26 November 1996 GST/HST Interpretation 11595-2[1] - Financing and Loan Agreements

Dear Sir:

I refer to your letter of August 6, 1996, requesting an application ruling with respect to a financing agreement between XXXXX (the City) XXXXX for the construction of a portion of XXXXX[.]

1. Pursuant to XXXXX (the ByLaw) was created by City Council allowing City Council to incur indebtedness on behalf of the City by entering into an agreement in the total amount of $XXXXX with XXXXX for the purpose of financing the construction of a portion of XXXXX. The ByLaw was approved by City Council on XXXXX[.]

2. The City will repay the indebtedness to XXXXX within XXXXX years of the completion date of the construction of the XXXXX which shall not be later than XXXXX, with no interest payable if repaid and interest thereafter, if not fully paid as aforesaid, on the unpaid balance at the prime lending rate of the XXXXX plus XXXXX percent per annum computed from day to day.

3. According to Article XXXXX of the ByLaw, the sum of $XXXXX and any interest owing thereon shall be repaid by the XXXXX[.]

•   from development charges imposed by the City on the developers in respect of lands in the vicinity of such construction which are to be imposed specifically for such purpose,

•   in respect of the amount outstanding, in the year in which repayment becomes due, there shall be levied and raised on all ratable property in the City an amount sufficient to pay the amount outstanding which shall be collectable at the same time and in the same manner as other rates and taxes.

4. On XXXXX, the City entered into an agreement with XXXXX pursuant to the ByLaw, in which XXXXX extended XXXXX interest free to the City for a period of XXXXX years. Construction completion date of the XXXXX is defined in the agreement as the earlier of XXXXX or the date of substantial completion, or such later date as XXXXX may agree to.

5. The City entered into an agreement (the Agreement) with XXXXX and XXXXX XXXXX (the developers) on XXXXX XXXXX in which the City advanced to the developers the $XXXXX the City received from XXXXX for the construction of the XXXXX will receive $XXXXX and XXXXX will receive $XXXXX. These amounts are to be paid back to the City per Articles XXXXX and XXXXX of the Agreement.

6. The $XXXXX will be utilized by the developers as partial funding for XXXXX XXXXX[.]

7. Under Article XXXXX of the Agreement, XXXXX shall dedicate the land required for the XXXXX to the City at no cost to the City.

8. Under Article XXXXX share of the $XXXXX shall be repayable by XXXXX to the City as and when approval for subdivision is granted by the subdivision authority at the rate of $XXXXX for each acre included in each plan of subdivision within XXXXX lands.

9. Under Article XXXXX share of the $XXXXX shall be repayable by XXXXX to the City as and when approval for the subdivision is granted by the subdivision authority at the rate of $XXXXX for each acre included in each plan of subdivision within XXXXX lands.

10. Pursuant to Article XXXXX of the Agreement, in the event any part of XXXXX share or XXXXX share of the $XXXXX remains unpaid within XXXXX years of the completion date of the XXXXX interest shall be paid by XXXXX and XXXXX to the City from and including the completion date at the rate of interest charged from time to time by the XXXXX[.]

Ruling Requested

The $XXXXX payment by XXXXX to the City pursuant to the XXXXX, agreement, and the $XXXXX payment by the City to the developers, pursuant to XXXXX XXXXX, agreement, are financing arrangements and do not represent consideration payable for taxable or exempt supplies under the Excise Tax Act (the Act).

Ruling Provided

XXXXX is making an exempt supply of a financial service, as defined in paragraph (g) of the definition of financial service in subsection 123(1) of the Act, to the City. The consideration for the supply of the financial service made by XXXXX to the City is the interest payable on the $XXXXX advanced to the City, the interest payment contingent upon the repayment of the $XXXXX within the specified time frame.

The City is making an exempt supply of a financial service, as defined in paragraph (g) of the definition of financial service in subsection 123(1) of the Act, to the developers. The consideration for the supply of the financial service made by the developers to the City is the interest payable on the $XXXXX advanced to the City, the interest payment contingent upon the repayment of the $XXXXX within the specified time frame.

The City, having made an exempt supply of a financial service to the developers, is not entitled to claim input tax credits for GST incurred in respect of purchases related to the exempt supply. Pursuant to subsection 259(3) of the Act, the City, as a municipality, is entitled to the municipal rebate of 57.14% of non-creditable tax incurred in respect of purchases related to the exempt supply.

This ruling is subject to the general limitations and qualifications outlined in the GST Memorandum Series Section 1.4. We are bound by this ruling provided that none of the above issues are presently under audit, objection or appeal, there are no relevant changes in the future to Excise Tax Act, and provided that you have fully described all necessary facts and transactions for which you requested a ruling.

Should you have any questions please contact Ms. Enikö Vermes, Manager, Municipalities at (613) 954-5127 or Mr. Owen Newell, Policy Officer, Municipalities at (613) 954-4280.

Yours truly

J.A. Venne
Director
PSB's and Government
GST Rulings and Interpretations