15 January 1999 GST/HST Interpretation HQR000141936 - Application of the GST/HST to Project Costs and to an Annual Monitoring Service Fee

GST/HST Rulings and Interpretations  Directorate Place Vanier, Tower C, 10th Floor 25 McArthur Road Vanier, Ontario K1A 0L5XXXXX XXXXX XXXXXXXXXX

Case #: HQR000141936File #: 11740-1/11595-1January 15, 1999

Subject:

Application of the GST/HST to Supplies Made by XXXXX to the City XXXXX

XXXXX

I refer to XXXXX facsimile message of October 29, 1998 regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by XXXXX. ("XXXXX") to the City of XXXXX (the "City"). As XXXXX is presently on secondment to Headquarters, he requested that I send my reply to you.

Our understanding of the facts is as follows:

Statement of Facts

The City and XXXXX entered into an XXXXX Services Agreement (the "Agreement") dated

XXXXX

•   Section 2.0 of the Agreement is entitled "Scope of XXXXX Services". Sections 2.1 and 2.2 provide, in part, as follows:

2.1 The City hereby retains XXXXX to implement the Project in its Facilities described in Appendix A(1), and more particularly to provide the XXXXX Feasibility Study and Concept Report, designs, and Working Documents, act as general contractor to implement the improvements and provide certain post-construction services, all as set out in subsequent sections of this Contract and as approved by the City. The City agrees to pay XXXXX for the work as provided in Section 22 of this Contract.

2.2 The parties agree that the scope of XXXXX services under this contract is set out in the Appendix A(3) to this contract and is taken from the Feasibility Study and Concept[.]

Report submitted by XXXXX to the City in May, 1997, a copy of which is attached hereto as Appendix A(2).

•   Appendix A(1) lists the following: XXXXX XXXXX

•   Included under the heading "Summary" of the Feasibility Study and Concept Report (the "Report") is the following:

XXXXX has prepared this Feasibility Study to define annual XXXXX and operating cost savings an capital costs associated with a program of XXXXX conservation and building renewal measures. The program of measures includes new lighting equipment in podium areas and the Council Chamber at XXXXX, a new chiller at XXXXX fan system and control measures at XXXXX and XXXXX efficient gas boiler installations in six other buildings.

Equipment to be provided under this program includes:

•   20 new boilers

•   4,000 renovated light fixtures

•   new centrifugal refrigeration chiller

•   The Agreement also indicates that:

... the XXXXX has approved the City entering into this Agreement with XXXXX for retrofit work to be performed in the amount of XXXXX based upon the XXXXX XXXXX Feasibility Study.

•   The City will pay the contract price based upon the monthly XXXXX savings that it will realize as a result of the work performed by XXXXX[.] The City is obligated to pay XXXXX over the life of the contract XXXXX from the guaranteed annual savings resulting from the XXXXX savings retrofits. Once the program is paid for, all savings realized subsequently revert to the City. In the event that the savings realized over the XXXXX year Contract term do not cover the cost of the retrofits, then the Contract is terminated and XXXXX is responsible for the balance.

XXXXX is a GST registrant. XXXXX has provided a proposed repayment schedule which is included in the Agreement as Appendix A(4). In Appendix A(4), an annual interest rate of XXXXX is calculated on the outstanding monthly balances. As well, the project is scheduled to be completed by XXXXX. The City will make the first monthly payment in XXXXX[.]

Information Requested

The City has requested an interpretation with respect to the three issues below.

First Issue

An interpretation is requested confirming that the GST is applicable to the XXXXX project cost and to the XXXXX annual monitoring service fee.

Second Issue

That the GST is payable on the entire XXXXX project cost in XXXXX when the project was completed, pursuant to paragraph 168(3)(c) of the Excise Tax Act (the "Act").

Third Issue

That the GST is not applicable on the interest charges over the entire contract term XXXXX based on section 161 of the Act.

