Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 242566r
Business Number:
Dear [Client]:
Subject: GST/HST RULING
GST/HST on fees or charges for capital costs
Thank you for your letter of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the payment of capital contributions by a company to a municipality that is undertaking a municipal construction project.
We provided you with a ruling, dated [mm/dd/yyyy], under case number 242566. As a result of your [recent] letter and additional documentation submitted, we wish to revise our previous ruling. […]
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand the following:
1. […] ([The] Municipality) is located in the […] Province of Ontario. The Municipality is […] registered for GST/HST purposes.
2. Subsection 11(3) of the Municipal Act, 2001, S.O. 2001, c. 25 (Municipal Act) provides that […] municipalities may pass by-laws respecting public utilities. Section 1 of the Municipal Act defines a “public utility” to include a system that is used to provide sewage and water services for the public.
3. Subsection 391(1) of the Municipal Act authorizes a municipality to impose a fee or charge on persons, for services or activities provided or done by or on behalf of it, for costs payable by it for services or activities provided or done by or on behalf of any other municipality or local board, and for the use of its property including property under its control.
4. Subsection 391(2) of the Municipal Act provides that a fee or charge imposed for capital costs related to services or activities that may be imposed on persons not receiving an immediate benefit from the services or activities but who will receive a benefit at some later point in time.
5. […][By-law A], authorizes the construction [or expansion] of the […][Municipality’s] sanitary sewer system and to establish a serviced area in the settlement areas of [the Municipality] and to impose connection requirements and charges to obtain revenue to pay the capital cost thereof.
6. According to [By-law A]:
* Section 391 of the Municipal Act provides that the Municipality may pass by-laws imposing charges on any class of persons for capital costs payable by it for sewage and other services which will be provided by the Municipality after the charges are imposed.
* Sections 9, 11 and Part XII of the Municipal Act and the Regulations thereto authorize the imposition of a charge for capital costs related to the Municipal sewage services, and thus the Sanitary Sewer, upon the owners of lands to whom such services are provided.
* Council deems it necessary, desirable and in the public interest to require all Owners to connect to the Sanitary Sewer and related Service Pipes pursuant to its authority under Sections 8 and 11 of the Municipal Act.
* No person can construct, operate, use or maintain an on-site private sewage system, including septic tank system and/or holding tank, and all future development requiring sanitary sewers must connect to the municipal sewer services, other than exempt properties.
7. […][By-law B], prohibits the discharge of wastewater into the sewage collection and wastewater treatment system that exceeds specified limits unless a discharger has entered into an Extra Strength Surcharge Agreement with the Municipality, and allows the Municipality to include terms and conditions in its Extra Strength Surcharge Agreement related to the calculation and payment for discharge.
8. […][By-law C] imposes fees and charges for goods and services provided by the Municipality, enacted in accordance with subsection 391(1) of the Municipal Act. Fees for wastewater treatment services are imposed by the Municipality under this By-law, including industrial waste fees as per agreement.
9. […] ([The] Company) […][which is located] within the municipal area, […] owns and operates a […] [processing facility] on lands owned by the Company. The [Company’s processing] facility […] generates wastewater that is treated at the Municipality’s […] (Treatment Plant).
10. […][By-law D] authorized an Agreement made on [mm/dd/yyyy], between the Company and the Municipality (Parties) to allow the discharge of extra-strength sewage into the sewage collection and treatment system in the Municipality. The Parties entered into an Extra Strength Surcharge Agreement (Surcharge Agreement) that sets out specific terms and conditions under which the Company is allowed to discharge extra-strength sewage into the Municipality’s sewage collection and treatment system. The Surcharge Agreement forms part of [By-law D].
11. […][By-law E] authorized an Amending Agreement […] between the Parties allowing the Company to discharge additional extra-strength wastewater into the Municipality’s sewage collection and wastewater treatment system and provide for an additional monthly maintenance payment.
