31 March 2000 GST/HST Interpretation 6837/HQR443 - Treatment of Infrastructure Servicing Agreements

Dear XXXXX

I refer to your letters of October 3, 1994 and November 26, 1996 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to municipal infrastructure activities and latecomer charges imposed by the XXXXX XXXXX (the City). This matter has been the subject of an extensive review and was recently finalized.

On November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the CCRA).

Our understanding of development arrangements between the City, frontenders and latecomers is as follows.

1. Under XXXXX a council may in a land use bylaw require that, as a condition of a development permit being issued, the applicant (the frontender) enter into an agreement with the City to:

a) construct or pay for the construction of a road required to give access to the development;

b) to construct or pay for the construction of:

(i) a pedestrian walkway system to serve the development, or

(ii) a pedestrian walkway to connect the pedestrian walkway system serving the development with a pedestrian walkway system that serves or is proposed to serve an adjacent development, or both;

c) to install or pay for the installation of public utilities, other than telecommunication systems or works, that are necessary to serve the development;

d) to construct or pay for the construction of:

(i) off-street or other parking facilities, and

(ii) loading and unloading facilities;

e) to pay an off-site levy or redevelopment levy; and

f) to give security to ensure that the terms of the agreement under this section are carried out.

2. Under XXXXX [a]n agreement entered into in XXXXX require the frontender for a development permit or subdivision approval:

a) to pay for all or a portion of the cost of an improvement constructed or paid for in whole or in part by a municipality at any time prior to the date of approval of the development permit or subdivision application, or

b) to construct or pay for all or a portion of an improvement with an excess capacity.

3. Under XXXXX an agreement referred to in XXXXX that obliges an applicant for a development permit or subdivision approval to construct or pay for an improvement with an excess capacity may also provide for the reimbursement of the cost incurred or payment made in respect of the excess capacity together with interest calculated at the rate fixed pursuant to subsection (4) on the amount of the cost until the land that benefits from the excess capacity is developed or subdivided.

4. Under XXXXX (or previously under XXXXX (now repealed)), if the City has at any time, entered into an agreement providing for reimbursement of payments made or costs incurred in respect of the excess capacity of an improvement by an applicant for a development permit or subdivision approval, the City must, when other land that benefits from the development (i.e., the latecomers) that is developed or subdivided, enter into an agreement with the applicant for a development permit or subdivision approval for the other land, and that agreement may require the latecomer to pay an amount in respect of the improvement, as determined by the City, which may be in excess of the cost of the improvement required for the proposed development or subdivision.

5. XXXXX (a) defines excess capacity to mean any capacity in excess of that required for a proposed development or subdivision.

6. The City enters into front-end servicing agreements with the frontender. Article 6 of the standard front-end servicing agreement between the City and the frontender provides that the front-end developer owns the tangible infrastructure up until the date that the City issues the Final Acceptance Certificate for the infrastructure. The City then assumes ownership of the tangible infrastructure for nil or nominal consideration. In article 2 of the servicing agreement it states that the City acknowledges that the frontenders are required to pay for the construction of all or a portion of the storm and sanitary trunk sewers in excess of the requirement for the said lands. The City shall, at such time as other land benefited by the storm and sanitary trunk sewers is developed or subdivided, as the case may be, enter into agreements with the applicants for development permits or subdivision approval (i.e., latecomers) for that other land requiring the latecomers to pay an amount as specified in a schedule attached to the agreement in respect of the storm and sanitary trunk sewers as a condition of approval of their subdivision. If and at such time as the City receives from the latecomers the aforesaid payments, the City agrees to pay the frontenders.

Interpretation Requested

In your letter four scenarios were presented:

A) Private, front-end developer selling tangible infrastructure to the City.

B) Private, front-end developer selling intangible oversizing rights to a private, subsequent developer.

C) City as the front-end developer selling intangible oversizing rights to a private subsequent developer.

D) Private, front-end developer selling intangible oversizing rights to the City as the subsequent developer.

Based on these scenarios, you have asked the CCRA to provide an interpretation on the following issues:

Scenario A:

The infrastructure, once installed, is considered to be real property for purposes of the Excise Tax Act (ETA). The infrastructure transferred to the City after January 1, 1991, would be subject to GST, in accordance with the subsection 168(5) of the Act on the nominal or nil consideration.