Information Provided

First Issue

Pursuant to subsection 153(1) of the Act the value of the consideration for the supply and installation of the equipment is XXXXX[.]

As the contract stipulates a monthly charge for the annual monitoring service fee in the amount of XXXXX pursuant to subsection 168(1) of the Act, the GST is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration becomes due. Therefore, the GST is payable by the City on a monthly basis. The tax, collected by XXXXX, would be remitted in accordance with their reporting period.

Second Issue

Paragraph 168(3)(c) of the Act does not apply to this situation. However, paragraph 168(3)(a) of the Act does. As the project was completed in XXXXX possession of the property transfers to the City at that time. Pursuant to paragraph 168(3)(a) of the Act, the GST is calculated on the value of the consideration and the tax is payable on or before the last day of the calendar month immediately following the month when the possession of the property was transferred to the City (i.e. payable by XXXXX[.]

Section 161 of the Act is not applicable to this particular case. The supply has been completed pursuant to paragraph 168(3)(a) of the Act and the GST is calculated on the value of the consideration XXXXX[.] Amounts paid as interest would represent consideration for an exempt financial service.

Analysis

Subsection 168(3) of the Act provides:

Notwithstanding subsections (1) and (2), where all or any part of the consideration for a taxable supply has not been paid or become due on or before the last day of the calendar month immediately following the first calendar month in which

(a) where the supply is of tangible personal property by way of sale, other than a supply described in paragraph (b) or (c), the ownership or possession of the property is transferred to the recipient,

(b) where the supply is of tangible personal property by way of sale under which the supplier delivers the property to the recipient on approval, consignment, sale-or-return basis or other similar terms, the recipient acquires ownership of the property or makes a supply of it to any person, other than the supplier, or

(c) where the supply is under an agreement in writing for the construction, renovation or alteration of, or repair to,

(i) any real property, or

(ii) any ship or other marine vessel, and it may reasonably be expected that the construction, renovation, alteration or repair will require more than three months to complete, the construction, renovation, alteration or repair is substantially completed,

tax under this Division in respect of the supply, calculated on the value of that consideration or part, as the case may be, is payable on that day.

The contract specifies two separate amounts, XXXXX for the supply and installation of the equipment and XXXXX for an annual Project Monitoring Service.

The Department has indicated in previous letters that a contract for the installation of equipment (i.e. boilers and light fixtures) does not come within the provisions of paragraph 168(3)(c) of the Act. Although once installed, the equipment is considered to form part of the real property, the contract for the supply and installation cannot be considered the construction, renovation or alteration of, or repair to, real property. The contract between XXXXX and the City does not fall within the provisions of paragraph 168(3)(c) of the Act.

The supply by XXXXX to the City would, however, fall within paragraph 168(3)(a) of the Act. The Department has indicated in previous letters that where equipment is purchased on a supply and install basis, under the provisions of section 138 of the Act, the installation service is considered to be incidental to the supply of the equipment.

It is also necessary to consider the single/multiple supply issue with respect to the supply and installation of the equipment. If the contract were considered to represent multiple supplies, then paragraph 168(3)(a) of the Act would apply to each of those supplies. The liability for tax would be determined based upon ownership or possession transferring to the City at each of the locations. Alternatively, if the contract were considered to be a single supply, then the liability for tax would be determined based upon ownership or possession transferring to the City upon completion of the contract.

When viewed in its entirety, the contract between XXXXX and the City can be considered a single supply for the supply and installation of equipment with the exception of the annual monitoring fee.

When determining whether or not a single supply has been made, it is necessary to apply the Department's Administrative Policy P-077R, Single and Multiple Supplies. Policy P-077R indicates that it is necessary to first consider three factors:

1. Whether Some Elements Are Inputs or Themselves Supplies

In identifying and analyzing the various elements of a package of goods and/or services, a distinction must be made between elements that are actually supplied to the recipient and those that are simply inputs consumed in making the supply. Further analysis would be necessary only if two or more elements remain, each with a different tax status, after all of the inputs have been eliminated.

