Charity acquires construction inputs for re-supply to the City and/or the CSD or Option (3): the XXXXX Charity simply made a financial payment - perhaps in the form of a refundable deposit. For instance, it is not clear whether the XXXXX Charity gets its $XXXXX back at the end of its XXXXX-year term or only if its contract is terminated earlier. Please clarify.

If evidence is found in the applicable agreements to support that the City and/or the CSD are paying the XXXXX Charity for these construction inputs, they option (2) is likely to be correct. In this case, since the XXXXX Charity is a charity the re-supply of such materials and services is likely to be exempt. Thus the denial of ITCs arises from the fact that, for purposes of paragraph 169(1)(c), the extent to which these construction inputs were acquired for supply in the course of a commercial activity would be nil.

I hope this helps. If you have further questions, please call.

Daryl Hooley
Senior Rulings Officer
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
(613) 954-8852 (office phone)
(613) 990-3602 (fax)
daryl.hooley@ccra-adrc.gc.ca