Taxation of Intermunicipal Cost Sharing Agreements

Resolution Category Extraordinary 1
Subject Economic
Year 2019
Status Adopted - Expired
Sponsor - Mover
Peace River, Town of
Active Clauses

IT IS THEREFORE RESOLVED THAT the AUMA engage with the Federation of Canadian Municipalities, other municipalities and municipal organizations to advocate for the CRA to officially confirm intermunicipal cost sharing arrangements and resulting fund transfers as being made for a public purpose and therefore not constituting a taxable supply; and

FURTHER BE IT RESOLVED THAT the AUMA provide material assistance in the preparation of the Appeal to the Minister.

Whereas Clauses

WHEREAS Section 55(1) of the Municipal Government Act (MGA) permits a municipality to enter into an agreement with another municipality to share grants paid under section 366 or taxes; and

WHEREAS the Canada Revenue Agency’s (CRA) GST/HST Technical Bulletin B-067 provides that a transfer payment made for a public purpose does not constitute a taxable supply; and

WHEREAS the CRA has recently determined that a cost share agreement may constitute a taxable supply; and

WHEREAS Part 17.2 of the MGA requires the establishment of intermunicipal collaboration frameworks that include cost sharing agreements for infrastructure and services that provide mutual benefit; and

WHEREAS there now exists a situation whereby municipalities are required to enter into agreements with no clear provision for ascertaining the taxation status of matters within the agreements.

Resolution Background

The CRA Technical Bulletin B-067 exempts payment of GST for grants, subsidies and transfer payments on several grounds, including when:

  1. The transfer is made for a public purpose;
  2. No direct benefit is provided to the grantor or a specified third party;
  3. The payment is not for a purchase purpose;
  4. The transfer payments are part of a regular, on-going program of financial support
  5. The grantor is not a commercial organization; and
  6. No supply was made solely for the purposes of accountability by any party.

In July 2019, the CRA upheld an auditor’s report which found that items on intermunicipal cost share agreements constituted “supply”. Specifically cited was language within the agreement which, while establishing the agreement as being for regional benefit, specified that the signatories would “provide access to regional assets, programs and services to each other’s residents in a manner that does not discriminate between them.”

The CRA holds that the clause constituted a “supply of access” under the Excise Tax Act, S. 146(e) even though no direct benefit was provided such as preferential rates, right of access, purchase of service, nor other form of supply. This ruling contradicted a previous CRA assessment in 2011 when the same clauses were in effect and the auditor at that time did not assess the agreements as ‘supply’.

CRA further applies this interpretation to transfers outside the specified agreements. For example, where the cost share agreement covered Recreation Programs and arena operating costs, CRA assessed GST on $8,000,000 in capital contributions to a new multiplex. Additional examples of areas assessed, but outside the specified agreements, include:

  1. Contributions to the Healthcare Attraction and Retention Committee;
  2. Costs for an RCMP Liaison Officer;
  3. Fire Hall Lease cost share;
  4. Canada Day Fireworks contribution; and

This finding potentially affects all Alberta municipalities given that:

  1. There is no longer surety with respect to how CRA is determining ‘public purpose’. With the requirement to develop Intermunicipal Collaboration Frameworks, it is now unclear as to which items should or will be assessed as taxable supply.
  2. Related clauses in any existing agreements expose municipalities and other public bodies to risk of reassessment.
  3. Adjustment, collection and remittance of GST assessed under this interpretation imposes a substantial burden on municipalities in terms of manpower and short-term expenditure.
  4. The inconsistency within the interpretation of agreements and the Technical Bulletin results in accounting firms being unable to appropriately advise their clients as to their financial obligations. As a result, municipalities are severely hampered in their ability to provide accurate annual financial statements to the Province

While this finding currently rests on a single case, it establishes a precedent which affects any municipality or public body which has entered into a cost sharing agreement. Given that any GST collected in the course of a cost sharing agreement is reflected by an input tax credit, this finding does not affect the balance of GST revenue received by CRA. It does, however, impair the ability of municipalities to enter effective agreements, appropriately collect/remit GST, and maintain accurate financial statements.

Government Response

This resolution was sent to the Minister of National Revenue in November 2019 but no formal response was received. Instead, on January 10, 2020, staff from the CRA met with Alberta Municipalities staff via teleconference to discuss potential strategies to address the concerns raised in the resolution. The COVID-19 pandemic then led to the prioritization of other matters by both ABmunis and the CRA, so no actions were implemented following this initial meeting.

A follow up letter was sent to the Minister of National Revenue in May 2022, which prompted another meeting and further conversations between ABmunis and CRA staff in July.  

Alberta Municipalities notes

Intent partially met.

At the initial meeting in January 2020, the CRA offered to work with Alberta Municipalities to develop a resource (e.g. a tip sheet) for municipalities to assist with drafting cost-sharing agreements that would not trigger the assessment of GST; provide CRA auditors a better understanding of Intermunicipal Collaboration Frameworks and intermunicipal agreements; and increase the CRA's presence in Alberta at events for municipalities (i.e. Conventions, trade shows, etc.). It was acknowledged at that time that CRA may need to revise their policy as well. Further meetings between ABmunis and the CRA did not take place in 2020 and 2021, and the options discussed were not implemented.

CRA and ABmunis staff have had discussions twice in July 2022 following our second letter to the Minister of National Revenue. The CRA is working on a policy memorandum to replace Technical Bulletin B-067, entitled Determining Whether a Transfer Payment is Consideration For a Supply. CRA also plans to deliver an online information session on GST for ABmunis and Rural Municipalities of Alberta (RMA) members in fall 2022.

Alberta Municipalities staff have previously connected with RMA, as well as FCM, to coordinate a unified position on this issue. RMA members adopted a similar resolution at their 2019 fall Convention. FCM adopted a similar resolution at their March 2020 Board meeting.

Town of Peace River’s Objection

In July 2019, CRA upheld an auditor’s report which found that items on Town of Peace River intermunicipal cost share agreements constituted “supply” and were subject to GST. The Town was required to pay $609,571 in GST as a result of this auditor’s decision. The Town filed an Objection (i.e. appeal) to the decision with the CRA on October 9, 2019.

The Town of Peace River advised on May 6, 2021 that the CRA had started reviewing their Objection. The CRA asked the Town for information from their accountants (specifically any existing invoices) which would suggest they were charging their partners for providing services to them (i.e. supply).

After some back and forth about the sufficiency of the Town’s supporting documentation, on March 14, 2022, the Town of Peace River received a decision from the CRA indicating that their Objection was “allowed in full” and they will receive a refund of the GST that they paid in 2019. The reasons given were:

“It is your position that this revenue received were transfer payments received for a public purpose and therefore, outside the scope of GST/HST, and not taxable. Appeals has reviewed the submissions you provided and has accepted that adequate documentation has been provided to support your position.”

While this decision was good news for the Town, the Objection process was costly as it required significant expenditures for consultants and staff time. Additionally, the CRA stated in its decision letter:

“Please note however that GST/HST is a transactional tax and if in the future you enter into another cost sharing arrangement, the specifics of that arrangement would need to be reviewed in detail to determine if it meets the condition to be a non taxable transfer payment.”

This proviso means that Alberta municipalities will continue to be risk of being charged GST on cost sharing agreements based on the interpretation of individual CRA auditors unless the revised policy specifically addresses the matter. ABmunis staff are reviewing the policy memorandum and will provide this comment to the CRA (and others, as needed). Members were informed about the CRA’s policy memorandum and the opportunity to provide comment via an article in The Weekly on July 19.