Canada - English

Supreme Court Restricts GST Input Tax Credits on Publicly Funded Project 

Supreme Court Restricts GST Input Tax Credits on Publicly Funded Project

April 26, 2012
No. 2012-21


The Supreme Court of Canada (SCC) today released its unanimous ruling that the City of Calgary was not entitled to input tax credits (ITCs) for GST paid in connection with the development of its public transit facilities for which it received funding from the Province of Alberta. Though this case dealt specifically with a municipality, it has implications for other organizations that receive public funding.


The Court ruled that the City of Calgary only made one supply—the exempt supply of a municipal transit system to the public. As such, the city was not entitled to ITCs. The City had argued that it made two supplies: one by constructing the transit system and another by operating it.

In light of the SCC’s analysis in this case on single versus multiple supplies and the concept of the recipient of the supply, many organizations, including various public sector entities, that receive funding from the federal or provincial governments may wish to review their agreements to determine whether the supply and the recipient identified on these agreements reflect the SCC’s conclusions.

KPMG observation

While this appeal dealt with ITCs, the SCC’s analysis may be relevant to other situations, such as determining whether there is a taxable supply and whether the supplier should collect tax from the person providing funding or another form of assistance, particularly when many provinces are now paying the GST. 



In this case, the City of Calgary (the City) constructed a transit system for the use of the residents of Calgary. The City entered into funding agreements with the Province of Alberta (the Province) to receive funding for the construction of its public transit system.


The City paid GST on purchases for the construction of the transit system and originally claimed public service body partial rebates from the CRA. In January 2003, the City claimed input tax credits (ITCs) for the different between the rebates received and the GST paid. The City took the position that it made two supplies:


  • Constructing, acquiring, and making transit facilities available to the public (“transit facilities services”), and
  • Operating the transit system.


The City argued that the construction of the transit system was a taxable supply made to the Province under the agreements, for which the Province paid consideration.


The CRA denied the ITCs and the City appealed to the Tax Court of Canada (TCC). The TCC allowed the City’s appeal, ruling that the City was entitled to the additional ITCs as claimed. The TCC found that the City made a taxable supply for consideration to the Province in acquiring, constructing and making available the buses, light rail transit vehicles and other related facilities.


The CRA appealed the TCC’s decision to the Federal Court of Appeal (FCA). The FCA overturned the decision, finding that, under the agreements, the City was not required to supply a municipal transit system to the Province for the use of the Calgary public. Instead, the agreements merely provided a mechanism for financial assistance. As such, the City had not made a taxable supply to the Province and was not entitled to the additional input tax credits.


Supreme Court decision

The SCC stated that the question in this appeal was whether the acquisition and construction of the transit facilities constituted an exempt supply only, or whether it also, or instead, constituted a taxable supply.

The City had argued that it made two supplies: One to the public of GST-exempt “public transit services”, and one to the Province of GST-taxable “transit facilities services”. The City argued that it provided the separate GST-taxable supply of “transit facilities services” to the Province by “acquiring, constructing and making available the transit facilities to the citizens of Calgary”.

The SCC reviewed the concept of single versus multiple supplies of goods and services and the related jurisprudence. The Court noted that, if one supply is work of a preparatory nature to another supply (i.e., an input to the supply), the input is a component of the single overall supply.

The Court found that the true nature of the City’s “transit facilities services” was work of a preparatory nature for the supply of municipal transit service to the public and, as such, a component of the overall supply of the public transit services made to the public.

The Court noted that the jurisprudence related to single versus multiple supplies dealt with a single recipient. In this appeal, there were allegedly two recipients: the public and the Province. As such, the Court noted that to determine whether the Province received any service or benefit from the City, the agreements had to be analyzed having regard to the statutory context.

The Court found that the provincial legislation did not provide for any supply of goods, services or other benefit to the Province. The legislation did not impose on the Province an obligation with respect to the establishment or operation of municipal transit services. The legislation also did not provide for a transfer of the title of the transportation facilities. The Court found that the legislation did not support the City’s contention that it provided a supply to the Province of fulfilling a statutory obligation on its behalf.

The Court then turned to the agreements between the City and the Province. Did the City supply a service or benefit to the Province under the agreements? The SCC reviewed the conclusions of the TCC and FCA and agreed with the FCA. The Province provided funding under the agreement to assist the City in carrying out its own activities. Fulfilling the accountability obligations under the funding agreements did not result in a separate supply to the Province.

As a result, the Court ruled that there was only one supply by the City, the supply of municipal transit services. Nothing in the legislation or agreements indicated that there was a separate supply of “transit facilities services” by the City to the Province.

The Court stated that there is nothing in the law that requires a supply to have only one recipient. The Court added that whether or not the Province is also a recipient of the supply in addition to the public, the supply was of a municipal transit service to the public and was therefore a GST-exempt supply. As such, the City was not entitled to the ITCs claimed.


KPMG observation

The SCC’s analysis of single versus multiple supplies and the concept of the “recipient” of a supply is interesting. The SCC noted that the true nature of the transit facilities services was “work of a preparatory nature” and not a separate supply by itself. It remains to be seen how this concept of work of a preparatory nature will be applied or interpreted in some transactions.


Also, the Court noted that there may be more than one recipient for a supply. In this case, the supply was GST-exempt but this concept raises other issues where the supply may be GST-taxable, such as the application of the place of supply rules.


We can help

Your KPMG adviser can help you assess the impact of this decision on your agreements involving grants and subsidies as well as multiple recipients. For details, please contact your KPMG adviser. 


Download KPMG’s new Tax Hub Canada app

KPMG’s free Tax Hub Canada App for iPads and Blackberrys provides timely, convenient tax news and tax rates to help you respond to changes in tax rules and regulations. Download the app today.








Information is current to April 26, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

KPMG LLP, the audit, tax and advisory firm (, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.


KPMG's Canadian web site is located at

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.