WHEREAS municipalities undergo routine federal Goods and Services Tax (GST)/Public Service Body (PSB) audits by the Canada Revenue Agency (CRA); and

WHEREAS the Municipal Government Act (MGA) requires that municipal governments establish intermunicipal collaboration frameworks by March 31, 2020 that specify what and how services are funded and delivered with neighbouring municipalities; and

WHEREAS municipalities may enter intermunicipal cost sharing agreements for the purpose of funding services through contributions by regional partners whose rate payers will be using the services provided; and

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

WHEREAS when the Town of Peace River underwent a routine GST/PSB audit, the CRA assessed GST on “a supply of a right to enter, to have access to, or to use property of the government, municipality, or other body” and ruled that the “town supplied a right to use the municipal property to other municipalities through the use of cost sharing agreements”; and

WHEREAS the Town of Peace River facilities have a flat payment scale that does not discriminate on the basis of residence and all agreements are specifically worded towards regional benefit;

THEREFORE, BE IT RESOLVED that the Rural Municipalities of Alberta (RMA) request that the Government of Alberta advocate to the Government of Canada on behalf of the municipalities of Alberta that the Canada Revenue Agency’s (CRA) interpretation be reviewed and the tax status of cost-sharing agreements be clarified; and

FURTHER BE IT RESOLVED that RMA request that the CRA reassess the 2019 GST/PSB audit on the Town of Peace River regarding the interpretation of the CRA Bulletin on GST for grants and subsidies.

The Town of Peace River was subject to a routine Goods and Services Tax (GST) audit by the Canada Revenue Agency (CRA), following which they were informed that their cost sharing agreements were being assessed as being subject to GST. The cost sharing agreements have been in place since at least 2002 and the agreement examined in the 2019 audit was previously audited in 2011, with no issues being raised regarding GST.

The reinterpretation of CRA Bulletin on GST for Grants and Subsidies has set a number of concerning precedents: auditors may parse an existing agreement to justify a finding even if the remainder of the agreement is contradictory, municipalities may no longer rely on the GST/HST Technical Information Bulletin B-067 with respect to determining supply as it relates to on-going programs of financial support, it is unclear which cost-sharing items may now be assessed as supply, and transactions not contained within the cost- sharing agreement are being assessed as though they were.

Intermunicipal collaboration framework agreements will now require a tax provision. The lack of consistency in the application of the regulation provides challenges in identifying what should be considered supply. Municipalities must be prepared for further reinterpretation of the agreements. The cost of reversing any collection or remittance creates the potential for significant economic burden on the municipality.

This recent interpretation, and unpredictability in future interpretations, by CRA has impacts on municipalities across Canada and on cost sharing agreements held between all levels of government throughout the country. The ability for municipalities to viably sustain these collaborative agreements will be compromised due to the financial instability and risks that are created by the inconsistent application of this regulation.

The Town of Peace River has reached out to Alberta Urban Municipalities Association (AUMA) and Federation of Canadian Municipalities (FCM) for advocacy and legal advice and undertaken political advocacy work to raise awareness of the issue both federally and provincially. Additionally, the Town of Peace River has submitted the issue to the Northern Alberta Development Council, Rural Municipalities of Alberta and Municipal Affairs and is working with AUMA to prepare an emergency resolution to be presented in September.

RMA has no active resolutions directly related to this issue.

Alberta Municipal Affairs

Alberta Municipal Affairs is aware of the results of the Town of Peace River’s federal Goods and Services Tax audit and is concerned about the possible impact of this ruling. The ministry is awaiting the outcome of the town’s appeal of the ruling to the Canada Revenue Agency (CRA). In the meantime, Minister Madu has written to the federal Minister responsible for the CRA to express his concerns with the ruling.

Regardless of the CRA ruling, we continue to believe it is in the best interest of municipalities across the province to be good neighbours by working together to reduce duplication of services and infrastructure, provide more efficient use of tax dollars, and develop coordinated long-term planning.

Alberta Treasury Board and Finance

Alberta Treasury Board and Finance recognizes the concern from municipalities regarding the Canada Revenue Agencies’ (CRA) reinterpretation of the CRA Bulletin on GST for grants and subsidies. Alberta Treasury Board and Finance notes that the CRA is solely responsible for the interpretation of GST rules and the interpretation of circumstances specific to the Peace River cost sharing agreements. The provincial government’s policy is not to interfere with the application of federal rules in specific cases.

It is Alberta Treasury Board and Finance’s understanding that the reinterpretation of the CRA Bulletin on GST for grants and subsidies applies consistently across Canada and does not target Alberta specifically. Alberta Treasury Board and Finance recommends that the best approach for resolving this issue is for the Rural Municipalities of Alberta to work with other municipal bodies, both within Alberta and from other provinces, to challenge the federal government if the GST rules are not being applied consistently or if the rules and their application have changed without proper notice. Alberta Treasury Board and Finance

would further recommend the Rural Municipalities of Alberta to engage with tax practitioners and obtain legal advice regarding the CRA’s reinterpretation of the CRA Bulletin on GST for grants and subsidies.

The Government of Alberta response indicates a concern with the impact that the Canada Revenue Agency (CRA) interpretation of the tax status of cost-sharing agreements may have on Alberta’s municipalities. RMA appreciates that the Minister of Municipal Affairs has informed his federal counterpart of this concern.

The response from Alberta Treasury Board and Finance indicates that it is the Ministry’s policy not to interfere in the application of federal rules in specific cases. As the CRA decision has fiscal impact on both municipalities and the province more broadly (as a municipal funding source), RMA is concerned with this lack of response from Treasury Board and Finance.

RMA also continues to work with Alberta Municipalities and the Federation of Canadian Municipalities to address this issue with the CRA, including through the possible development of a guide or FAQ document to ensure municipalities use language in cost-sharing agreements that minimizes the likelihood of a perception of an exchange of taxable services.

In early 2022, the CRA informed the Town of Peace River that their objection to the CRA’s taxation of their intermunicipal agreement was successful. In response to this decision, the CRA has drafted a new memorandum, titled Determining Whether a Transfer Payment is Consideration for a Supply, which replaces two previous memorandums and is intended to explain how and when the GST/HST provisions of the Excise Tax Act apply to transfer payments. While this memorandum reflects an effort on the part of the CRA to better address this issue, RMA has not yet had an opportunity to analyze the memorandum.

As Municipal Affairs has noted that Minister Madu wrote a letter expressing concern about this issue to the Minister responsible for the CRA, this resolution is assigned the status of Accepted in Part.