3 January 2007 GST/HST Ruling 85807 - XXXXX Bars

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.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees collected under an agreement XXXXX, made between the XXXXX (the "municipality") and XXXXX (the "contractor") for the purpose of allowing the contractor to use a municipal road to transport goods and materials.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

On the basis of the above-noted agreement, our understanding of the facts is as follows:

1. The contractor wishes to use a municipal road for the purpose of transporting quantities of goods and materials that are significant in nature. For consideration of the amount agreed upon per mile, the municipality shall allow the contactor to haul product along a specified route on a municipal road.

2. The contractor is required to enter into a road maintenance agreement with municipality and pay haul road fees to the municipality for the use of a municipal road and the municipality will maintain the road in a reasonable state of repair.

3. Haul road fees are based on percentages of volume supplied by the contractor on a XXXXX basis and are payable by the contractor on a XXXXX basis. The contractor is to pay XXXXX of the estimated cost of maintenance of the road to be determined by the municipality.

4. If severe road damage occurs which is directly attributable to the hauling operation by the contractor, the municipality reserves the right to negotiate the costs of the damage with the contractor. If an agreement cannot be reached, both parties agree that an engineer from XXXXX will assess the damage and this assessment shall be binding.

5. The contractor shall haul weight equivalent to the secondary highway weight limits as stated in the XXXXX. Weights exceeding secondary highway weights are prohibited unless the municipality issues a XXXXX.

6. The municipality reserves the right to stop the hauling operation during time of inclement weather when it is determined that severe road damage is likely to occur.

7. If the contractor breaches any part of the agreement, the municipality reserves the right to cancel the agreement and cease the hauling operation until such time as the concerns have been addressed.

8. The agreement is valid for XXXXX and thereafter from year to year, subject to periodic review based on production volumes.

Ruling Requested

You would like to know whether the amounts payable by the contractor; i.e., haul road fees and estimated costs of road maintenance, to the municipality are consideration for a taxable supply and thus subject to the 6% GST/HST.

Ruling Given

Based on the facts set out above, we rule that the amounts payable by the contractor; i.e., haul road fees and estimated costs of road maintenance, to the municipality are consideration for a taxable supply pursuant to section 165 and thus subject to the 6% GST/HST.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

The general rule under the ETA in section 165 is that all supplies of goods and services made in Canada are subject to the GST/HST at the rate of 6% (or at the rate of 14% for supplies made in New Brunswick, Newfoundland and Labrador, and Nova Scotia). Part VI of Schedule V contains a list of exceptions for a limited number of supplies made by municipalities and other public sector bodies that are identified as being exempt from the GST/HST. However, there are certain supplies made by municipalities that are specifically excluded from these exemptions. We note that paragraph 20(l) of Part VI of Schedule V excludes the following:

"A supply of a right to enter, to have access to or to use property of the ... municipality ...".

It is our view that the substance of the agreement between the municipality and the contractor is for a supply made by the municipality of the right to use portions of a municipal road for the purpose of transporting goods; i.e., a supply of a right to use municipal property. This supply is specifically excluded from the exemptions in section 20 of Part VI of Schedule V for certain supplies made by municipalities and therefore this supply is taxable.

Because the hauling operation involves goods that are significant in nature and likely to cause severe damage to the municipal road, we understand that the municipality requires the contractor to enter into a road maintenance agreement which essentially provides for the municipality to recover the extra costs it will incur to maintain the road as a result of the contractor' hauling operation. Although the agreement discusses road maintenance costs, the purpose of the agreement is to allow the contractor to transport goods along a portion of a municipal road for a specified period and therefore, the only supply acquired by the contractor is the right to use a municipal road. The consideration for this right, which includes haul road fees and any other amounts, are based on percentages of volume hauled by the contractor as well as part of the municipality's estimated cost of maintaining the road.

Thus, in exchange for a supply of a right to transport goods along a municipal road, the contractor is required to pay amounts to the municipality on a quarterly basis throughout the term of the agreement. That the municipality requires the contractor to cover additional maintenance costs for road damage that is attributable to the hauling operation does not alter the nature of the supply. In addition, we note that the municipal road is property of the municipality for which it would be required to maintain in any event.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-6761.

Yours truly,

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

2007/01/04 — RITS 86262 — Application of GST to Container Recycling Fees