14 August 2002 GST/HST Interpretation 40673 - Request to be Designated a Municipality

Dear Sir:

This is further to your letter of XXXXX, in which you requested that XXXXX (the "Association") be designated a municipality for purposes of subsection 259(1) of the Excise Tax Act (the "ETA"). It is your understanding that the Association will provide certain municipal services in a residential community in XXXXX. You would like the Association to be designated so that it may claim a partial rebate of the Goods and Services Tax ("GST")/Harmonized Sales Tax ("HST") that it pays on expenses used to provide these services.

Please note that to qualify for designation as a municipality for purposes of the ETA, e.g., to claim partial GST/HST rebates, an organization must demonstrate that it provides exempt municipal services. The organization may then qualify to be designated to be a municipality under subsection 259(1) because it provides these exempt municipal services. Such exempt municipal services would generally be listed in Part VI of Schedule V to the ETA. When an organization is designated to be a municipality for purposes of subsection 259(1) of the ETA, the designation only applies to the activities specified in the designation. Accordingly, the partial rebate would be limited to the expenses the organization incurs for its activities specified in the designation.

Interpretation Requested

We understand that you are proposing to enter into an agreement with the XXXXX XXXXX (the "Township") that would refer to activities such as:

•   Water chlorination, quality testing, and distribution to homes;

•   Sewage removal involving pumping sewage to specific lagoons and chemically treating the sewage before it is released into the environment;

•   Snow removal from roadways and residents' driveways;

•   Maintenance of parks and common areas, consisting of grass cutting, planting flowers, maintaining flower beds, etc.;

•   Street lighting of main thoroughfare;

•   Cleaning adjoining canals, including weed control;

•   Maintenance of a swimming pool;

•   Maintenance of tennis courts;

•   Maintenance of a recreation centre; and

•   Maintaining the roads within your residential area.

You are requesting the Association be designated to be a municipality for purposes of the ETA.

Interpretation Given

As previously noted in this letter, exempt municipal services are generally listed in Part VI of Schedule V to the ETA. Based on the information provided, our interpretation will focus on section 21 and section 22 of that Part.

Section 21 of Part VI of Schedule V

Section 21 of Part VI of Schedule V to the ETA exempts certain municipal services provided to owners and occupants of real property situated in a particular geographic area when the services are provided by a government or municipality, or by another organization on behalf of a government or municipality, and the services are non-optional services or are performed as a result of an owner or occupant's failure to comply with an obligation imposed under a law. The exemption sets out the following key characteristics of the type of service that it covers:

1. It must be a municipal service.

Generally, a service that can reasonably be considered to be a service typically provided by a municipality to owners or occupants, such as garbage collection, fire protection, etc., would fall within the meaning of municipal service. The exemption requires that the municipal service be one that is provided to owners or occupants of real property in the municipality.

2. The municipal service must be supplied "on behalf of" a municipality.

The phrase "on behalf of" means a situation where a municipality has arranged for another person to provide a municipal service on its behalf (other than as its agent). Therefore, when a person other than a municipality provides the service, the exemption requires that the service be one for which the municipality has the responsibility of providing its residents. As an example, this would involve a situation where the Township is responsible for the roads in the particular geographic area and has arranged for the Association to maintain the roads on its behalf.

3. The municipal service is made to owners or occupants of real property

A service provided by the Association will have this characteristic if the owners or occupants of real property are the parties who are the "recipients" of the service. This characteristic is subject to the meaning of "recipient" that is defined subsection 123(1) of the ETA. If there is an amount (i.e., "consideration") payable for the service, the exemption requires that the owners or occupants are the parties who pay, or who are liable to pay, for the service. If the Township makes a payment to the Association to provide the service, then the exemption may not apply.

In addition to requiring the characteristics discussed above, the exemption is limited to those municipal services where the owners or owners or occupants have no choice but to receive the service, or when the service is performed as a result of an owner or occupant's failure to comply with an obligation imposed under a law. Certain services are excluded from the exemption, but these excluded services do not appear to be relevant to the Association's activities.

Section 22 of Part VI of Schedule V

Section 22 of Part VI of Schedule V to the ETA provides an exemption for the supply of a service, made by an organization that operates a water distribution, sewerage or drainage system and that is designated by the Minister of National Revenue to be a municipality for the purposes of this section, of installing, repairing, maintaining or interrupting the operation of a water distribution, sewerage or drainage system. This designation under section 22 only applies to persons who operate an entire water distribution, sewerage or drainage system rather than just part of any of these systems.

If the Association operates a water distribution, sewerage or drainage system, it may qualify to be designated as described above. If it is designated, its activities of water chlorination, quality testing, and water distribution may be an exempt supply of maintaining a water distribution system. Further, its activities of sewage removal and treatment may be an exempt supply of maintaining a sewerage system if the Association operates a sewerage system.

Documentary Evidence

In order to consider your request for municipal designation, we would require documentation that demonstrates that the Association is making exempt supplies of municipal services for purposes of the ETA. We will be pleased to review you request for municipal designation when you submit the documents as described below.

For instance, in order to determine whether any of the Association's services are exempt under section 21 of Part VI of Schedule V to the ETA, we would require documentary evidence that the Association's services fulfill all the conditions described above. For example, this evidence would show that the Township has the responsibility for providing the services in question (e.g., snow removal, maintenance of parks, common areas, swimming pool and tennis courts, cleaning adjoining canals, etc.), and that the Township has entered into an agreement with the Association to provide these services on its behalf. In addition, we require documentary evidence that the services are supplied to owners or occupants of real property (the "residents"), such as a copy of an agreement between the Association and the residents for these services.

A request for designation under section 22 must be supported by documentary evidence showing that the Association operates a water distribution, sewerage or drainage system, and that it is making a supply of installing, repairing, maintaining, or interrupting the system that it operates. Such evidence could include a signed contract with the Township to operate a water distribution, sewerage or drainage system as well as a complete description of the system and its components. Other documentary evidence could include copies of invoices from suppliers for the repair of the system and to residents for the supply of maintaining the system, and a copy of an agreement between the Association and the residents that describes the responsibilities of the Association for the operation and maintenance of the system.

If it is determined that the Association is making exempt supplies, the Association may then qualify to be designated to be a municipality under subsection 259(1) of the ETA to claim a partial GST/HST rebate for its expenses incurred to provide the exempt municipal services specified in the designation, i.e., the expenses incurred to supply the exempt services described in section 21 or section 22 of Part VI of Schedule V to the ETA.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretations 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 Canada Customs and Revenue Agency 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) 952-6761.

Yours truly,

Susan Eastman
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division