File 11925-3-1(EB)
Doc. 1668
Leg. Ref.: s. 259
XXXXX February 2, 1995
Madame:
This is in response to your facsimile request dated December 16, 1994, concerning the status under the GST of membership fees paid by school boards to XXXXX
Based on the information provided, our understanding of the facts is as follows.
Statement of Facts
1) XXXXX is a non-profit organization incorporated under la partie III de la loi sur les compagnies du Québec. Its primary activity is supporting school boards in carrying out their mandate.
2) It receives almost all its revenue as membership fees from its member school boards. There is no direct funding from the province of Quebec.
3) Memberships sold by XXXXX are exempt supplies under section 17 of Part VI to Schedule V of the Excise Tax Act (ETA).
4) The school boards receive their revenue by way of funding from the Quebec Department of Education (le "MEQ") and through tax revenues.
5) The school boards receive funding based on their projected budgets which specify an amount for membership in XXXXX
6) The financial statements of XXXXX do not show amounts received from the school boards as government funding but rather, membership fees.
7) The school boards have not issued Certificates of Government Funding in respect of amounts paid as membership fees to XXXXX
Your questions have been restated below.
Questions
1) Do the school boards constitute "other persons" referred to in subparagraph 2(a)(ii) of the Public Service Body Rebate GST Regulations (i.e., "Regulations")?
2) Does the money paid to XXXXX by the school boards for an exempt supply of membership qualify as government funding as defined in paragraph 2 of the Regulations?
3) Does XXXXX meet the definition of a qualifying non-profit organization?
Conclusion
The member school boards do not constitute "other persons" referred to in subparagraph 2(a)(ii) of the Regulations.
Amounts paid by the school boards are consideration for membership supplied by XXXXX and do not constitute government funding in the hands of that organization.
XXXXX does not meet the definition of a "qualifying non-profit organization" and may not claim the 50% rebate provided under section 259 of the ETA.
Analysis
Government funding of a person, as defined in section 2 of the Regulations means an amount of money that is readily measurable and is paid or payable to a 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 consideration for exempt supplies of property or services provided to persons other than the grantor or a person that is related to the grantor.
A grantor is normally a government or a municipality.
Payments made by an organization which is not a grantor (i.e., an intermediary) will be considered to be government funding to the person receiving the payment under the following conditions:
i) the payments were originally received by the intermediary from a grantor;
ii) the funds paid by the intermediary to the person must be to assist the person in the pursuit of its objectives or to pay for an exempt supply provided to "other persons";
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 of Government Funding in a form prescribed by the Minister (form GST-322) certifying to the person that the payment is government funding;
v) the funds are recorded in the annual financial statements of the recipient non-profit organization as government funding.
The Regulations permit amounts transferred though intermediary bodies to retain their status as government funding in recognition of the fact that grantors are sometimes unable to make funding directly available to the non-profit organization that is the ultimate recipient of the funds.
Subparagraph 2(a)(ii) includes in the definition of government funding, consideration that is paid for an exempt supply made to "other persons". The term "other persons" is not defined in the ETA or in these Regulations. However, this term is followed in subparagraph 2(a)(ii) with a descriptive clause "... (other than the grantor, individuals who are officers, employees, shareholders or members of the grantor, or persons related to the grantor or to such individuals) ...".
The persons listed in the brackets following the term "other persons" have been provided as examples for the purposes of clarity. As such, we do not consider that this is an exhaustive list of entities that would not constitute "other persons". The intention behind this provision is that an "other person" who receives an exempt supply in this context cannot be the person who provided the funds in the first place (i.e., the grantor who provided the consideration for the exempt supply or a person related to the grantor). Similarly, it was not the intention of the legislation that funds provided by an intermediary body (that were received from a grantor) should be considered government funding if the intermediary acquires an exempt supply from the person in return for providing the funds. Although the persons listed in the bracket following the term "other persons" do not specifically include an intermediary who receives funds from the grantor, we do not consider that this should be taken to mean an intermediary will constitute an "other person" for the purposes of this subparagraph.
Accordingly, it is our opinion that consideration paid by school boards for the supply of membership in XXXXX should not be regarded as government funding for the purpose of determining whether that organization is a qualifying non-profit organization. As indicated in our previous discussions with your office, we have brought this issue to the attention of the Department of Finance and their officials agree strongly with our position and will be examining this issue further. In the meantime, we suggest the following approach in resolving this matter.
• Can the school boards be included in the descriptive clause following "other persons" in subparagraph 2(a)(ii) because they are related to the grantor? Can we say that the province has control (or de facto control) of the school boards? While there are no shares held by the province in the school boards, is there nonetheless a degree of control exercised by the province over the operations of these entities? For example, we understand the province provides almost all of their funding and stipulates the curriculum to be used in the schools. The boards may operate with some degree of autonomy, but if they deviated from the province's policy on fiscal or educational matters, what would be the consequence?
• In order for an amount to constitute government funding in the hands of a non-profit organization, it has to be identified in that organization's annual financial statements as government funding. XXXXX did not record amounts received from the school boards as government funding but rather as consideration in respect of its sales of memberships. It would not be proper for XXXXX to characterize these amounts as government funding when they are in fact consideration for supplies made by that organization to the school boards.
• The Certificate Of Government Funding (form GST 322) that must be completed by the intermediary body clearly indicates that the purpose of the government funding to the non-profit organization must be either to assist the non-profit organization in pursuing its objectives or as payment for an exempt supply provided by that organization to a third party. This is further indication that "other persons" for the purpose of subparagraph 2(a)(ii) is intended to be a person or persons other than the intermediary body or the final recipient of the funds.
As the intermediary body is the person completing the form in respect of the funding it is providing to the recipient non-profit organization, that entity cannot then be regarded as a third party.
• The explanation provided with the form also indicates that the funds received by the non-profit organization must be a "flow through" of government funding from an intermediary that received the funds from the grantor or from another intermediary. This concept (i.e., that the funds are received by an intermediary for the purpose of redistribution) is inconsistent with the idea that an intermediary could use the funds for the purpose of acquiring a supply from the final recipient.
• We understand that the school boards receive funding based on their projected budgets which include an amount for membership in XXXXX We do not consider that the province is providing government funding to XXXXX simply because it approves the school boards' budgets and provides funding to those organizations which then use part of these funds to acquire this membership.
Our comments set out above relate specifically to amounts received by XXXXX from its member school boards. However, we understand that you are also considering several situations where organizations contend that amounts received from intermediaries should qualify as government funding when these amounts are consideration for exempt supplies provided by the recipient to the intermediary (e.g., consideration for exempt supplies of real property or exempt memberships supplied by the recipient non-profit organization to the intermediary body).
In this connection, we would reiterate our opinion that if an intermediary uses funds received from a grantor to acquire a supply from a non-profit organization, then it is not appropriate for the non-profit organization to record these amounts as government funding in its financial statements, even if the supply was exempt of the GST. The intermediary organization may not complete a Certificate of Government Funding in respect of amounts provided to the non-profit organization that are consideration for exempt supplies supplied to the intermediary by that organization. If no certificate is provided, amounts received by the non-profit organization from the intermediary will not constitute government funding.
I trust that this information will be of assistance. If you 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
GST Policy and Legislation
| c.c.: |
J. Houlahan
M. Brûlé
XXXXX
Audit Headquarters |
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