CHARITIES AND THE GST/HST
By Terrance S. Carter, B.A., LL.B., Trade-mark Agent
Assisted by Nancy E. Claridge, B.A., M.A., LL.B. Candidate
A. INTRODUCTION
Section 165 of the Excise Tax Act, R.S.C.
1985, c. E-15, provides that every recipient of a taxable supply
in Canada shall pay tax to the federal government in respect
of the supply, calculated at a rate of 7 percent on the total
value of the consideration for the supply. This is referred
to as the Goods and Services Tax ("GST"). Three Atlantic
provinces - Nova Scotia, New Brunswick and Newfoundland and
Labrador - pay an amount equivalent to the provincial sales
tax in addition to the GST on the value of the consideration
for the supply. This is referred to collectively as the Harmonized
Sales Tax ("HST") and is calculated at a rate of 15
percent. Everyone in Canada, with the exception of provincial
and territorial governments, Indians, and Indian bands, must
pay the GST/HST on taxable supplies of goods and services made
by a GST/HST registrant. Generally, organizations involved in
commercial activities in Canada are obliged to register for
GST/HST because most of their supplies are taxable and they
do not qualify as small suppliers. Registered organizations
must collect and remit the tax, although they can claim input
tax credits ("ITC") to recover the tax paid or owed
on purchases and operating expenses used, consumed, or supplied
in their commercial activities. Charities are an exception to
this general rule, with exemptions on most of their supply of
goods and services. Charities do not fit into the general mould
for GST/HST.
As of January 2004, the Charities Directorate
of the Canada Revenue Agency ("CRA") calculated the
charitable sector in Canada to have grown to over 80,500 organizations.
This Charity Law Bulletin focuses on charities and the
GST/HST. CRA's publication entitled "GST/HST Information
for Charities" can be found at http://www.cra-arc.gc.ca/E/pub/gp/rc4082/rc4082-02e.pdf.
As different rules apply, non-profit organizations should refer
to the CRA publication, entitled "GST/HST Information for
Non-Profit Organizations," available at http://www.cra-arc.gc.ca/E/pub/gp/rc4081/rc4081-e.pdf.
In order for a charity to determine its rights
and obligations under the GST/HST, the charity must first determine
the nature and scope of its activities. Charities fall into
three categories:
a) When all goods and services supplied are exempt
goods and services;
b) When some goods and services are taxable, but the charity
qualifies as a small supplier; or
c) When some goods and services are taxable and the charity
does not qualify as a small supplier.
B. CHARITIES WITH EXEMPT GOODS AND SERVICES
As a general rule, most supplies made by charities
are exempt. The CRA does not have a definitive list of exempt
goods and services, but does provide guidance through its publication
entitled "GST/HST Information for Charities."
Examples of exempt goods and services that are exempt when rendered
by charities provide them include:
-
Most services provided by a charity;
-
Supplies of used and donated goods;
-
Short-term residential accommodation (less
than one month of occupancy);
-
Meals-on-wheels programs;
-
Parking space rentals;
-
Facility rentals;
-
Catering services for private functions;
- Fund-raising activities that are not provided on a regular
or continual basis;
- Goods and services supplied for an amount that does not exceed
the direct cost;
- Certain gambling events;
- Recreational programs provided primarily for children 14 years
of age or younger;
- Where substantially all (i.e. 90 percent or more) supplies
are made free of charge, then all supplies of that good or service
are exempt;
- Memberships supplied without significant benefit;
- Admissions to places of amusement if the maximum admission
charged is $1 or less, or where charitable receipts for income
tax purposes may be issued, or where admission is supplied to
an athletic event at which 90 percent or more of the athletes
or competitors are not paid; and
- Supplies made for the relief of poverty, suffering or distress
of individuals.
If a charity's activities fall within these categories
of exempt goods and services, then specific rules apply. First,
the charity cannot register for GST/HST. Second, the charity
cannot charge tax on its supplies. Third, the charity cannot
claim ITCs to recover the GST/HST paid or owing on its purchases.
