|
Attention: XXXXX
|
August 16, 1994
|
|
Subject:
|
Application of the GST to Political Parties
|
Dear Mr. XXXXX
This is in response to your letter dated February 22, 1994, requesting a ruling concerning the entitlement of XXXXX to GST refunds in respect of its expenditures.
In the information provided with your request, you included a copy of the XXXXX, XXXXX and a general outline of the category of activities carried on by the Party. In order to provide you with a GST ruling we would need to be provided with detailed information and documentation setting out how the Party is structured and operated and explaining each of the transactions that it undertakes. We can however, provide you with a interpretation explaining the application of the Excise Tax Act (ETA) to this organization's activities.
This interpretation is based upon our current understanding of the ETA and regulations thereunder in their present form and does not take into account the effects of any proposed or future amendments thereto or future changes in interpretation.
Further, while we trust that these comments will be of assistance to you, they do not constitute a GST ruling and are therefore not binding upon the Department in respect of any particular fact situation.
Statement of Facts
From the information provided in your letter and in telephone conversations with Elaine Bonnah of this office, we have noted the following facts:
1) The Party is an unincorporated association that has been in existence XXXXX. It was registered as XXXXX on XXXXX. Official income tax receipts are issued for contributions made to the Party.
2) Its governing documents are XXXXX, which has been adopted as XXXXX and the XXXXX[.]
3) The XXXXX is an incorporated entity, XXXXX[.]
4) The Party promotes its principles by:
disseminating information through written materials, public meetings, advertising and other means,
supporting and endorsing candidates for office in federal provincial territorial and local elections,
establishing local associations to provide assistance to candidates and affiliates in connection with ballot access and other activities,
organizing volunteers and regularly holding conventions.
5) The governing body of the Party is the Executive Committee. This organization has the powers necessary to carry out XXXXX Party's purposes and the ability to delegate such powers and authority as it shall determine. For example, the Executive Committee (or in some cases, the President of the Executive Committee) has the authority to:
designate the Party's offices throughout Canada,
establish membership dues,
determine when memberships should be revoked,
by majority vote, elect its own members,
may appoint or remove officers of the Party,
select the Party leader,
establish committees to carry out XXXXX activities (i.e. Budget Committee, Nominating Committee, Finance Committee, etc.),
select members to sit on these committees,
determine the form and substance of agreements to grant provincial or territorial associations status within XXXXX[,]
determine the form and substance of agreements to grant constituency associations status within XXXXX[,]
determine guidelines and rules with respect to the nomination and selection of candidates for federal and provincial/territorial elections,
select time and place of conventions and determine who may attend, establish convention rules and activities and,
control the use of the name XXXXX by other persons, groups or organizations.
5) The principal office of the Party is in Ottawa. Branch offices have been designated in all provinces in Canada by the Executive Committee. These offices maintain their own bank account, however, official receipts are issued by the XXXXX and the Party itself maintains a centralized control over the operations of the branch offices.
6) The Party is a GST registrant XXXXX. It collects GST on its supplies of memberships and sales of t-shirts.
7) The Party has two classes of membership - founding members and ordinary members. At present there are XXXXX members whose membership fees range between XXXXX and XXXXX[.] Memberships are supplied at the Party's national level.
8) It appears that an election has not been made to have these memberships treated as non-exempt.
9) Membership in the Party is granted to individuals who:
pay membership dues determined by the Party's Executive Committee,
support the principles and policy of the Party and
are of voting age.
Members shall not be otherwise elected or appointed and shall have no right to vote on matters relating to XXXXX[.] Individuals lose their membership if the Party's Executive Committee determines that they do not fairly represent the principles and policies of the Party.
Analysis
Candidates
A candidate in a federal election is not considered to be engaged in a commercial activity as that term is defined in subsection 123(1) of the ETA. Therefore, candidates or official agents acting on behalf of candidates, cannot register for the purposes of the GST. As a result, the candidate will not be able to claim input tax credits to recover any part of the GST paid on election expenses.
Candidate Campaign Committees
A candidate may establish a campaign committee to coordinate activities in the course of his or her election campaign. In our view, it is reasonable to conclude that a campaign committee is not a separate person in its own right for the purposes of the GST.
Activities carried on by a candidate's campaign committee before an election writ is issued will be viewed as those of the local constituency association. The activities carried on by the campaign committee after the election writ has been issued will be viewed as those of the candidate. Therefore, regardless of the degree of organization and the number of persons involved in campaign activities on behalf of the candidate, a campaign committee is not an autonomous entity and is not a person in its own right.
As only "persons" are entitled to register for GST purposes, the candidate's campaign committee will not be entitled to register and will not be able to claim input tax credits in respect of the GST paid on purchases made in the course of the campaign.