In this particular case, the elements (i.e. the work carried out at each location) would not be considered inputs. Each would be considered a supply.

2. The Provisions or Terms of the Agreement, Contract or Invoice

Where property and/or services are provided under an agreement, contract or invoice, the provisions or terms of the agreement, contract or invoice may help to determine the likelihood of a single supply or multiple supplies. Nevertheless, an agreement should not be viewed in isolation. Rather, it must be examined in the context of other factors such as the intent of the parties, the circumstances surrounding the transaction, and the supplier's usual business practices. It may be appropriate in some cases to discount the terms of an agreement if they do not reflect the reality of the transaction.

An analysis of the agreement may also help determine whether some elements are inputs or part of a supply. For example, an agreement may specify that just one element is to be supplied, although it may refer to other elements to be acquired by the supplier in the course of the transaction. In such a case, the analysis may lead to the conclusion that the elements acquired by the supplier in the course of the transaction are merely inputs used in making a single supply.

In this particular case, the City has entered into a contract for the supply and installation of equipment at various locations. Given that the payment terms are dependent upon the total XXXXX savings that will be realized for all locations combined, the intent of the parties is that the contract is for a single supply.

3. The Number of Suppliers and/or Recipients

It is also important to consider whether a combination of goods and/or services is supplied by the same supplier or different suppliers, and whether there is more than one recipient. The provision of goods and/or services by two or more suppliers indicates that multiple supplies are being made, notwithstanding that the various elements are provided together. Similarly, the acquisition of goods and/or services by two or more recipients also suggests that multiple supplies are being made.

In this particular case, there is only one supplier, XXXXX and one recipient, the City.

Policy P-077R, also indicates that in some cases, one or more of the three factors previously described will provide sufficient evidence to support a determination. But if the answer is still not clear, then it may be useful to ask the following three questions.

No one question is more important than another. Each question should be weighted relative to the other questions according to the facts of each case. In some cases, it may be apparent that a particular question is overwhelmingly more important than the others, rendering the answers to the other questions irrelevant.

1. If the recipient did not receive all of the elements, would each element, in itself, and in the context of this transaction, be of any use to the recipient? [If yes, likely multiple supplies; if no, likely a single supply.]

In the context of this transaction, the answer is no. The contract price and payment terms are such that all elements must be supplied. Therefore, completing work at one of the locations specified in the contract but not at another would not be of use to the recipient.

2. Is the provision of a particular element contingent on the provision of another element? [If yes, likely a single supply; if no, likely multiple supplies.] This question seeks to establish the strength of the relationship between the different elements. In this regard, one looks at the structure of the transaction in the context of how the supplier conducts business.

Considering the structure of the transaction in the context of how the supplier conducts business, the answer is yes. Equipment must be supplied and installed at each location in order to satisfy the contract and the payment terms.

3. Is the recipient made aware of the specific elements (in detail) that are part of the package? [If yes, likely multiple supplies; if no, likely a single supply.] It is not unusual for a recipient to be made aware of the various elements that make up a package of goods and/or services. This question attempts to establish the relative importance, if any, of the individual elements and the emphasis put on those elements. It is important to consider the manner in which the supplier of the package conducts business and structures the transaction.

In this case, the answer would be yes. However, based upon the manner in which the supplier conducts its business and the structure of the transaction, an argument can be made that the contract is for a single supply with respect to the supply and installation of the equipment.

It is understood that the project was completed in XXXXX[.] Therefore, this is the time when possession of the property was transferred to the City.

The annual Program Monitoring Services fee would, however, be considered a separate supply of a service.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 957-8222.

Yours truly,

Tim A. Krawchuk
Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

Legislative References:	Paragraph 168(3)(a), Definition of Financial Service s. 123(1)
NCS Subject Code(s):	I-11740-1 / 11595-1