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Attention: XXXXX
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July 20, 1994
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Dear XXXXX
This is in reply to the correspondence dated May 4, 1993, and accompanying documentation sent to this office by XXXXX‚ and XXXXX asking whether payments made by the government of Canada to the XXXXX which were then transferred to the XXXXX for distribution would qualify as government funding in the hands of the end recipients. We regret the delay in our response.
Statement of Facts:
1) In XXXXX the federal government agreed to pay XXXXX community, through the XXXXX for community related capital projects, educational, social and cultural activities. The XXXXX is a non-profit organization.
2) An agreement ("Agreement") was entered into on XXXXX between the Canadian government, the XXXXX and the XXXXX[.] The preamble to the Agreement states that the payment of XXXXX by Canada to the XXXXX, through the XXXXX is to undertake educational, social and cultural activities or programmes that contribute to the well-being of the community or that promote human rights.
3) The preamble to the Agreement also states that the XXXXX has established the XXXXX to implement this term of the XXXXX. The XXXXX is a non-profit organization that has not registered for the GST.
4) Clause 1.1 of the Agreement provides that the XXXXX agrees to transfer the full amount of $ XXXXX to the XXXXX upon its receipt from the government.
5) Under clause 2.1 of the Agreement, the XXXXX agrees to spend the $ XXXXX referred to in clause 3.1 and interest earned thereon only for the reasonable expenditures involved in the undertaking of educational, social and cultural activities or programmes that contribute to the well-being of the XXXXX community or that promote human rights. The XXXXX will utilize less than 5% of the funding it receives from the XXXXX for administrative costs.
6) Clause 3.1 of the Agreement states that the Minister of State (Multiculturalism and Citizenship) agrees, subject to the terms and conditions of this Agreement to pay to the XXXXX an amount of XXXXX for immediate transfer by the XXXXX to the XXXXX for the implementation of undertakings described in Clause 2.
7) Clause 6.1 of the Agreement states that the XXXXX is released and discharged from all liability under or in respect of this Agreement, once the XXXXX paid to it pursuant to Clause 3.1 of this Agreement and any interest earned thereon is transferred to the XXXXX by the XXXXX[.]
8) Pursuant to clause 7 and 9 of the Agreement, the XXXXX will submit to the Minister, financial statements on the use of the funds no later than three months after each fiscal year end and a detailed report of all activities of the XXXXX for each year during which the Agreement is in effect.
9) Appendix A of the Agreement lists a number of provisions that comprise the XXXXX and by-laws for the duration of the Agreement.
10) Appendix B of the Agreement outlines the way in which the XXXXX must expend the $12 million. The "Categories of permissible expenditures" is broken down by capital projects (clause 1(a) of Appendix B), educational, social and cultural activities or programmes (clause 1(b) of Appendix B), and outreach work (clause 1(c) of Appendix B). The main priorities with respect to capital projects are "buildings for health care, seniors' housing, seniors' drop-in centres, community cultural centres and any similar project ...".
The way in which interest earned on the XXXXX (or any unexpended portion thereof) is to be expended is also identified (i.e., on capital projects and educational, social and cultural activities & programmes).
11) Appendix C of the Agreement lists the criteria that must be used by the XXXXX in evaluating possible projects to be funded by the XXXXX. Separate criteria are identified for each category outlined in Appendix B of the Agreement. The purpose of the project proposals for capital projects, educational, social and cultural activities must fall within the criteria established in the XXXXX Memorandum of Agreement. In addition, in order for an organization to be eligible for funding by the XXXXX it must have community support and a history of community involvement and provision of services to the XXXXX[.]
12) The final recipient of the funds (i.e., the projects funded) are almost exclusively non-profit organizations. Various chapters of the XXXXX are the largest recipients of the funds.
Questions
XXXXX on behalf of the XXXXX have requested that the Department confirm the following:
1) that the XXXXX has authority to issue certificates in respect of future distribution of funds to qualifying recipients;
2) that the XXXXX may issue such certificates retroactively in respect of funds already disbursed, and
3) that excess interest income earned on the funds in the hands of the XXXXX qualifies as government funding.
