Explanatory Notes Relating to the GST and HST Rebate for Municipalities

Part 7 of the Budget Implementation Act, 2004 proposes amendments to the Excise Tax Act to implement the 100-per-cent rebate of the Goods and Services Tax and the federal component of the Harmonized Sales Tax for municipalities and to implement other measures relating to municipalities.

Subsection 123(1) of the Excise Tax Act contains definitions of terms used in Part IX of the Act. The amendment to subsection 123(1) adds the new definition "designated municipal property", which is relevant for purposes of several new and amended sections that set out new rules for certain supplies of property by municipalities or persons designated to be municipalities for the purposes of section 259 of the Act. These new rules apply to supplies of "designated municipal property" in the same manner as they apply to supplies of property by municipalities.

"Designated municipal property" is property of a person designated to be a municipality for the purposes of section 259 and in respect of which, or in respect of an improvement to which, the person was at any time entitled to claim a municipal rebate under that section, provided that the extent to which the property was for use in the course of activities specified in the person’s designation was not insignificant. Once the property qualifies as designated municipal property, it is always treated as such.

This amendment comes into force on February 1, 2004.

The amendment introduces new section 141.2 of the Act, which sets out rules applicable to sales of personal property.

New section 141.2 applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

New subsection 141.2(1) of the Act provides that sales of personal property by a municipality are considered to be made in the course of commercial activities. This subsection applies despite section 141.1 of the Act, which sets out the rules that clarify the GST/HST treatment of extraordinary supplies that do not necessarily occur in the ordinary course of a business. However, subsection 141.2(1) does not apply to supplies of personal property that are exempt supplies. As a result of the application of subsection 141.2(1), most sales of personal property of municipalities are considered to be made in the course of commercial activities and therefore subject to GST/HST.

A public service body rebate of GST/HST is provided to persons designated, for the purposes of section 259 of the Act, to be municipalities in respect of certain municipal activities. These persons are entitled to a public service body rebate under that section, but only to the extent that they use property or services in the course of the activities specified in their designation.

New subsection 141.2(2) of the Act parallels new subsection 141.2(1) and applies to sales of personal property that is "designated municipal property" of a person designated to be a municipality. The new definition of "designated municipal property" under subsection 123(1) describes the circumstances under which property of a designated municipality is "designated municipal property".

Subsection 141.2(2) provides that sales of personal property of a person designated to be a municipality are considered to be made in the course of commercial activities if the property is designated municipal property of the person. This subsection applies despite section 141.1 of the Act, which sets out the rules that clarify the GST/HST treatment of extraordinary supplies that do not necessarily occur in the ordinary course of a business. However, subsection 141.2(2) does not apply to supplies of personal property that are exempt supplies.

Section 166 of the Act provides GST/HST relief for supplies by small suppliers. It applies if, at the time the consideration is paid or becomes due for a supply, the person who made the supply was a small supplier (as determined under the rules in section 148 of the Act). Where section 166 applies, no tax is payable in respect of that supply on the consideration that is paid or becomes due when the person is neither registered nor required to be registered. Section 166 does not provide relief for sales of real property by small suppliers.

Section 166 is amended to also exclude, from its application, sales of personal property by a municipality that is capital property of the municipality and sales of "designated municipal property" (as newly defined in subsection 123(1) of the Act) of a person designated to be a municipality for the purposes of section 259 of the Act that is capital property of the person. Under section 148, sales of capital property are not taken into account in determining whether the municipality qualifies as a small supplier.

This amendment applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Subsection 123(1) of the Act defines the "basic tax content" of a person’s property. It is generally the amount of tax under Part IX of the Act that the person was required to pay on the property and improvements to it, after deducting any amounts (other than input tax credits) that the person was entitled to recover by rebate, remission or otherwise and after taking into account any depreciation in the value of the property.

The value determined under this definition applies in determining a person’s liability for tax or eligibility for input tax credits or rebates in a number of cases where the person supplied, or is deemed under Part IX to have supplied or acquired, property. The basic tax content is most commonly used for purposes of the capital property rules set out in Subdivision d of Division II of Part IX, which allow a person to claim additional input tax credits where the person increases the use of capital property in commercial activities and recapture the credits where the use in commercial activities decreases.

