7 August 2003 GST/HST Interpretation 45876 - Request for Municipal Designation for Purposes of the Excise Tax Act

Dear XXXXX

This is further to your letters XXXXX in which you requested that the XXXXX (the "Organization") be designated a municipality for purposes of the Excise Tax Act (the "ETA"). We understand that you would like the Organization to be designated a municipality so that it may claim a public service body rebate of the Goods and Services Tax "GST")/Harmonized Sales Tax ("HST") incurred on expenses related to the operation and maintenance of a XXXXX comprised of various activities, which are described below, for the XXXXX.

Please note that to qualify for designation as a municipality for purposes of the ETA to claim partial GST/HST rebates for public service bodies, an organization must demonstrate that it makes supplies of municipal services that are not taxable supplies. The organization may then qualify to be designated to be a municipality under subsection 259(1) because it makes these supplies. Municipal services that are not taxable supplies are generally listed in Part VI of Schedule V to the ETA. Please note that 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 undertaken by the organization to make the non-taxable supplies of municipal services. Accordingly, the partial rebate would be limited to the expenses an organization incurs for its activities specified in the designation.

Interpretation Requested

You advised that the Organization signed a reciprocal agreement with all of the XXXXX to deal with certain matters that pertain to the operation and maintenance of the XXXXX.

To support your request for municipal designation, you submitted copies of two agreements made between the Organization and several other parties, which include a XXXXX XXXXX[.] We understand that these agreements establish a framework (XXXXX.) for the operation and maintenance of a XXXXX, referred to as the XXXXX on certain private lands; the construction, maintenance and operation of a community centre as part of the XXXXX; and the funding of the various components of the XXXXX. We understand that the users of the XXXXX are a condominium corporation and private business landowners.

The XXXXX identifies the privately held lands to be serviced by the XXXXX as being XXXXX. It describes the XXXXX as being comprised of the following:

•   A water supply system consisting of a well supply, ground storage reservoir, pumping station, a distribution system, hydrants, and water service connections;

•   A sewage system consisting of building sewer connections, sanitary sewers, sewage pumping station, force mains, sewage treatment plant, storage pond and outfall sewer;

•   A storm drainage system consisting of catch basins, manholes, pipes, ditches, culverts and retention system;

•   An irrigation system as applicable;

•   Roadways, street lighting and walkways;

•   Hydro;

•   Private garbage pick-up and disposal;

•   Community Centre; and

•   Other necessary servicing.

The XXXXX describes how the Organization will manage the cost sharing allocations for operating and depreciating costs of the XXXXX. This agreement sets out the method by which the business landowners and the condominium corporations make monthly payments to the Organization in respect of the operation and maintenance of the XXXXX.

In summary, we note that there are several parties to the agreements and each have their own responsibilities with respect to the XXXXX[.] Because of the multitude of activities involving the various parties and the cost-sharing arrangements among the parties included in the agreements, the provision of any supplies and the identity of the suppliers, if any, are unclear. After reviewing these agreements, we were unable to determine whether any discrete supplies of municipal services that would qualify for municipal designation were being made by the Organization. Rather, the agreements suggest that the Organization may be making one new supply of management services in respect of the operation and maintenance of the XXXXX on private lands to some of the other parties.

Interpretation Given

Section 259 of the ETA contains the rebate provisions for public service bodies. Pursuant to subsection 259(1), suppliers of municipal services that are not taxable supplies may apply to be designated as a municipality for purposes of the ETA in order to claim partial rebates for the GST/HST they incurred related to their activities that involve making these supplies.

There is no exemption in the ETA for municipal services. Rather, a supply is taxable unless the supply is specifically identified in Schedule V as being exempt. As previously noted in this letter, exempt municipal services are generally listed in Part VI of Schedule V to the ETA. These exemptions apply on a service-by-service basis (supply-by-supply) where specific criteria are met. Generally, these exempt municipal services would be supplied directly to consumers. Therefore, when considering whether an organization qualifies for municipal designation for purposes of subsection 259(1) of the ETA, the organization must identify the specific supply it makes that falls within any of the provisions of Part VI of Schedule V to the ETA that would entitle the organization to be designated a municipality. If no exemption applies, then the organization's supplies are taxable and the designation criteria would not be met.

Because the exemptions in the ETA apply to specific services, the Organization's activities related to the management of the operation and maintenance of the XXXXX would not fall within the exemptions in Schedule V to the ETA. Therefore, if the Organization's activities constitute a supply made by the Organization, it would be a taxable supply. Any consideration paid by the recipient of this supply would be subject to the GST/HST at the rate of 7% or 15%. As a GST/HST registrant, the Organization could recover the tax it paid on expenses incurred to make this taxable supply by means of input tax credits rather than rebates.