12. According to the terms of the Surcharge Agreement and the Amending Agreement:
* The Company agreed to contribute to the cost of construction of the [Municipality’s] sewage collection and treatment system […], and the Municipality agreed to allow the Company to discharge wastewater, without pre-treatment, to the […][sewage collection and treatment system] which would otherwise be prohibited by [By-law B].
* The Company agreed to pay to the Municipality the following:
a) $[…] over [#] years […], starting on [mm/dd/yyyy];
b) a per kilogram amount of excess biochemical oxygen demand (BOD) loads;
c) a per cubic metre/per day amount as a flow rate; and
d) a fixed rate monthly maintenance amount.
* The Company is also required to pay to the Municipality additional amounts for any breach of the agreements where either the flow or BOD loads limits are exceeded.
* The Municipality is required to consider any reasonable request from the Company to increase wastewater flows and/or BOD loads from the limits outlined in the Surcharge Agreement.
13. On [mm/dd/yyyy], the Parties entered into […][Agreement X] for an addition to the Company’s […] processing facility as part of an expansion of its operations. The addition was expected to result in an increased level of wastewater discharge into the Municipality’s sewage collection and wastewater treatment system. Construction started in [yyyy].
14. [By-law F], authorized the entering into the [Agreement X] between the Parties under subsection 41(7) of the Planning Act, 1990.
15. According to the Recitals of the [Agreement X]:
* The Municipality approved the plans and drawings submitted by the Company on [mm/dd/yyyy], [...][for the expansion of building 1].
* The Company acknowledges that sufficient uncommitted reserve sewage capacity is not presently available at the Treatment Plant to accommodate the expected sewage effluent from the Company’s approved expansion of […][building 1].
* The Company acknowledges that a financial contribution from the Company to the Municipality will be required in order to construct and/or allocate sufficient uncommitted reserve sewage capacity at the Treatment Plant.
* The Company acknowledges that the [building 1] expansion shall not be used or occupied until either sufficient uncommitted reserve sewage capacity is available at the Treatment Plant; or the Parties agree on an alternative method of handling any hydraulic load and/or BOD levels that are in excess of today’s parameters resulting from the expansion.
16. According to [Agreement X]:
The Company agrees not to permit use or occupancy of any part of the building for which building permits have been issued as part of the approved expansion of [building 1], or request the issuance of an Occupancy Permit, under section 11 of the Building Code Act, 1992, for [building 1] until such time as sufficient uncommitted reserve sewage capacity, as defined by the Ministry of the Environment and Climate Change, is available at the Treatment Plant to the satisfaction of the Operations Manager of the Municipality, or the Company implements an alternative method of handling any hydraulic load and/or BOD levels that are in excess of today’s parameters in a manner satisfactory to the Parties, acting in a commercially reasonable manner.
If the sufficient uncommitted reserve sewage capacity is dependent upon the construction of new or expanded treatment facilities, the uncommitted reserve sewage capacity will be considered available once Environmental Assessment Act approval has been given, and the Council of the Municipality has passed a resolution approving a specific budget item that dedicates capital for the completion of the treatment facilities such that the treatment facilities are completed prior to the issuance of an occupancy permit for the approved expansion of [building 1].
17. According to [Agreement X], the Company agrees not to permit use or occupancy of any building or part thereof for which building permits have been issued, or request the issuance of occupancy permits under section 11 of the Building Code Act, 1992, for [building 1], until such time as the Parties have entered into a revised Extra Strength Surcharge Agreement [By-law D] in order to address shortcomings and failings within the current Surcharge Agreement and to properly address the expansion of [building 1] and the uncommitted reserve sewage capacity.
18. […].
19. […].
20. […].
21. The Company’s use of the Treatment Plant is governed by the Surcharge Agreement that requires the Municipality to provide the Company with sufficient treatment capacity at the Treatment Plant such that the Company shall be able to, at all time during the term of the Surcharge Agreement, discharge sewage to the Treatment Plant without pre-treatment.
