The Supreme Court of Canada recently released its decision in
City of Calgary v The Queen, a case which highlights the
importance of early planning to ensure the maximum recovery of
goods and services tax ("GST") or harmonized sales tax
("HST") in public infrastructure projects.
OVERVIEW OF GST AND HST
The GST is similar to a value added tax and is applied to most
goods and services in Canada at a rate of 5%. Goods and services
purchased in a "participating province" are subject to
HST at the applicable rate, which range from 12-15%. Currently, the
participating provinces are British Columbia, Ontario, New
Brunswick, Nova Scotia, Newfoundland and Labrador.1
Certain goods and services, known as "exempt supplies",
are not subject to GST or HST. Where GST or HST is paid by a
purchaser on goods or services that will be used in commercial
activities, the purchaser may recover all or a portion of the tax
paid by claiming an input tax credit ("ITC"). If a
purchaser will use goods or services in making exempt supplies, the
purchaser cannot claim ITCs in respect of any GST or HST paid on
those goods and services. Accordingly, a provider of exempt
supplies will bear the cost of the GST or HST.
The City of Calgary (the "City") built transit
facilities to operate its transit service. The City entered into
funding agreements with the Province of Alberta (the
"Province") to provide financial assistance in the
construction of the transit facilities. The operation of a
"municipal transit service" is an exempt supply under the
Excise Tax Act (Canada) ("ETA"). Accordingly,
the provider of such a service is not entitled to claim ITCs for
GST or HST incurred in operating the municipal transit service.
However, the construction of transit facilities is a taxable supply
and therefore, ITCs can be claimed in respect of GST or HST
incurred in the construction. The City of Calgary argued that it
made two supplies: i) building the transit facilities (which it
supplied to the Province); and ii) operating the transit service
(which it supplied to the Calgary public). The City of Calgary
argued that it was entitled to claim ITCs for the GST it incurred
in building the transit facilities.
The Supreme Court concluded that the construction of the transit
facilities was preparatory work for operating the transit service.
The transit facilities were in the nature of an "input";
they were constructed, acquired and made available in order to
supply a municipal transit service to the citizens of Calgary. The
City did not make a separate supply to the Province. Accordingly,
the City only made one exempt supply, and therefore was not
entitled to claim ITCs in respect of the construction of the
While this case did not involve a public-private partnership,
public-private partnerships often involve projects to construct
infrastructure which will constitute exempt supplies under the ETA
and where public funding is involved. As more provinces adopt the
HST, the cost of unrecoverable tax becomes higher. Accordingly, it
is important at the early stages of planning public-infrastructure
projects to consider the legal relationships between parties and
what supplies are made by each party for purposes of the ETA. This
will ensure the maximum recovery of GST or HST.
1. Quebec has a separate Quebec Sales Tax that is similar
to the GST.
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guide to the subject matter. Specialist advice should be sought
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