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.


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 transit facilities.


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.