Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX
XXXXX
XXXXX
XXXXX
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 85601
Attention: XXXXX XXXXX
July 19, 2010
Dear XXXXX:
Subject:
GST/HST RULING
Application of the GST/HST to forgivable loans and forgivable interest
Thank you for your XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to forgivable loans and forgivable interest. We apologize for the delay in responding to this enquiry.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
Statement of Facts
We understand
1. You have a client (the Proponent) who is a non-profit organization as that term is defined in section 123(1) of the ETA and clarified in Policy Statement P-215, Determination of whether an entity is a "non-profit organization" in the ETA.
2. The Proponent has entered into an agreement XXXXX.
XXXXX.
XXXXX.
XXXXX.
Ruling Requested
You would like to know:
1. Is the Loan considered to be government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations?
2. If the Loan is considered to be government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations, should that amount be recognized as government funding:
• in the year of receipt?
• in the year of forgiveness?
• over time as per its recognition for financial reporting purposes?
3. Is the annual forgiveness of accrued interest considered to be government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations?
Ruling Given
Based on the facts set out above, we rule that:
1. The Loan discussed in section XXXXX of the Agreement is government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations.
2. It is not possible to rule on this issue. A ruling would require an opinion on generally accepted accounting principles or commercial practices. An interpretation will be provided instead.
3. The annual forgiveness of accrued interest is not considered to be government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
The Proponent receives an amount of money that is a forgivable loan. That amount of money is readily ascertainable because it is outlined in section XXXXX of the Agreement. The amount of money is paid or payable to the Proponent by a grantor. The amount of money paid by the grantor to the Proponent under the Agreement as a forgivable loan is not consideration for a supply because neither the grantor nor a third party receives a supply that can be directly linked to the forgivable loan. Therefore, the Loan discussed in section XXXXX of the Agreement is government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations.
With respect to the forgivable interest discussed in section XXXXX of the Agreement, the Proponent does not receive an amount of money that is readily ascertainable. The forgivable interest does not reflect an amount that is actually paid or payable to the Proponent from the Minister and available for the Proponent's purposes. For this reason, the annual forgiveness of accrued interest is not considered to be government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations.
Interpretation Given
You have asked, if the Loan is considered to be government funding as defined in section 2 of the Public Service Body Rebate (GST/HST) Regulations, should that amount be recognized as government funding:
• in the year of receipt?
• in the year of forgiveness?
• over time as per its recognition for financial reporting purposes?
It is not possible to rule on this issue. A ruling would require an opinion on generally accepted accounting principles or commercial practices. The following interpretation provides our position on this issue.
A qualifying non-profit organization is eligible for a rebate under subsection 259(3) of the ETA. A non-profit organization is a qualifying non-profit organization at any time in a fiscal year if, at that time, the non-profit organization's percentage of government funding for the year is at least 40%. The percentage of government funding of a person for a fiscal year is to be calculated in accordance with section 3 of the Public Service Body Rebate (GST/HST) Regulations.
An amount identified in the financial statement of a particular person as government funding will be included in the percentage of government funding calculation formula found in section 3 of the Public Service Body Rebate (GST/HST) Regulations where the amount "... is received or became receivable in the year (depending upon the method followed by the person in determining the particular person's revenue or funding for the year) ..."
Where a non-profit organization receives restricted contributions in a lump sum amount during a fiscal year and the non-profit organization defers and recognizes the amount in a later period, rather than in the period in which it was received, the CRA, on a case by case basis, may accept this method of revenue recognition for purposes of determining the percentage of government funding formula pursuant to the Public Service Body Rebate (GST/HST) Regulations and section 259 of the ETA under the following conditions:
• the contribution received is government funding as defined in the Regulations;
• the contribution is subject to restrictions in the funding agreement that specify the specific conditions on the expenditure of the funding, when the amount must be expended, and that obligations linked to the expenditure are required to be fulfilled in the subsequent reporting periods;
• the non-profit organization complies with accepted accounting and reporting requirements (i.e. as outlined in the CICA Handbook) with respect to using a deferral method of accounting to recognize restricted contributions as revenue in its financial statements; and
• the deferred contribution is identified as government funding for the period in which it is recognized as revenue in the financial statements.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-0420. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Trent MacDonald
Charities, Non-Profit Organizations and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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