22. The Company and the Municipality recognize there is insufficient capacity at the Treatment Plant to handle the level of discharge required by the Company to operate its facility to its full capabilities over the long-term, and therefore there is a need for additional capacity at the Treatment Plant.
23. The Company and the Municipality also recognize that the Surcharge Agreement, as currently drafted, does not provide the Company with its desired capacity levels to discharge sewage generated by the facility nor does it provide the Municipality with sufficient financial compensation to handle the impacts on the Treatment Plant of the Company’s desired sewage discharge levels.
24. The Municipality reviewed the future requirements for the industry to remain and expand its sewage treatment operations in [the Municipality]. It was determined that the Treatment Plant would need to be expanded to provide for the future needs of the industry and to retain sewage capacity for ongoing development in [the Municipality], and that the Municipality would impose charges to the Company for the recovery of capital costs of the expansion under subsection 391(2) of the Municipalities Act.
25. […] [the Settlement] details an arrangement between the Parties to amend the Surcharge Agreement and to share in the cost of the expansion of the Treatment Plant. […][The Settlement was] approved during proceeding of council on [mm/dd/yyyy], and confirmed by[By-law G]. According to [the Settlement]:
* The Parties recognized that under the Surcharge Agreement:
a) there is insufficient treatment capacity at the Treatment Plant to handle the desired level of wastewater discharged by the Company from its expanded [processing facility] over the long-term; and
b) the Municipality is not provided with sufficient financial compensation to handle the impacts on the Treatment Plant of the Company’s desired wastewater discharge levels.
* The Parties agreed that constructing an expansion to the Treatment Plant (Expansion) will create additional treatment capacity over the long-term, including capacity for the Company, and will allow for other growth opportunities in the Municipality. The engineering and construction costs (Capital Cost) of the Expansion were estimated at approximately$[…], plus the GST/HST.
* The Parties agreed that the provisions in [the Settlement] and the schedules attached thereto will apply and are deemed to amend the Surcharge Agreement.
* In order to achieve the desired capacity objectives, the Parties agreed to share in the cost of the Expansion (Cost of Expansion). This cost includes all costs associated with the environmental assessment process, design, tendering, contracting and the Capital Cost incurred by the Parties. The Cost of Expansion is to be allocated as follows:
a) Company - 70%
b) Municipality - 30%
[The Settlement] refers to this cost allocation as the Cost Sharing Agreement.
* The Expansion will form part of the Treatment Plant, be solely owned by the Municipality, and be operated by an operator of the Municipality’s choosing. All contracts related to the Expansion will be signed solely by the Municipality.
* Any government grants received by the Municipality for the Expansion will reduce the corresponding capital contributions of the Parties, and be allocated equally between them.
* On or before the date the Expansion achieves substantial performance, as defined in the Construction Act, the Parties agree to enter into a new Extra Strength Surcharge Agreement which will satisfy the requirements of [By-law B], and include the terms agreed to.
* Any change orders and/or change directives related to the construction of the Expansion will be subject to approval by both Parties.
* The Parties agree that the process outlined in Schedule A, […] forms part of [the Settlement], and will be used by the Parties for the purpose of the administration of and payment of the Cost of Expansion based on the Cost Sharing Agreement. According to Schedule A, the process is generally as follows:
a) All invoices will be submitted by the contractor to the Municipality for payment.
b) The Municipality will process payment of the invoices within 15 days of receipt of the invoices.
c) The Municipality will then invoice the Company for 70% of the payment processed by the Municipality and treat the payment from the Company to the Municipality as a capital contribution to the project.
d) The Company will reimburse the Municipality within 30 days of the date of the Municipality’s invoice to the Company.
* After [#] years from the date the Expansion achieves substantial performance, the Municipality will undergo a rate review and establish new rates for the Company’s use of the expanded Treatment Plant. The new rates will take into consideration the operating costs of the expanded Treatment Plant during these [#] years.
* The Company will pay the Municipality a separate amount for any breach of the agreement where either flow or BOD loadings exceed the limits set out in [the Settlement].
