7 April 2006 GST/HST Ruling 45276 - Dried Fruits

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.

Dear XXXXX:

Thank you for your letter XXXXX concerning the calculation of government funding by your client, XXXXX, for purposes of determining whether it is a qualifying non-profit organization pursuant to subsection 259(2) of the Excise Tax Act (ETA). We apologize for the delay in responding to your request.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

Our understanding of the facts from the information in your letter, attachments and the related legislation is as follows:

1. XXXXX was created XXXXX as a result of a funding agreement ("Funding Agreement") XXXXX. The XXXXX is not an agent XXXXX.

2. XXXXX.

3. The XXXXX is not registered for the GST/HST.

4. The XXXXX business number is XXXXX.

5. The XXXXX mission is to act as the XXXXX in Canada. Its purpose is to:

•   XXXXX;

•   XXXXX;

•   XXXXX.

6. The XXXXX has received grants of various amounts from the Consolidated Revenue Fund (the Funding) upon the requisition of the XXXXX. The Funding is provided in lump sum amounts rather than on a regular annual basis. There are restrictions imposed on the XXXXX as to how and when the Funding is to be used, as well as budgeting and reporting requirements.

7. XXXXX.

8. The XXXXX provides funds for qualifying XXXXX related projects to eligible recipients. The recipients must sign a contractual agreement with the XXXXX outlining the obligations of the parties to the agreement, the terms and conditions of the funding allocation, and the recovery of funds in the event of default, XXXXX. There is no retention of commercial assets by the XXXXX or individual members of a project. If the XXXXX does recover any funding, the funds return to the "pool" for allocation to other eligible projects.

9. XXXXX.

10. XXXXX.

11. XXXXX is wound up or dissolved, remaining funds would be divided amongst eligible recipients involved in projects or repaid to the credit of the Consolidated Revenue Fund.

12. The XXXXX uses the "deferral method" of accounting in its financial statements to recognize restricted contributions received from the federal government under the Agreement. This method is outlined in the Canadian Institute of Chartered Accountants Handbook. The XXXXX defers restricted contributions represented by the Funding amount as liabilities and recognizes the amount as revenue in the same period as the related expenses are recognized XXXXX.

Ruling Requested

You would like to know if XXXXX is entitled to calculate the percentage of its government funding for purposes of section 259, based on the amount identified as a contribution using the deferral method as recorded in its financial statements?

Ruling Given

Based on the facts set out above, we rule that to calculate the percentage of government funding for the year for purposes of section 259, XXXXX may use the deferral method whereby it records in its financial statements the restricted contributions granted pursuant to the Funding Agreement, as revenue in a year subsequent to the year received.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is 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

Subsection 259(3) provides for a rebate of a percentage of the GST/HST paid by certain persons, including a qualifying non-profit organization (NPO). Subsection 259(2) specifies that a person is considered a qualifying NPO at any time in a fiscal year of the person if, at that time, the person is a NPO, and the percentage of government funding for the fiscal year is at least 40% of its total revenue.

Under subsection 123(1) "non-profit organization means a person (other than an individual, an estate, a trust, a charity, a public institution, a municipality or a government) that was organized and is operated solely for a purpose other than profit, no part of the income of which is payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder is a club, a society or an association the primary purpose and function of which is the promotion of amateur athletics in Canada."

It is our view that the XXXXX would be considered to be operating solely for a purpose other than profit provided it operates in compliance with its articles of incorporation, its by-laws and the XXXXX. Whether an organization operates solely for a purpose other than profit is a question of fact, which must be determined on an ongoing basis.

For purposes of the rebate under subsection 259(3), 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 (GST/HST) Regulations ("the Regulations"). In the calculation formula, the amount identified in the financial statements of the particular person for the year as government funding is specified as the government funding that "... 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 NPO receives restricted contributions in a lump sum amount during a fiscal year and the NPO 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 the percentage of government funding formula pursuant to the Regulations and section 259 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 the expenditure of certain amounts is thereby deferred until subsequent reporting periods.

•   The NPO 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.

Based on a review of the XXXXX, the contribution amounts are intended to assist the XXXXX in carrying out its purpose and are considered government funding for purposes of the Regulations and section 259. Interest income earned on investment of the Funding does not qualify as government funding.

The XXXXX is restricted from distribution of the contribution amount except for the purposes and under the conditions specified in the XXXXX. The XXXXX is required to provide annual statements detailing its funding activities. It identifies the restricted contribution amounts as government funding in its financial statements XXXXX. These amounts are recorded using the deferral method of accounting, and recognized as revenue in the same periods as the related expenses that they were intended to fund are recognized.

Accordingly, as the XXXXX meets the above noted conditions with respect to restricted contributions, it is entitled to utilize the deferred method of accounting for revenue recognition of the contributions when calculating the percentage of government funding in the period pursuant to the Regulations and section 259.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 952-0420.

Yours truly,

Debra Murphy
Charities, NPO & Educational Services Unit
PSB & Governments Division
Excise and GST/HST Rulings Directorate

XXXXX

2006/03/10 — RITS 46083 — Importation of Donated Works of Art XXXXX