In the case of property of a municipality that is not a listed financial institution, new subsection 198.1(1) of the Act provides new rules for the determination of the basic tax content of property. These rules only apply with respect to the basic tax content of property at a particular time after January 30, 2004. Essentially, the application of new subsection 198.1(1) results in excluding the GST and the federal component of the HST payable before February 2004 for the purpose of determining the basic tax content of a property of a municipality at a particular time after January 30, 2004.

New subsection 198.1(2) provides that subsection 198.1(1) applies to property of a person designated to be a municipality for the purposes of section 259 of the Act, provided that the property was consumed, used or supplied by the person on January 31, 2004, otherwise than exclusively in the course of activities that are not activities specified in the designation. As a result, the determination of the basic tax content of property that was only minimally used in the course of activities specified in the designation is not modified by these rules.

New section 198.1 comes into force on January 31, 2004.

Section 200 of the Act sets out the rules applicable to the sale of capital personal property that was not used primarily in commercial activities and to the cessation of such use of property.

The amendments to section 200 apply to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but do not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Subsection 200(3) of the Act ensures that GST/HST does not apply to a sale by a registrant of capital personal property that was not used primarily in commercial activities since unrecoverable tax would already have been paid in respect of the property. This subsection prevents tax cascading on the property by deeming the resale to be made otherwise than in the course of a commercial activity and therefore not taxable.

Consistent with new section 141.2 of the Act, which deems sales of personal property by municipalities and sales of "designated municipal property" (as newly defined in subsection 123(1) of the Act) by persons designated to be municipalities for the purposes of section 259 of the Act to be made in the course of commercial activities, subsection 200(3) is amended to ensure that new section 141.2 applies and that such sales are not deemed to have been made in the course of activities that are not commercial activities.

Subsection 200(4) of the Act provides that subsection 200(3) does not apply in the case of sales of capital personal property by the federal government or by provincial governments (other than a "specified Crown agent"), since provincial governments do not pay GST/HST on their purchases and federal government departments are internally reimbursed for the GST/HST they pay.

Specified Crown agents pay tax on their purchases and they do not recover tax except to the extent they are entitled to input tax credits or rebates. There are instances where specified Crown agents are eligible for a municipal rebate of GST/HST under section 259 of the Act. In such instances, specified Crown agents are treated the same as municipalities with respect to sales of personal property, which are covered by new section 141.2 of the Act. The amendment ensures that new section 141.2 applies to these specified Crown agents.

The amendment introduces new section 200.1 of the Act. This section allows a municipality to claim a credit for the portion of the GST/HST that is not otherwise recoverable where personal property of a municipality or of a person designated to be a municipality for the purposes of section 259 of the Act is sold.

Subsection 193(2) of the Act enables a public sector body that is not a financial institution to claim an input tax credit on its taxable sales of real property. By referring to subsection 193(2), new section 200.1 provides that subsection 193(2) applies, with any modifications that the circumstances require, to sales of capital personal property of a registrant that is a municipality and to sales of "designated municipal property" (as newly defined in subsection 123(1) of the Act) of a registrant that is a person designated to be a municipality for the purposes of section 259.

The credit provided under new section 200.1 is not available in respect of sales of personal property that is a passenger vehicle, an aircraft of a registrant who is an individual or a partnership and property of a person designated to be a municipality for the purposes of section 259 that is not designated municipal property of the person.

New section 200.1 applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Section 201 of the Act limits the maximum amount of input tax credits a registrant is allowed to claim in respect of a passenger vehicle that is capital property of the registrant. The limit is based on the maximum capital cost of the vehicle for income tax purposes. Section 201 also provides an adjustment in certain circumstances where the registrant is entitled to claim a public service body rebate under section 259 of the Act.

The description of B in paragraph 201(b), which provides the adjustment to take into account the public service body rebate available to a registrant, refers to the percentage "prescribed" for the purposes of the rebate under section 259. This description is amended to refer to "specified percentage" since the applicable percentages are no longer prescribed by regulations as a result of the introduction of a new definition of "specified percentage" in subsection 259(1).

This amendment applies for the purpose of determining an input tax credit of a registrant in respect of a passenger vehicle that the registrant acquires, imports or brings into a participating province after January 2004.

