3 June 1999 GST/HST Interpretation HQR0001806 - Application of GST/HST To Strata Development Fees

Dear XXXXX

Thank you for your letter of May 12, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain supplies made by a not-for-profit corporation. Your query arises from our letter to you of December 4, 1998, file HQR0001254.

All legislative references are to the Excise Tax Act (the Act).

You have described the following scenario:

1. A not-for-profit corporation (the Corporation) supplies property and services to the owners or lessees of condominium units in a bare land strata development.

2. The Corporation is not registered for the GST/HST and does not claim input tax credits.

3. The owners and lessees pay an annual fee to the Corporation. The aggregate fee paid by the owners and lessees is designed to cover expenses incurred by the Corporation for the strata development for the next year. The fees paid to the Corporation exceed XXXXX annually.

4. The fee includes a contingency amount of approximately XXXXX of the total fee, which is meant to cover cost overruns and unanticipated expenses incurred by the Corporation.

5. The supplies made by the Corporation to owners and lessees of the units include the following:

•   Electricity

•   Repairs and maintenance

•   Groundskeeping

•   Garbage removal

•   Insurance

•   Management fees

•   Water and sewer

•   Snow removal and street cleaning[.]

6. The owners and lessees of the condominium units occupy those units as their principal residence.

Interpretation Requested

Do supplies of the property and services referred to above made by the Corporation to owners or lessees of a condominium unit in the bare land strata development fall within the exempting provisions of section 6 of Part VI of Schedule V to the Act?

Interpretation Given

Based on the information provided, it is our view that the supplies of property and services referred to above made by the Corporation do not fall within the exempting provisions of section 6 of Part VI of Schedule V to the Act for the reasons outlined below.

The supplies made by the Corporation appear to be services, and it is true that the direct cost exemption provided under section 6 may apply to services (as well as tangible personal property). However, under the definition of "direct cost" in subsection 123(1), the direct cost of supplying a service includes only the cost of a service that was purchased "for the purpose of making a supply by way of sale of the ... service".

Therefore, the cost of other inputs used in making a supply of a service, such as employee costs, costs of articles or materials, administrative costs or costs of other services used as inputs, are not included in the "direct cost" of a service under subsection 123(1).

It appears that the direct cost of any services acquired by the Corporation for supply to the owners and lessees would be less than the actual costs incurred in providing such services. For this reason, the direct cost exemption would not apply since it applies only where the consideration for the supply is equal to or less than the direct cost. That is not the situation here, given the lesser value of "direct cost". In fact, even if the direct costs were equal to the actual costs in this situation, the direct cost exemption would not apply since the consideration (i.e[.], the annual fee) is set at approximately XXXXX above the actual costs.

You indicated that the Corporation's revenues from these supplies would exceed $XXXXX annually. As the Corporation would therefore not be a small supplier as determined under subsection 148(1), the Corporation would be required to register for the GST/HST and collect tax on the supplies referred to above. Subject to the general provisions of the Act, the Corporation would be entitled to input tax credits in respect of the GST/HST payable on property and services used to make those supplies.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4393. Should you have questions or require information on other GST/HST matters, we invite you to contact your district Tax Services Office XXXXX[.]

Yours truly,

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate