21 December 2007 GST/HST Interpretation 86844 - Tax Status of Sewer Services Supplied by a Private Developer

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to private sewer services provided in the residential subdivision of XXXXX (the Subdivision).

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.

Statement of Facts

On the basis of your letter and attachments as well as our additional research, we understand the facts as follows:

XXXXX

Ruling Requested

You would like to know whether the sewer services provided by XXXXX operating as XXXXX to the lot owners in the Subdivision are exempt supplies pursuant to section 21 of Part VI of Schedule V.

Ruling Given

Based on the facts set out above, we rule that the sewer services provided by XXXXX operating as XXXXX to the lot owners in the Subdivision are not exempt and are therefore taxable supplies. Pursuant to subsection 165(1), every recipient of these taxable supplies is required to pay the GST/HST in respect of these supplies calculated at the rate of 6% on the value of the consideration for these supplies.

Effective January 1, 2008, the rate of the GST will be reduced from 6% to 5% and the rate of the HST from 14% to 13%. The new rates will apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules will apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

Subsections 165(1) and (2) require that every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 6% or 14% for supplies made in a participating province (i.e., New Brunswick, Nova Scotia and Newfoundland and Labrador) on the value of the consideration for the supply. Further, every person who makes a taxable supply shall pursuant to subsection 221(1) as agent of Her Majesty in right of Canada collect the GST/HST payable by the recipient of the supply. Subsection 228(2) requires the person to remit the net tax to the Receiver General. A "taxable supply" is defined to be a supply made in the course of a commercial activity where a "commercial activity" is defined to include a business of a person except to the extent that the business involves making exempt supplies.

Section 21 of Part VI of Schedule V exempts a supply of a municipal service made by a municipality or government or on behalf of a municipality or government to a recipient that is an owner or occupant of real property situated in a particular geographic area, where the recipient has no option but to receive the service from the municipality or government. For this section to apply to the sewer services provided by XXXXX, the services must satisfy five essential elements set out therein:

1. There must be a supply;

2. The supply must be that of a municipal service;

3. The supply must be made to the owner or occupant of real property situated in a geographic area;

4. The supply must be made on behalf of the XXXXX; and

5. The supply must be one provided in circumstances where the owner or occupant has no option but to receive the supply from the XXXXX.

If any one of these elements is not present the supply will not come within section 21 of Part VI of Schedule V and therefore not be an exempt supply pursuant to this section. We note that the elements in question are whether the sewer service supplied by XXXXX is a municipal service, whether XXXXX supplies this service on behalf of the XXXXX and whether the recipients have no option but to receive this service from the XXXXX.

We understand that essentially, you are asserting that XXXXX is currently supplying sewer services on behalf of the XXXXX on the basis that the bylaws and policies of the XXXXX require that all development be connected to a sewer system; there exists an expectation that in the future, the XXXXX may assume operation of the sewer system in the Subdivision if it becomes economically feasible to do so; and it is cost prohibitive for the XXXXX to provide the sewer services in question at this time.

The purpose of section 21 of Part VI of Schedule V is to exempt a municipal service supplied to property owners and occupants of real property where the service is one that is usually funded from the municipality's general revenues and when the service is one that only the municipality can provide. This section also addresses a situation where a private company acts as the legal supplier in providing a municipal service to property owners and occupants of real property on behalf of the municipality. The references to 'municipal service' and 'on behalf of' qualify the nature of the service in question in the sense that it would fall within the mandate of the municipality to provide the service to the residents within its jurisdiction. A finding that a person is making a supply on behalf of a municipality must be supported by facts and documentary evidence that the municipality has a responsibility to provide the service in question to the residents in its jurisdiction and has a written agreement with a particular supplier for the provision of these services on its behalf. We also note that generally, municipalities are required to enact bylaws to authorize agreements between them and other persons pursuant to which the other persons will supply a municipal service on behalf of the municipalities and the residents will be legally bound to pay these persons for the service.

The documentation you provided indicates that the XXXXX has not engaged XXXXX to supply sewer services in the Subdivision on its behalf. The facts also indicate that the particular sewer services in question are not supplies that the homeowners in the Subdivision have no option but to receive from the XXXXX, as that municipality's bylaws permit sewer services to be supplied by private companies acting on their own behalf.

We understand that the policies and bylaws of the XXXXX impose certain requirements on developers as well as homeowners and owners of other buildings and facilities to be connected to an approved sewer system. However, compliance with bylaws and regulations is not determinative of a supplier making supplies to owners and occupants of real property on behalf of a municipality.