Finally, the charity would be eligible to claim a public service
bodies' ("PSB") rebate of 50 percent of the GST/HST
paid or owing on eligible purchases or expenses.
C. CHARITIES WITH TAXABLE GOODS AND SERVICES
The supply of goods and services that fall outside
of the above-listed exemptions may mean the charity is providing
taxable goods and services. As such, the charity must determine
if the scope of its activities requires it to register for GST/HST
and charge and remit tax on its supply of goods and services.
CRA regulations require that a charity must register for GST/HST
if two conditions are met:
a) The charity provides taxable goods and services
in Canada, and
b) The charity does not qualify as a small supplier.
Two tests are available to determine if a charity
qualifies as a small supplier. A charity need only meet one
of the two following tests to qualify as a small supplier, i.e.
either:
a) the Gross Revenue Test, and
b) the $50,000 Annual Taxable Supplies Test.
1. Gross Revenue Test
The annual limit for the gross revenue test for
a charity is $250,000. Basically, a charity will qualify as
a small supplier if gross revenues for the fiscal year amount
to $250,000 or less. If the charity is in its first fiscal year,
it need not register for GST/HST, regardless of gross revenue.
In the charity's second fiscal year, gross revenue is calculated
from the first fiscal year to make the determination as to small
supplier status. In subsequent years, the charity will calculate
the gross revenue in each of the two previous fiscal years.
If the total amount is $250,000 or less in either year, the
charity will continue to qualify as a small supplier.
Gross revenue includes business income, donations,
grants, gifts, property income, and investment income, less
any amount considered a capital loss for income tax purposes.
In making the calculations, the charity must include revenues
from the organization as a whole, meaning income generated from
branches or divisions must be included.
2. $50,000 Annual Taxable Supplies Test
The annual taxable supplies limit is $50,000 for
charities and other PSBs. The charity must calculate its total
revenue from taxable supplies in the current calendar quarter,
and the total revenue from taxable supplies in the last four
calendar quarters. If both amounts are $50,000 or less, then
the charity qualifies as a small supplier. If the amounts are
more than $50,000, the charity must register for GST/HST and
charge and remit the tax, unless the charity qualifies as a
small supplier under the gross revenue test.
Charities that qualify as a small supplier have
certain rights and obligations. First, like the charity supplying
exempt goods and services, small supplier charities cannot charge
tax on their supplies. Similarly, they cannot claim ITCs to
recover the GST/HST paid or owing on their purchases, though
they are permitted to claim a PSB rebate of 50 percent of the
GST/HST paid or owing on eligible purchases and expenses. Finally,
charities do not have to register for GST/HST until they exceed
the small supplier threshold, but they may register voluntarily.
D. CHARITIES THAT DO NOT QUALIFY AS SMALL SUPPLIERS
Charities that do not qualify as small suppliers
and provide taxable goods and services in Canada must register
for GST/HST. Once registered, they must collect and remit GST/HST
on taxable supplies of goods and services. They must file annual
returns, or they may elect to change their reporting periods,
and file monthly or quarterly returns. Charities should note
that failure to remit tax can result in the directors, officers
or members being held liable to remit an amount of the tax owing.
Unlike those charities that have not or cannot
register for GST/HST, registered charities that are registered
for GST/HST can claim ITCs to recover the GST/HST paid or owing
on purchases to provide taxable goods and services. ITCs can
be claimed when charities file a return, or they may hold the
credit over. A credit must be claimed within four years.
GST/HST registrants may also claim a PSB rebate
of 50 percent of the GST (or the federal part of the HST) paid
or owing on eligible purchases and expenses for which they could
not claim an ITC. Most charities would also be eligible for
a 50 percent rebate of the provincial part of the HST if they
are residents of a participating province. Similar to the ITC
credit, the PSB rebate application must be filed within four
years from the due date of the GST/HST return for the claim
period in which the expense was incurred.