As explained above, if the candidate, or the official agent acting on behalf of the candidate, make purchases in the course of the campaign, no portion of the GST paid may be recovered through input tax credits.
On the other hand, if purchases in the course of an election campaign are made by the political party, then the entitlement to input tax credits will depend on whether the party is a GST registrant and whether these acquisitions are incurred in the course of a commercial activity.
Political Parties and the GST
Non-profit organizations, including political parties, that make taxable supplies in the course of a commercial activity are required to register to collect and remit the GST on their sales of taxable goods and services. A political party will not be required to register if it falls under the "small supplier threshold", meaning it has less than $30,000 in taxable sales in its current fiscal quarter, or in its preceding four fiscal quarters. However, it may register voluntarily, as long as it is engaged in some commercial activity.
A political party that is registered for the GST is entitled to claim input tax credits to recover the GST paid on purchases used in the course of its commercial activities. Input tax credits may not be claimed in respect of purchases used in supplying exempt goods or services.
Memberships
The significant supply made by political parties is the supply of memberships. In order to determine the tax status of memberships in a political party, it is necessary to examine the benefits received by the members.
Memberships sold by a political party will be exempt if the members only receive an indirect benefit that is enjoyed by all members collectively (e.g., the promotion of a particular political philosophy).
Memberships will also be exempt if the members only receive insignificant direct benefits. These "allowable" benefits are as follows:
the right to receives services supplied by the political party that are in the nature of investigating, conciliating or settling complaints or disputes involving its members;
the right to vote at, or to participate in meetings;
the right to receive or acquire property or services supplied to the member for consideration, that is not part of the membership fee, and that is equal to the fair market value of the property or service provided;
the right to receive a discount on consideration paid for supplies made by the political party where the total of these discounts is less than 30% of the amount paid for the membership;
the right to receive periodic newsletters, reports or publications where the value is less than 30% of the amount of the membership fee or that provide information on the activities of the political party or its financial status, other than newsletters, reports or publication whose value is significant (i.e., equalling 30% or more of the membership fee) and for which a fee is ordinarily charged to non-members.
A political party may have its otherwise exempt memberships treated as non-exempt. In order to do this, the political party must make an election under section 17 of Part VI to Schedule V of the ETA, using form GST 23. This form does not have to be filed with the Department but must be kept in the organization's records. Once this election is made, if the political party is engaged in commercial activities, its otherwise exempt memberships will be subject to GST and the political party may claim input tax credits for the GST paid on purchases to the extent that they are used in supplying these memberships. The election must be made prior to the supply of membership. An election cannot be made to retroactively deem exempt supplies of memberships to be taxable for the purpose of claiming input tax credits.
We understand that the Party has been charging GST on its supplies of memberships; however, based on the information provided, it seems that Party members do not receive significant, direct benefits in return for their membership fee and therefore, the memberships would appear to be exempt. As it appears that the Party has not made an election under section 17 of Part VI to have its memberships treated as taxable, we cannot confirm that it has properly charged GST on its supplies of memberships. If you would like to provide additional information to this office on this matter, we would be pleased to advise you in this regard.
In the next section we will explain how the GST applies to candidates in a federal election, to candidate campaign committees and to federal political parties.
Political Parties
Issue of Single vs. Separate Persons
There are certain advantages available to GST registrants under the ETA; however, in determining whether a political party is entitled to register for the GST, the first question that must be asked is whether it constitutes a single person or a number of separate persons for the purposes of the GST.
It will be a question of fact as to whether a political party will constitute a single person or a number of separate persons under the GST. The various divisions of a political party (i.e., national associations, provincial or territorial associations or constituency associations) may, depending on the manner in which the party is constituted and the degree of control exercised by the national association, be considered to be part of a single person. However, if these divisions are sufficiently autonomous, they may constitute separate persons in their own right under the GST. Any division of a political party that is separately incorporated would also constitute a separate person for the purposes of the GST.
The question of whether a political party is a single person or whether it is made up of different persons is extremely important as a political party that is a single person must make only one application for registration for the purposes of the GST. If the party is a single person, GST will not apply to any supplies of goods or services made between the various branches or divisions of that party. However, if the various branches and divisions of the party are themselves separate persons, then separate applications for registration must be made by each branch and division. The branches and divisions that constitute separate persons would also be required to make separate elections to have their memberships deemed to be non-exempt and any transactions made in the course of a commercial activity between these branches and division will be subject to GST.
As XXXXX is a separately incorporated entity, it is a separate person for the purposes of the GST. However, it is our understanding that the activities of XXXXX Party (e.g., acquisitions, supplies of memberships, election activities and policy development) are not carried on by XXXXX but by the Party itself. Therefore, the Party must determine whether it alone is required to register or whether its branch organizations are separate persons that should register in their own right. While it appears that the Executive Committee of the Party has significant authority over the Party's operations and activities, we do not have sufficient information to confirm whether the Party's national association and its constituency associations or other divisions would constitute a single person for the purposes of the GST.