While the agreements suggest that the Organization may be making a supply of managing the operation and maintenance of the XXXXX we were unable to determine whether the Organization is making exempt supplies. The terms of the agreements do not identify the particular supplies that the Organization is making and the recipients of those supplies. Therefore, these agreements do not demonstrate that the Organization meets the designation criteria of making discrete supplies of non-taxable municipal services directly to consumers. Also, please note that the application for incorporation document that you provided does not show the Organization's effective date of registration as a corporation.

As noted previously in this letter, exempt (non-taxable) municipal services are generally listed in Part VI of Schedule V to the ETA. Based on the information you submitted, we are providing the following interpretations concerning sections 22 and 23 of that Part.

Section 22 of Part VI of Schedule V

An organization that operates a water distribution, sewerage or drainage system may qualify for municipal designation for purposes of section 22 of Part VI of Schedule V to the ETA. This designation does not exempt the supply an organization makes of operating another person's system; rather the purpose of this designation is to exempt any separate supply the organization makes (to consumers) of installing, repairing, maintaining, or interrupting the system. Please note that this designation only applies to entities that operate a water distribution, sewerage or drainage system in its entirety rather than just part of any of these systems.

If the Organization submits supporting documentation that demonstrates that it in fact operates a water distribution, sewerage or drainage system, then we would be pleased to consider a request from the Organization for municipal designation to exempt the separate supplies that it makes (to consumers) of installing, repairing, maintaining, or interrupting the water distribution, sewerage or drainage system in the course of operating the system.

Should you decide to submit a request for municipal designation for purposes of section 22, please note that we would require documentary evidence that demonstrates that the Organization operates a water distribution, sewerage or drainage system. Documentary evidence should include a complete description of the system and its components, which may be found in business plans, permit applications and licenses, environmental reports, etc. Documentary evidence showing that the Organization is operating a system could include a separate agreement between the Organization and the owner of the system that describes the system itself as well as the responsibilities of the Organization for the operation of the system.

Section 23

Supplies of unbottled water, including the service of delivering that water, are exempt under section 23 of Part VI of Schedule V to the ETA. If the Organization supplies unbottled water, whether or not it charges consideration for that water, it will be making an exempt supply. The Organization does not require municipal designation to make exempt supplies of unbottled water. If the Organization submits documentation to demonstrate that it is making exempt supplies of unbottled water, then it may qualify for municipal designation for purposes of claiming a municipal GST/HST rebate for expenses incurred to supply exempt water, as explained below.

Subsection 259(1) of the ETA

Note that a designation under section 22 or the provision of exempt supplies of unbottled water relate to supplies made by an organization and therefore, these provisions would not entitle a private organization to municipal GST/HST rebates. Rather, an organization must be specifically designated under subsection 259(1) of the ETA to claim municipal rebates. However, in order to qualify for this designation, the private organization must meet the legislative criteria of making supplies of municipal services that are not taxable supplies. Generally, we would see these services being made directly to consumers.

Municipal designation for purposes of the GST/HST rebate is limited to the activities specified in the designation undertaken to make supplies of municipal services that are not taxable supplies. This designation will enable an organization to claim a partial rebate for the GST/HST it paid on its expenses incurred to provide these municipal services. Municipal designation does not apply to all of an organization's activities and the GST/HST rebate that an organization may claim is limited to the expenses it incurs regarding activities specified in the designation.

If the Organization receives municipal designation for purposes of section 22 of Part VI of Schedule V to the ETA and the Organization makes separate supplies directly to consumers of installing, repairing, maintaining or interrupting the operation of a water distribution, sewerage or drainage system that it operates, then the Organization would be considered to be making supplies of municipal services that are not taxable supplies and therefore qualify for municipal designation to claim partial GST/HST rebates . However, entitlement to the rebate would be limited to the GST/HST the Organization incurred in the course of its activities that involve making exempt supplies of installing, repairing, maintaining, or interrupting the water distribution, sewerage or drainage system that it operates.

In addition, if the Organization can demonstrate that it is making exempt supplies of unbottled water as described in section 23 of Part VI of Schedule V to the ETA, then it may qualify for municipal designation for purposes of claiming municipal GST/HST rebates for expenses incurred to make exempt supplies of unbottled water.

In summary, municipal designation for purposes of the rebate is limited to activities undertaken to make specific supplies of non-taxable municipal services. Because the Organization's activity of managing the operation and maintenance of the XXXXX would not fall within any of the exemptions in Schedule V to the ETA nor would this activity meet the ETA criteria for municipal designation, any GST/HST the Organization incurred for this activity would not qualify for a municipal rebate. For instance, the municipal GST/HST rebate would not apply to expenses incurred for the construction and operation of the Community Centre or to expenses incurred for road repairs, street lighting, garbage pick-up and disposal, supervision, hydro, and other matters related to the XXXXX 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 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 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