E. VOLUNTARY REGISTRATION
If charities do not provide any taxable goods
or services, they cannot register for GST/HST or charge tax
on supply of goods and services. Those charitable organizations
that do provide taxable goods or services, yet do not meet the
threshold demanding registration, may voluntarily register for
GST/HST. If they decide to register, they must begin collecting
GST/HST on their taxable supply of goods and services and file
GST/HST returns to account for the tax collected. By registering,
charities may become eligible to claim ITCs to recover GST/HST
paid or owing on expenses incurred to provide taxable goods
and services. It would also be required to follow the PSB rebate
rules pertaining to GST/HST registrants.
F. BRANCHES AND DIVISIONS
Whether a charity is required to register or voluntarily
registers for GST/HST, it must do so as a single entity. Thus,
branches or divisions of that charity cannot register separately.
Similarly, when performing the calculations to determine small
supplier status, the charity must include the revenue from all
branches or divisions. However, the charity may apply to have
each branch or division with $50,000 or less in annual taxable
supplies designated as a small supplier division. If the application
is approved by the CRA, the branch or division will no longer
collect GST/HST on its taxable supplies and it will not claim
ITCs for its purchases. To qualify, the branch or division must
be separately identified by either its location or the nature
of its activities; must keep separate records, books of account,
and accounting systems; and must meet the $50,000 annual taxable
supplies test. There is the additional qualification that the
charity must not have revoked an earlier designation of the
branch or division within the previous 365-day period.
Charities should note that supplies transferred
between branches or divisions that are part of one entity are
not subject to GST/HST.
G. SPECIAL TAXING CONSIDERATIONS
1. Donations and Gifts
As a donation or gift is a voluntary transfer
of money or property for which the donor receives no benefit
in return, the GST/HST does not apply. This remains true even
if the donor receives property in return that has a nominal
value. However, if the donor receives a good or service having
more than nominal value in exchange for the donation, the donation
may be subject to tax.
2. Grants and Subsidies
Grants and subsidies are generally viewed as transfer
payments made in the public interest, and thus the CRA does
not regard them as payment for supply necessitating the charging
of GST/HST. However, if there is a direct link between the grant
or subsidy and the supply that the charity provides to either
the grantor of the transfer payment or a third party, the transfer
payment may be regarded as a payment for supply and subject
to taxation.1 The CRA notes that
as the tax treatment of transfer payments may be complex, they
will need to be determined on a case-by-case basis.
3. Sponsorships
Depending on the nature and the extent of the
promotional benefits given to the sponsor, sponsorships may
not be subject to GST/HST. If the payment made by the sponsor
is made primarily in order to obtain advertising, the CRA may
consider it a payment for advertising services and not a sponsorship,
and thus subject to GST/HST (except when a charity provides
the advertising services).
H. PUBLIC SERVICE BODIES' REBATE
The PSB rebate allows certain public service bodies,
including charities, to recover a percentage of the GST/HST
paid on purchases and expenses. Charities are eligible for a
rebate of 50 percent of the GST (or the federal part of the
HST) paid or owing on eligible purchases and expenses. Most
charities will also be eligible for a 50 percent rebate of the
provincial portion of the HST, if they are residents of a participating
province. Charities have four years from the end of the claim
period to file the rebate application. Although original invoices
or receipts do not have to be included in the rebate applications,
for audit purposes, the charity must keep those documents for
six years after the calendar year to which they relate.
Should the CRA designate a charity to be a municipality
in relation to certain municipal services it provides, the charity
may be able to recover 57.14 percent of the GST (or 57.14 percent
of the federal portion of the HST) paid or owing on purchases
and expenses related to that designated activity. GST paid or
owing on purchases and expenses related to other activities
will be subject to the regular 50 percent rebate.