Conclusions
1) The XXXXX may issue certificates to qualifying recipients certifying that the funds they receive are a flow-through of government funding.
2) The XXXXX will be entitled to issue certificates retroactively in respect of funds already disbursed.
3) The XXXXX may not issue certificates in respect of interest income earned by that organization on amounts received from the XXXXX and subsequently paid by the XXXXX to the end recipients. The recipient organizations must not include these amounts as government funding but should include them in their calculation of total revenue.
Analysis
Based on the information provided, it is our view that the XXXXX payment to the XXXXX by the government of Canada is not consideration for a supply since the payment is for a public purpose and not a purchase purpose. The government of Canada did not make the payment to the community based organizations (through the XXXXX and the XXXXX for the purpose of purchasing property or services for its own use or benefit or for the benefit of a specified third party. While the end recipients may receive supplies as a result of the payments received from the XXXXX the purpose of the payment by the original grantor was to benefit a class of persons, the XXXXX.
The funding which flows from the XXXXX to the XXXXX and the funding provided by the XXXXX to various organizations in the XXXXX, many of whom are themselves non-profit organizations, would maintain its status as not consideration for a supply. The Department's interpretive policy regarding the Extension of Transfer Payments (issued May 25, 1993), supports the view that payments passed from the XXXXX to the XXXXX and from the XXXXX to the end recipients are not consideration, as it states that payments which pass through intermediaries to a final recipient are not consideration where it is the original grantor's intention that the funds be used for a public purpose.
"Government funding" of a person, as defined in the Public Service Body Rebate (GST) Regulations, means an amount of money that is readily measurable and is paid or payable to the particular person by a grantor for the purpose of:
i) financially assisting the particular person in carrying out its objectives and not as consideration for supplies made by the person, or,
ii) as payment for exempt supplies of property or services provided to persons other than the grantor.
Payments made by an organization which does not qualify as a grantor (i.e., an intermediary) will be considered to be government funding under the following conditions:
i) the payments were originally made by a grantor;
ii) the funds paid by the intermediary to the recipient must be to assist the recipient in the pursuit of its objectives or to pay for an exempt supply provided to other persons (i.e., persons other than the grantor, officers, employees, shareholders or members of the grantor or persons related to the grantor or to such individuals);
iii) the funds do not flow through more than two intermediaries to the final recipient (for example, from a grantor to a national organization to a provincial organization and then to a local organization);
iv) the intermediary provides a certificate in a form prescribed by the Minister (i.e., form GST-322) certifying to the end recipient that the payment is a flow-through of government funding.
If a recipient non-profit organization does not have this certificate on file, amounts it receives from the intermediary will not qualify as "government funding" for the purpose of establishing whether the recipient is entitled to claim the 50% rebate available to "qualifying non-profit organizations" under section 259.
Since the payments at each level of flow-through are not consideration in respect of a supply, these payments meet the definition of "government funding", set out in the Public Service Body Rebate (GST) Regulations. The amounts transferred will be afforded the same treatment through all levels of its flow-through, provided the certification requirements described in the Regulations are met.
Concerning the question of when certificates may be issued, the Public Service Body Rebate (GST) Regulations indicate that a certificate is to be provided by an intermediary to the recipient of its funds at the time the amount is paid. Therefore, a certificate should be prepared by the XXXXX when it distributes funds to qualifying recipients. However, in view of the delay in responding to this matter, we will administratively allow the XXXXX to issue such certificates retroactively in respect of funds it has already disbursed.
With respect to the question of whether interest income can be considered to be government funding, we must look to the definition of this term in the Public Service Body Rebate (GST) Regulations.
The Regulations clearly indicate that an amount must be paid or payable to the recipient by the grantor in order to be considered government funding. Interest income earned on amounts originally received from a grantor will not qualify as government funding in their own right as these are not amounts paid by the grantor. In other words, a payment made by an intermediary body to another party will only qualify as government funding if that payment was originally made by a grantor.
I hope that this information will be of assistance. If you have any questions or would like to discuss this matter further, please do not hesitate to contact Elaine Bonnah at (613) 952-6761.
Yours truly,
J.A. Venne
Director
Tax Policy - Special Sectors
Policy and Legislation
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