Backgrounder

Current GST/HST Rebate for Municipalities

The goods and services tax / harmonized sales tax (GST/HST) is a value-added tax that applies to the vast majority of goods and services consumed in Canada.

In general, suppliers of goods and services collect the tax on their sales and are entitled to claim a refund of the tax they paid on their purchases in the form of an input tax credit. To the extent that municipalities make taxable supplies (e.g., municipal parking), they are entitled to claim full input tax credits in respect of the tax paid on related purchases.

However, most municipal services, including public transit, water and sewer services, road construction, repair and maintenance, snow removal, garbage collection, and police and fire protection, are exempt services under the GST/HST. This means that municipalities do not charge GST/HST on such services. At the same time, they are not eligible to recover GST/HST in the form of input tax credits when they make purchases used in providing such services. Instead, municipalities are entitled to claim a 57.14-per-cent rebate of the GST and the federal portion of the HST paid on such purchases.

The municipal rebate rate was established at the time of introduction of the GST to ensure that the change from the former federal sales tax to the GST did not result in an additional tax burden for municipalities. It is estimated that approximately $775 million is currently paid to municipalities annually under the 57.14-per-cent GST rebate.

Entities that are currently eligible to claim the 57.14-per-cent rebate include:

• incorporated municipal bodies, for example cities, towns, villages and metropolitan authorities,

• entities "determined" by the Minister of National Revenue to be a municipality, for example transit commissions and public libraries, and

• entities "designated" by the Minister of National Revenue in respect of their delivery of municipal services, such as some non-profit social housing corporations or cooperatives.

There are approximately 8,500 entities currently claiming the municipal rebate.

The rebate in respect of the GST and the federal portion of the HST for municipalities will be increased to 100 per cent from 57.14 per cent. This new rebate rate will apply to purchases of goods and services by municipalities in respect of which tax becomes payable on or after February 1, 2004. All municipal entities, including those determined or designated by the Minister of National Revenue to be a municipality, will be eligible for the increased rebate. Rebate rates on the provincial portion of the HST are not affected by this announcement.

For municipalities, the higher rebate represents an additional source of reliable, predictable and long-term funding equivalent to approximately $580 million in the first year alone. This amount will grow over time in line with municipal spending on goods and services. It is estimated that, over 10 years, the measure will provide an additional $7 billion to municipalities.

The Minister of Finance will propose legislative amendments in Parliament at the earliest opportunity to implement the full rebate. This will include consequential legislative amendments to facilitate an orderly transition to the full rebate and to protect the integrity of the tax system.

Further details of the measure and its operation will be provided in the very near future.

- News Release 2004-007 -