The following criteria may be useful in determining whether a branch organization of the Party is a separate person in its own right:
1) the fact that the branch organization may sue and be sued in its own name;
2) the fact that the branch organization is capable of holding property in its own name;
3) the fact that the parent body is not liable for the debts and obligations of the branch organization and the branch organization is not liable for the debts and obligations of the parent body or of any other branch organization;
4) the fact that the branch organization has the capacity to contract in its own name;
5) the fact that the branch organization has its own constitution (or Charter) and by-laws;
6) the fact that the branch organization has its own board of directors and does not have, to any significant extent, directors, officers or employees that are common with the parent body or any other branch organization;
7) the fact that the branch organization enjoys a considerable degree of autonomy in its day-to-day operations (e.g. financial resources allocation, program development, staffing, payroll, etc.);
8) the fact that the branch organization raises most of its revenues as opposed to receiving funding from the parent body (i.e. the branch organization is self sustaining financially);
9) the fact that the accounting activities of the branch organization are separate from those of the parent body and other branch organizations (e.g., separate books and records, financial statements, bank accounts, etc.);
10) the fact that the financial and/or fiscal year of the branch organization is different from the financial and/or fiscal year of the parent body and other branch organizations;
11) the fact that the members of the branch organization are different from the members of the parent body and other branch organizations;
12) the fact that persons do not automatically become members of the parent body or of another branch organization by becoming members of the branch organization and vice versa;
13) the fact that the branch organization has its own distinct seal.
Input Tax Credits
A political party that is a single person may register for the GST if it conducts its activities on a regular and continuous basis and if it makes supplies in the course of these activities such as admissions to conventions and fund-raising events and supplies of non-exempt memberships.
National associations, local constituency associations and other divisions of federal political parties that are separate persons under the GST must review their activities separately to determine if they are engaged in regular and continuous activities, and if they make supplies in the course of these activities such as admissions to conventions, fund-raising events and supplies of non-exempt memberships. If they are carrying on such activities, we will consider that they are engaged in a commercial activity and they may register for the purposes of the GST.
For example, a national association of a political party may perform different functions than those performed by a local constituency association. Each association must determine if it is engaged in a commercial activity and if it makes taxable supplies in the course of that activity in order to establish whether it may become a GST registrant.
A political party that is engaged in a commercial activity and has registered for the GST may claim input tax credits in respect of the GST paid on purchases acquired for the purpose of making supplies of tangible property such as t-shirts and also for taxable admissions to fund-raising events, banquets or conventions.
Political parties also acquire property and services in the course of activities such as research, strategic planning, policy development, and election campaigns (including advertising, travel expenses, distribution of party literature, etc.). In our view, these purchases are acquired for the purpose of making supplies of memberships. Accordingly, input tax credits may be claimed if these purchases have been acquired for consumption or use by the party for the purpose of taxable supplies of memberships.
It is therefore important to establish whether the memberships to the party are taxable or exempt. If the memberships are exempt then the purchases acquired for the purpose of making these supplies will not be acquired for consumption or use in the course of commercial activities and therefore, no input tax credits may be claimed.
The GST paid on overhead costs must be apportioned by the party between its consumption or use in exempt or commercial activities.
Conclusion
Before it can be determined whether the XXXXX is entitled to claim input tax credits to recover the GST paid on its expenses, the following questions must be resolved:
1) Is the Party a single person or several separate persons for the purposes of the GST?
2) Is the Party engaged in a commercial activity? That is, does it carry on regular and continuous activities and make supplies in the course of these activities such as admissions to conventions, fund-raising events, supplies of tangible property, etc.?
3) Are memberships sold by the Party taxable?
4) If the memberships are exempt, did the Party make an election to have them treated as taxable?
If the Party consists of separate persons, then the activities of each person must be examined to determine whether it may register for the GST and the extent to which it is entitled to claim input tax credits.
If the Party is a single person that is engaged in a commercial activity which includes making supplies of taxable memberships, then it will be entitled to claim input tax credits to recover the GST paid on all its purchases, except to the extent that a purchase has been acquired for the purpose of making exempt supplies.
If the Party is engaged in a commercial activity but its memberships are exempt, then input tax credits will not be available for purchases directly related to the supply of memberships (e.g., election expenses, policy development, advertising, etc.).
I hope that the foregoing will be of assistance. If you would like to discuss the points raised in this letter or require any further information , please do not hesitate to contact Joanne Houlahan at 954-7945 or Elaine Bonnah at 952-6761.
Yours truly,
J. A. Venne
Director
Tax Policy - Special Sectors
Policy and Legislation
Email this Content