By Nancy E. Claridge and Adriel N. Clayton

An interpretation letter identified as Case no: 209926 (the “letter”) from the CRA addressed when certain registered charities that qualify as designated municipalities pursuant to subsection 259(1) of the Excise Tax Act (“ETA”) will be eligible for a rebate from the Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) paid on property and services. Specifically, the letter, dated May 25, 2021, and published on November 8, 2021, considered whether the charity’s supply of market units for moderate income households could qualify for a rebate of the GST/HST according to section 259 of the ETA. As all pertinent facts could not be established, the CRA could not issue a written ruling, but instead provided a general explanation of how the legislation might apply in the charity’s situation.

The charity had entered into a multi-year head lease agreement with a developer to lease several self-contained residential units in a multi-unit residential complex. The charity then leased those units to tenants on a Rent-geared-to-income (“RGI”) basis in accordance with the terms of an agreement with a separate organization. The charity planned to lease some of the units to tenants as affordable housing, some units being on an RGI basis, and others on a “deep subsidy” basis. Other units would be rented at the market rate (“Market Units”) and were intended for households with moderate incomes. The charity asked the CRA if the Market Units were eligible for the municipal rebate of GST or federal portion of HST paid on property and services related to these units.

The charity in this case was designated as a municipality as per subsection 259(1) of the ETA which says:

municipality includes a person designated by the Minister, for the purposes of this section, to be a municipality, but only in respect of activities, specified in the designation, that involve the making of supplies (other than taxable supplies) by the person of municipal service

While the letter notes that “municipal service” is not defined in the ETA, nor does the ETA set out other legislative criteria, an organization can be designated as a municipality if it meets all four eligibility criteria set out in the CRA’s info sheet GI-124 Municipal Designation of Organizations Providing Rent Geared to Income Housing:

• The organization is a charity, cooperative housing corporation, non-profit organization, or public institution;
• The organization supplies long-term residential accommodation within a program to provide housing to low-to-moderate-income households;
• More than 10% of the housing units are provided on an RGI basis; and
• The organization receives funding from a government or municipality to assist in providing accommodation within a program to provide housing to low-to-moderate-income households

The letter sets out that an organization that has been designated to be a municipality may be entitled to the Public Service Bodies’ rebate of GST/HST paid or payable on eligible property or services, but only to the extent that such property or services are intended for use “in the course of the activities for which it has been designated.” For example, this would include providing RGI housing, since this is included in the four eligibility criteria set out above. A designated municipality could claim 50% of the GST (in provinces where the GST is collected) and the federal part of the HST (in provinces where the HST has been introduced) on eligible purchases and expenses for which it cannot claim input tax credits.

In this instance, the CRA found that the charity’s market units would not qualify for the rebate because the market units did not meet certain eligibility requirements, such as receiving an operating subsidy for these units. The CRA also raised concerns that the charity would only review the income of tenants occupying Market Units at the time of initial occupancy and mentioned this as a further ground that the charity would not be eligible for the municipal rebate for these units.

Read the November 2021 Charity & NFP Law Update