Existing subsection 203(1) of the Act provides that a registrant may claim an input tax credit in respect of a taxable sale of a passenger vehicle that is capital property where the cost of the vehicle exceeds its capital cost for income tax purposes and hence, pursuant to section 201 of the Act, a portion of the tax originally paid (i.e., the portion calculated on the excess) could remain unrecovered.

As a consequence of the introduction of a general rule for municipalities in new subsection 203(4), subsection 203(1) is amended to exclude, from its application, supplies by municipalities and supplies of "designated municipal properties" (as newly defined in subsection 123(1) of the Act) of a person designated to be a municipality for the purposes of section 259 of the Act.

Existing subsection 203(3) provides that the sale, by a registrant who is an individual or partnership, of a passenger vehicle or aircraft that is capital property of the registrant and that was used otherwise than exclusively in commercial activities at all times after the individual or partnership becomes a registrant, is not subject to tax. Subsection 203(3) ensures that tax does not apply since, under subsection 202(4) of the Act, no input tax credit would have been claimed other than the credit based on the portion of the capital cost of the vehicle or aircraft deducted for income tax purposes.

Subsection 203(3) is amended to exclude from its application supplies made by municipalities and supplies of designated municipal property of a person designated to be a municipality for the purposes of section 259. These supplies are in general taxable pursuant to new section 141.2 of the Act.

New subsection 203(4) allows a registrant (other than an individual or a partnership) that is a municipality which makes a taxable sale of a passenger vehicle that was capital property of the registrant to claim an input tax credit in respect of unrecoverable tax previously paid by the registrant in respect of the vehicle. The amount of input tax credit available is determined on the basis of the basic tax content of the vehicle at the time it is sold and the percentage of previously unrecoverable tax. In all cases, the amount of input tax credit available cannot exceed the tax collectible by the registrant in respect of the sale of the vehicle. This credit is also available to a person that is designated to be a municipality if the vehicle is designated municipal property of the person.

These amendments apply to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but do not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Section 209 of the Act provides rules for the treatment of acquisitions, sales and changes in use of real property of certain public sector bodies. Generally, these bodies treat their capital real property as if it were capital personal property. Section 209 achieves this result by cross-referencing relevant sections of the Act. Subsections 209(1) to (3) are amended to add cross-references to new section 141.2 of the Act, which sets out rules applicable to sales of personal property.

The amendments to section 209 come into force on February 1, 2004.

The amendment introduces new section 257.1 of the Act that provides a rebate to non-registrant municipalities on sales of capital personal property.

New section 257.1 applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

New subsection 257.1(1) of the Act provides a rebate of tax to a person that is a municipality, or a person designated to be a municipality for the purposes of section 259 of the Act, and that is not a registrant, who makes taxable sales of capital personal property. In the case of a person designated to be a municipality, the rebate is only available in respect of "designated municipal property" (as newly defined in subsection 123(1) of the Act).

The non-registrant is not entitled to input tax credits for tax payable at the time of acquisition of the property. On the sale, however, the non-registrant is required to charge tax under amended section 166 of the Act. In these circumstances, new subsection 257.1(1) allows the non-registrant supplier to claim a rebate at the time of sale. The rebate is equal to the lesser of the basic tax content of the property at that time, and the tax that is or would, in the absence of section 167 of the Act, be payable in respect of the taxable supply.

New subsection 257.1(2) of the Act provides that the application for a rebate under this section in respect of a sale of property must be made within two years after the day consideration for the sale was paid or became due to the non-registrant municipality.

New subsection 257.1(3) of the Act addresses situations where a non-registrant’s property has been seized or repossessed by a creditor but the non-registrant has a statutory right or a right under an agreement relating to a debt security to redeem the property. In this case, the non-registrant is not entitled to claim the rebate under new subsection 257.1(1) unless and until the time limit for redeeming the property has expired without the non-registrant exercising the right.

Section 259 of the Act provides for rebates to municipalities and other public service bodies (i.e., charities, qualifying non-profit organizations, school authorities, hospital authorities, public colleges, and universities). The amendments to section 259 implement the 100-per-cent rebate of the GST and the federal component of the HST for municipalities.