The City as a GST registrant will be responsible for self-assessing the GST on this supply and for remitting this GST directly to the Receiver General, in accordance with subsections 221(2) and 228(4) of the Act.

Scenario B:

The front-end developer (the frontender) owns intangible oversizing rights and the subsequent developer (latecomer) is paying the latecomer fee to reimburse the frontender the cost of oversizing the frontender's infrastructure and the payment is not a right to use real property of the City.

The City is required by its role as a middleman to forward the latecomer's oversizing fee to the frontender.

Scenario C:

The City as a municipal land developer involved in municipal land development declares a section 211 election in respect to that development and as a result any oversizing rights sold by the City in relation to that development would be subject to the GST.

Should the City not declare a section 211 election in respect to the subdivision development, the oversizing sold by the City in respect to the subdivision development would be an exempt supply in accordance with section 22 of Part VI of Schedule V to the ETA.

Scenario D:

The frontender is making a taxable supply of the oversizing rights to the City as the subsequent developer, and therefore, would collect and remit the GST on this supply.

Interpretation Given

I have responded to the scenarios above in the order in which they were presented.

Scenario A:

1. The supply of the infrastructure by the frontender to the City is a taxable supply of real property when transferred to the City after 1990.

Pursuant to subsection 168(5) of the ETA, GST in respect of a taxable supply of real property by way of sale is payable on the earlier of the day ownership of the property is transferred to the recipient and the day possession of the property is transferred to the recipient under the agreement for the supply. However, where the value of the consideration for the supply of real property is not ascertainable on the day the tax is payable in accordance with subsection 168(5), the tax is payable on the value of the consideration on the day the value becomes ascertainable, pursuant to 168(6) of the ETA. It is our view that the funds collected as latecomer fees by the City from latecomers is the ascertainable value of the consideration for the supply of real property made by the frontender to the City.

Pursuant to subsection 221(1) of the Act, the frontender is not required to collect the GST from the City. Under subsection 228(4) of the Act, the City shall remit the GST due on the consideration for the supply of the real property from the frontender by filing form GST 60 (Goods and Services Tax Return for Acquisition of Real Property) on or before the last day of the month following the month in which the tax became payable.

Pursuant to paragraph 20(c) of Part VI of Schedule V to the Act, a supply by a government or municipality or by a board, commission or other body established by a government or municipality of a licence, permit, quota or similar right (other than such a right supplied in respect of the importation of alcoholic beverages), and the supply of any service in respect of an application for such a right is an exempt supply. With respect to the charge and collection of the latecomer fee from the latecomer by the City, under the terms of the agreement between the City and the frontender, the City having required the frontender to install the excess or extended services agrees to collect from latecomers, latecomer charges for connecting to the infrastructure built by the frontender, title of which was transferred to the City. All fees must be paid before the City will issue a development permit to the latecomer.

It is our opinion that the latecomer charges are made in respect of the supply of the permit. Pursuant to paragraph 20(c) of Part VI of Schedule V to the Act, the supply of the permit is an exempt supply. Therefore, GST will not apply to the latecomer fees charged by the City to the latecomers.

As a result of the use of the oversized infrastructure i.e., sewer, drainage, water distribution system or roadways to make exempt supplies such as those supplies under sections 21 and 22 of Part VI of Schedule V, the City is eligible for the municipal rebate of 57.14% for the GST incurred on the inputs.

Scenario B:

It is our view that the frontender is making a supply of real property to the City as explained above in Scenario A.

Scenario C:

It is our view that the payment made by the latecomer to the City is consideration for the exempt supply of a permit under section 20(c) of Part VI of Schedule V to the ETA.

Scenario D:

As explained above in my response to Scenario A, the frontender is making a supply of real property to the City. The fact that the City may be acting as a subsequent developer (latecomer) does not alter the tax status of the supply.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%.

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 CCRA with respect to a particular situation.

Should you have any further questions or require clarification on municipal services please contact the undersigned at (613) 941-3268. Questions relating to real property should be addressed to Mr. Costa Dimitrakopoulos, Manager, Real Property at (613) 954-3772.

Yours truly,

O.W. Newell, CGA
Manager
Municipalities and Health Care Services