* [The Settlement] constitutes the entire agreement between the Parties as to the matters dealt with, and supersede all prior negotiations, understandings and/or agreements.
26. An Amending Agreement to [the Settlement] was made on [mm/dd/yyyy], which increased the amount payable by the Company to $[…] due to an increase in engineering and construction costs. The Amending Agreement was approved during proceeding of council on [mm/dd/yyyy].
RULING REQUESTED
You would like to know whether the Municipality’s charges to the Company towards the Cost of Expansion are subject to the GST/HST.
RULING GIVEN
Based on the facts set out above, we rule that the Municipality’s charges to the Company towards the Cost of Expansion are consideration for a taxable supply of wastewater treatment services that is subject to the GST/HST.
EXPLANATION
Generally, every recipient of a taxable supply (other than a zero-rated supply) made in Canada is required to pay the GST/HST on the value of the consideration for the supply. An exempt supply is a supply that is not subject to the GST/HST and that is included in Schedule V.
Section 21 of Part VI of Schedule V exempts, in part, a supply of a municipal service, if the supply is made by a municipality to a recipient that is an owner or occupant of real property situated in a particular geographic area and the service is one which the recipient has no option but to receive. The exemption does not apply where the service is one of testing or inspecting any property for the purpose of verifying or certifying that the property meets particular standards of quality or is suitable for consumption, use or supply in a particular manner.
The Surcharge Agreement requires the Municipality to provide the Company sufficient wastewater treatment capacity at the Treatment Plant such that the Company is able to, at all times during the term of the Surcharge Agreement, discharge a defined amount of sewage into the sewage collection and treatment system.
Under [Agreement X], the Company acknowledges that there is insufficient uncommitted reserve sewage capacity available at the Treatment Plant to accommodate the expected sewage effluent from the Company’s expansion of [building 1] and that a financial contribution from the Company to the Municipality will be required in order to construct sufficient uncommitted reserve sewage capacity at the Treatment Plant. The Company is not permitted to use or occupy [building 1] until there is sufficient uncommitted reserve sewage capacity available at the Treatment Plant or the Company implements an alternative method of handling the sewage in a manner satisfactory to both Parties. The Company is also not permitted to use or occupy the building until the Parties enter into a revised Extra Strength Surcharge Agreement that addresses shortcomings and failings within the Surcharge Agreement and properly addresses the approved addition and the uncommitted reserve sewage capacity.
Under [the Settlement], the Company agreed to share the Cost of the Expansion [of the Treatment Plant] to create additional capacity necessary to handle the increased level of wastewater that will be discharged by the Company into the Municipality’s sewage collection and wastewater treatment system, and enter into a new Extra Strength Surcharge Agreement which will satisfy the requirements of the [By-law B] and include the new rates for the Company’s use of the expanded Treatment Plant.
Pursuant to subsection 391(2) of the Municipalities Act, the Municipality’s charges for 70% of the Cost of Expansion are related to the sewage or wastewater treatment services to be provided by the Municipality at a later point in time. Accordingly, the charges by the Municipality to the Company for the Cost of Expansion are consideration for the supply of wastewater treatment services.
The supply of wastewater treatment services made by the Municipality is not an exempt supply of municipal services under section 21 of Part VI of Schedule V, as the Company had the option of implementing an alternative method of handling the wastewater that is in excess of the existing parameters resulting from the expansion of [building 1].
As no other exempting or relieving provision applies, the Municipality’s supply of wastewater treatment services to the Company is taxable. In addition, the charges for the Cost of Expansion and the fees established under the new Extra Strength Surcharge Agreement for the wastewater treatment services are consideration for the taxable supply of the wastewater treatment services, and both fees are subject to the GST/HST.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed. The interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 289-257-6196. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287. Sincerely,
Maria Forte-Long
Industry Sector Specialist
Municipal Sectors Unit
Public Services Bodies and Governments Division
GST/HST Rulings Directorate
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