According to your letter, the XXXXX does not have a budgetary allocation to provide sewer services in the Subdivision. There are no legal contracts or written agreements between XXXXX and the XXXXX for the provision of sewer services within the Subdivision on behalf of that municipality. Further, our additional research of provincial legislation in XXXXX that applies to municipalities and their activities; i.e., the XXXXX, indicates that there is no legal requirement for municipalities to provide sewer services. Rather, these Acts are permissive in nature with respect to the provision of any service by municipalities and the imposition of requirements in relation to municipal services, such as requiring persons to do things with their property. Where municipalities chose to impose requirements for services, which would include sewer services, they must do so bylaw.

We understand that the XXXXX enacted the XXXXX Bylaw XXXXX under the authority of the XXXXX[.] This Bylaw applies to persons applying for approval of subdivision under the XXXXX or applying for development other than subdivision, whether as owner of the property or as agent for the owner. Approval for a plan of subdivision or development includes a requirement that the applicant construct a sewage collection system or on-site sewage disposal of effluent unless otherwise approved by a XXXXX[.] Essentially, we understand that this means that sewer services must be available in a subdivision or development within the boundaries of the XXXXX.

XXXXX Bylaw XXXXX only imposes a requirement on a developer to construct a sewage collection system or on-site sewage disposal system in a subdivision or development in accordance with certain standards as a condition of approval of a subdivision or development. It does not give any indication that there is an obligation on the part of the XXXXX to provide sewer services, that sewer services are supplies that owners and occupants of real property have no option but to receive from XXXXX, and that it represents an affiliation or agreement between the XXXXX and private companies for the provision of sewer services to owners or occupants of real property on behalf of the XXXXX. Further, the provincial legislation pertaining to municipalities and their activities suggests that the XXXXX would be required to enact a bylaw to authorize XXXXX to provide sewer services on its behalf.

We were advised that in XXXXX approved a variance to the XXXXX Bylaw XXXXX in connection with the Subdivision acknowledging servicing from private sanitary sewer systems and to indicate that the XXXXX has no responsibility for a sewer system or to provide sewer services in the Subdivision. XXXXX. It is our view that this variance further demonstrates that the XXXXX is not responsible for private sewer systems owned and operated by private businesses nor is it responsible for providing sewer services to land owners served by those private sewer systems and it corroborates that private companies, such as XXXXX, are not providing sewer services on behalf of the municipality.

We recognize that when a municipality itself supplies non-optional sewer services to owners or occupants of real property or enters into a legal contract or written agreement with a private contractor to provide such services on its behalf, these services would generally be exempt from GST/HST. In contrast, sewer services supplied by private businesses acting on their own behalf are taxable, which is the case for the sewer services in the Subdivision: this is a private system owned and operated by XXXXX on its own behalf and for which it operates independently of the XXXXX. In summary, the factors that indicate that the sewer services supplied by XXXXX are not made on behalf of the XXXXX and that these are not services for which owners and occupants of real property have no option but to receive from the XXXXX are that the XXXXX does not have a legal responsibility to provide sewer services in the Subdivision, it has not made any budgetary allocation for such services, nor has it entered into a legal contract or written agreement with XXXXX for the provision of these services on its behalf.

We understand that it is possible that the XXXXX may assume ownership and operation of the sewer system in the Subdivision in the future once it becomes economically feasible to do so. However, in the absence of any documentation between the XXXXX and XXXXX that demonstrates that XXXXX is currently providing sewer services on behalf of that municipality, such as a legal contract or written agreement or bylaw authorizing the municipality to enter into such a contract or agreement for this purpose, the sewer services supplied by XXXXX do not meet the conditions set out section 21 of Part VI of Schedule V to be exempt supplies.

The Canada Revenue Agency is responsible for issuing interpretations and rulings on the application of the ETA and its Regulations, as passed by Parliament. An amendment to the ETA would be required to treat the sewer services in the manner in which XXXXX is currently supplying them as exempt. Legislative amendments are a matter of tax policy, which falls within the responsibility of the Department of Finance. We will advise officials of that Department of your concerns regarding this ruling.

If you require clarification with respect to any of the issues discussed in this letter, please contact Chantal Desrosiers, Manager, Municipalities and Health Care Services Unit at 613-941-3268.

Yours truly,

Danielle Laflèche
Director
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate

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