1. Eligible Purchases and Expenses
Similar to the exempt goods and services, the
CRA does not have a definitive list of eligible purchases and
expenses for the GST/HST PSB rebate. However, some guidance
has been provided. Charities can claim a rebate of 50 percent
of the GST/HST paid or owing on eligible expenses, including:
-
General operating and overhead expenses, such
as rent, utilities, and administration expenses;
-
Most allowances and reimbursements paid to
employees and volunteers engaged in activities for the charity;
-
Supplies bought to produce finished goods
to sell, and merchandise bought to sell at fund-raising events;
and
-
Capital property (i.e., buildings, equipment,
vehicles, machinery, office furniture, computers, and photocopiers
the charity uses to carry on its activities).
2. Ineligible Purchases and Expenses
Purchases that are not eligible for the GST/HST
rebate include:
-
Memberships in dining, recreational, or sporting
clubs;
-
Goods and services bought to provide long-term
residential accommodation, unless at least 10 percent of the
accommodation is provided to seniors, youths, students, the
underprivileged, or individuals with a disability or who are
in distress;
-
A good or a service acquired to sell to an
officer, employee, or member of the charity, or to another
person related to that person, for personal use, unless:
- The good or service is supplied in the same year it was
acquired and the charity charges an amount equal to its
fair market value; or
- If the charity were to provide the good or service free
of charge to the person, it would not be a taxable benefit;
and
- A good or service supplied to another person, if the good
or service is a taxable benefit to that person for income tax
purposes, but the charity does not have to remit any GST/HST
on the supply.
Persons who operate charities out of their home,
or charities that share accommodation with other entities should
be cognizant of the fact that they must determine the percentage
of utility bills and other shared expenses that go towards the
charity's operations. The charity may only claim the rebate for
the part related to the charity's operations.
I. OTHER REBATES
1. Exported Goods and Services
Charities can apply for a 100 percent rebate of
the GST/HST paid to suppliers on goods and services that have
been exported outside Canada and for which the charity cannot
claim ITCs. The charity need not be registered for GST/HST in
order to receive this rebate. This rebate does not apply to goods
and services that are not exported, even if they are used in activities
that support other activities outside of Canada.
2. Purchases of Printed Books
A 100 percent GST/HST rebate is also available to
charities that operate a public lending library. This rebate relates
to GST/HST paid or owing on publications purchased for the lending
library that are not resold or given away.
J. INPUT TAX CREDITS ("ITC")
As noted above, an input tax credit is a claim to
recover the GST/HST paid or owing to suppliers for goods and services
acquired, imported, or brought into a participating province to
provide taxable goods and services by GST/HST registrants. Simply
put, ITCs are only available to the extent that purchases and
expenses are for consumption, use, or supply in the charity's
commercial activities. ITCs are claimed on the registered charity's
GST/HST return. There are two methods by which to calculate ITCs:
the general rules or the simplified method.
1. General Rules for Calculating ITCs
The general rules for calculating ITCs involve inserting
a column for GST/HST paid or owing to the purchases and expenses
side of the organization's records. This column is then totalled
to calculate the ITCs for each reporting period.
2. Simplified Method of Calculating ITCs
The simplified method of calculating ITCs involves
totalling the amount of taxable purchases for which the charity
can claim an ITC. This total will include all taxes paid on the
purchases. This total is multiplied by 7 and the result is divided
by 107 for the GST, or for those purchases subject to HST the
total is multiplied by 15 and the result is then divided by 115.
The CRA limits the use of the simplified method
of calculating ITCs to organizations that have annual worldwide
revenues from taxable goods and services of $500,000 or less in
the last fiscal year. The total taxable supplies for the preceding
fiscal quarters in the current fiscal year must also be $500,000
or less. These limits do not include goodwill, zero-rated financial
services, or sales of capital real property. Once an organization
begins to use this method of calculation, it must continue doing
so for at least one year, as long as the organization continues
to qualify.