The following amendments apply, unless otherwise specified, for the purpose of determining a rebate under section 259 of a person for claim periods ending on or after February 1, 2004. However, the rebate shall be determined as if these amendments did not come into force for the purpose of determining a rebate of a person for the claim period of the person that includes February 1, 2004 in respect of

• an amount of tax that became payable by the person before February 1, 2004;

• an amount that is deemed to have been paid or collected by the person before February 1, 2004; or

• an amount that is required to be added in determining the person’s net tax as a result of a branch or division of the person becoming a small supplier division before February 1, 2004, or as a result of the person ceasing before February 1, 2004 to be a registrant.

Subsection 259(1) of the Act defines terms used throughout the section.

Subsection 259(1) is amended by adding the new definition "specified percentage". This new definition lists the various rebate percentages applicable to different categories of public service bodies, which were previously set out in regulations. The new rebate percentage in respect of the GST and the federal component of HST applicable to municipalities is 100 per cent. The rebate percentages for other public service bodies are not affected by this amendment.

Subsection 259(1) is also amended by adding the definition "specified provincial percentage" applicable in respect of the provincial component of the HST for the calculation of rebates for public service bodies in participating provinces. These percentages are not affected by these amendments and were previously obtained through the application of existing subsection 259(4.21).

Subsection 259(3) of the Act provides authority for the Minister of National Revenue to pay rebates of GST/HST to municipalities, charities, qualifying non-profit organizations and other selected public service bodies. In the case of persons designated to be a municipality for the purposes of section 259, a similar rebate is available under subsection 259(4).

Since it is only the federal component of the HST that is affected by the increase in the rebate percentage from 57.14 per cent to 100 per cent for municipalities, subsection 259(3) is amended to take into account that the rebates in respect of the provincial and federal components of the HST may apply at different percentages.

The rebate is based on the "non-creditable tax charged", which is a term defined in subsection 259(1) and refers to certain amounts that the rebate applicant is or was required to pay as tax under Part IX of the Act (net of input tax credits).

The rebate is equal to the total of the specified percentage of the non-creditable tax charged in respect of the GST and the federal component of the HST, and the specified provincial percentage of the non-creditable tax charged in respect of the provincial component of the HST. The federal and provincial components of the non-creditable tax charged are determined through the application of amended subsections 259(4.2) and (4.21).

Subsection 259(4) of the Act provides authority for the Minister of National Revenue to pay rebates to persons designated to be municipalities for the purposes of section 259 in respect of the extent that they use property or service in the course of activities specified in the designation.

Since it is only the federal component of the HST that is affected by the increase in the rebate percentage from 57.14 per cent to 100 per cent for municipalities, subsection 259(4) is amended to take into account that the rebates in respect of the provincial and federal components of the HST may apply at different percentages. As is the case in amended subsection 259(3), the amounts on which the specified percentage and specified provincial percentage apply are determined as a result of the application of amended subsections 259(4.2) and (4.21).

Subsection 259(4.01) of the Act parallels, for the purposes of the rebate under subsection 259(4), the exclusions from the definition "non-creditable tax charged" that already apply in determining a rebate under subsection 259(3).

Subsection 259(4.01) is amended to add a cross-reference consequential to the amendment to subsection 259(4).

Subsection 259(4.1) of the Act provides specific rebate apportionment rules for charities, public institutions or qualifying non-profit organizations that are selected public service bodies that act in different capacities.

Subsection 259(4.1) is amended to provide that the apportionment of the rebate is subject to the rules set out in amended subsections 259(4.2) and (4.21). Subsection 259(4.1) is also amended to update references consequential to the introduction of the definitions of "specified percentage" and "specified provincial percentage" in subsection 259(1) and to amendments to subsection 259(4).

Subsection 259(4.2) of the Act provides that, subject to certain exceptions provided in existing subsection 259(4.21), no provincial component of the HST is to be included in determining rebates to public service bodies under section 259.

Subsection 259(4.2) is amended as a result of the amendments to subsections 259(3) and (4) to provide that no provincial component of the HST is to be included in determining the component of a rebate under new paragraphs 259(3)(a) and (4)(a) that is subject to the specified percentage.

The general rule under existing subsection 259(4.2) of the Act is that the provincial component of the HST is not included in determining a rebate under section 259. However, certain exceptions to that rule are set out in subsection 259(4.21).