3. Zero-rated Goods and Services
Zero-rated supplies refer to a limited number of
goods and services that are taxable at the rate of 0 percent.
Consequently, no GST/HST is charged on the supply of these goods
and services, but they are treated in the same way as items taxable
at 7 or 15 percent for the purpose of claiming ITCs. Zero-rated
supplies include basic groceries, certain goods when they are
exported outside of Canada, prescription drugs, certain medical
devices, and services of installing, maintaining, restoring, repairing
or modifying certain medical devices.
4. Real Property and ITCs
ITCs are available for the acquisition of real property
by a charity to be used as capital property, subject to the primary
use rule. Under this rule, a charity may claim a 100 percent ITC
on the acquisition of capital property, or an improvement to capital
property, if the charity intends to use the property primarily
in its commercial activities. If the primary use is not for commercial
purposes, the ITC cannot be claimed, but the 50% PSB rebate for
the GST/HST paid or owing can be claimed. Should a charity change
the primary use of a capital property there would be tax implications.
If the capital property is changed from exempt to
commercial use, the CRA will deem the capital property to have
been sold and reacquired at the time and to have paid GST/HST
equal to the basic tax content of the property at the time. If
this is done, an ITC could then be claimed.
If the capital property is changed from commercial
to exempt use, the CRA deems the charity to have sold the property
at that time and to have collected GST/HST equal to the basic
tax content of the capital property at that time. GST/HST would
then have to be remitted, essentially paying back the ITC that
had previously been claimed when the property was initially purchased
or improved.
5. Taxable Sales and Leases of Real Property
Generally, most sales, leases, or other supplies
of real property by charities are exempt from GST/HST. However,
there are exclusions from this general exemption to which the
GST/HST would be taxable. These exclusions include the sale of
a new or substantially renovated residential complex; most deemed
supplies of real property; and, real property that the charity
has chosen to treat as taxable by filing an election with the
CRA. Should a charity elect to treat certain exempt sales and
leases of real property as taxable supplies, the charity would
be able to claim ITCs for the GST/HST paid or owing on the acquisition
of the property, or any improvements to it to the extent that
the property is used to make taxable supplies. The election would
require the charity to charge GST/HST on the sale, lease, or licence
of the property, the primary use rule would not apply, and the
charity would calculate and claim the ITC based on the percentage
of the property's use in the commercial activities. After the
election has been made, the charity can claim ITCs on purchases
and expenses related to the real property if they have made the
election not to use the net tax calculation method assigned to
charities.
K. DETERMINING NET TAX
A GST/HST registrant is required to file a GST/HST
return, calculating the charity's net GST/HST remittance or refund.
This calculation takes into account two things: the next tax and
any instalments, rebates and other credits, and debts. Using this
calculation, the charity would remit 60 percent of the GST/HST
collected on most taxable supplies (100 percent GST/HST collected
is remitted on some items like the taxable sales of capital and
real property), less ITCs claimed on certain eligible items. The
result is the net tax. Taxes paid or owing on items purchased
that are not subject to the ITC may be subject to the 50 percent
PSB rebate.
L. CONCLUSION
The GST/HST regulations present a minefield that
charities and their boards of directors must navigate. The complexity
of the regime necessitates that charities examine the nature and
scope of their activities in order to properly determine their
rights and obligations under the GST/HST. As the CRA does not
claim to produce a definitive list of exempt and taxable activities,
it is that advisable charities seek confirmation in order to make
the proper determination in order to avoid unexpected liability
exposure.
Footnotes:
1.Such was the case in Meadow
Lake Swimming Pool Committee Inc. v. Canada, [1999] T.C.J.
No. 723 (T.C.C.), wherein the court upheld the assessment which
found a direct link between the payment received by the non-profit
organization running the municipal pool and the supply of services
to the municipality. Thus, the subsidies given by the municipality
to the non-profit organization to off-set the annual operating
deficit were deemed to be consideration for the supply of services
and subject to taxation.
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