Subsection 259(4.21) is rendered unnecessary and is replaced as a result of the introduction of the definition of "specified provincial percentage" in subsection 259(1) and the amendments to subsections 259(3) and (4). New subsection 259(4.21) provides that no GST nor any federal component of the HST is to be included in determining the portion of a rebate under new paragraphs 259(3)(b) and (4)(b) that is subject to the specified provincial percentage.

Under section 259 of the Act, no rebate of the provincial component of the HST is provided to municipalities, hospital or school authorities, universities or public colleges in Newfoundland and Labrador except in the case of certain designated municipalities as provided for in subsection 259(4.3).

Paragraph 259(4.3)(e) is amended to update references as a result of the introduction of definitions of "specified percentage" and "specified provincial percentage" in subsection 259(1) and amendments to subsection 259(4). It is also amended to remove a condition that is now provided under new subsection 259(4.21).

Subsection 259(9) of the Act ensures that the rebate percentages prescribed for the purposes of section 259 cannot be changed by regulations.

Subsection 259(9) is repealed as a result of the new definition of "specified percentage" in subsection 259(1). As the rebate percentages are now specified in the Act, no changes to the rebate percentages can be made without an amendment to the Act.

This amendment comes into force on February 1, 2004.

Subsection 259 of the Act is amended to increase the municipal rebate percentage from 57.14 per cent to 100 per cent in respect of the GST and the federal component of the HST incurred by municipalities which they are not entitled to recover as input tax credits or otherwise. In order to ensure transparency of this incremental rebate, new subsection 259(13) provides the Minister of National Revenue the authority to release for publication by the Government of Canada information as to the amount of the increase approved for payment to a municipality and any information necessary to identify the municipality. On publication, the information is not confidential information for the purposes of section 295 of the Act.

This amendment comes into force on Royal Assent.

Section 1 of Part V.1 of Schedule V to the Act exempts all supplies of property and services made by a charity except those listed in the section.

Section 1 is amended to exclude from the exemption supplies of "designated municipal property" (as newly defined in subsection 123(1) of the Act), if the charity is a person designated to be a municipality for the purposes of section 259 of the Act when the supply is made.

This amendment applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Section 5.1 of Part V.1 of Schedule V to the Act exempts certain supplies made by a charity for consideration that does not exceed the direct cost of the supplies. The expression "direct cost" is defined in subsection 123(1) of the Act.

Section 5.1 is amended to exclude from the exemption supplies of personal property that is "designated municipal property" (as newly defined in subsection 123(1)) of a charity that is a person designated to be a municipality for the purposes of section 259 of the Act when the supply is made.

This amendment applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Section 2 of Part VI of Schedule V to the Act exempts all supplies of personal property or a service made by a public institution (within the meaning of subsection 123(1) of the Act) except those listed in the section.

Section 2 is amended to exclude from the exemption supplies of property or a service made by a public institution that is a municipality. The amendment also excludes from the exemption supplies of "designated municipal property" (as newly defined in subsection 123(1)), if the public institution is a person designated to be a municipality for the purposes of section 259 of the Act when the supply is made.

This amendment applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Section 6 of Part VI of Schedule V to the Act exempts certain supplies made by public service bodies (other than charities) for consideration that does not exceed the direct cost of the supplies. The expression "direct cost" is defined in subsection 123(1) of the Act.

Section 6 is amended to exclude from the exemption supplies made by a public service body that is a municipality. It is also amended to exclude from the exemption supplies of personal property that is "designated municipal property" (as newly defined in subsection 123(1)) of a body designated to be a municipality for the purposes of section 259 of the Act when the supply is made.

This amendment applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Section 25 of Part VI of Schedule V to the Act exempts all supplies of real property made by public service bodies (other than a financial institution or a government) except those listed in the section.

Section 25 is amended to exclude from the exemption supplies of real property made by municipalities. It is also amended to exclude from the exemption supplies of real property that is "designated municipal property" (as newly defined in subsection 123(1)) of a body, if the body is designated to be a municipality for the purposes of section 259 of the Act when the supply is made.

This amendment applies to any supply for which consideration becomes due after March 9, 2004 or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before March 10, 2004.