22 January 1995 GST/HST Interpretation 1995-01-22 - GST Treatment of Activities and Projects Undertaken by a Non-Profit Organization

                                                                        file I- 11830-2
doc G-346 (MP)
XXXXX                                                                                 January 22, 1995

Dear XXXXX

We are writing in reply to your request for a number of interpretations concerning the GST treatment of the activities and projects undertaken by the XXXXX

These interpretations are based upon our current understanding of the Excise Tax Act ("the ETA") and its Regulations. The following interpretations do not take into account the effects of any proposed or future amendments to the ETA or future changes in interpretation.

It should be noted that the following interpretations are based only upon the documentation submitted and the projections you have provided with respect to supplies and acquisitions. The application of the ETA may vary if the facts vary from the information provided.

Facts

1. XXXXX is a non-profit organization for GST purposes. It is incorporated in XXXXX as a non-profit organization without share capital. The organization was created for the purpose of hosting the XXXXX

2. The championships will be held at XXXXX , a XXXXX facility near XXXXX . It is anticipated that there will be approximately XXXXX paid admissions, and an international television viewing audience of about XXXXX million.

3. Sources of income for XXXXX include federal, provincial and municipal grants, sponsorship revenues, advertising revenues, revenues from the sale of broadcast rights, admissions, merchandise royalties, accommodation fees and other miscellaneous revenues. Total budgeted revenues from all sources are approximately XXXXX of which approximately XXXXX is federal, provincial and municipal grants.

4. XXXXX makes both taxable supplies and exempt supplies.

5. At present, XXXXX reports on a monthly basis but has not yet claimed input tax credits ("ITCs").

Ceremonies & Competitive Events

6. The championships consist of three sports: XXXXX . There will also be opening and closing ceremonies.

7. All the competitors in the sporting events will be amateur athletes. Substantially all of the performers in the opening and closing ceremonies will not be remunerated. Advertising for these events is not expected to feature any remunerated performers.

8. XXXXX will sell XXXXX passes which will entitle purchasers to attend both opening and closing ceremonies, and all competitive events. Day passes for events will be sold for XXXXX . Tickets to the opening ceremonies will be sold for XXXXX . There will be no admission charge for the closing ceremonies.

Sponsorships

9. XXXXX has entered a sole and exclusive marketing agreement with XXXXX of XXXXX The copy of the agreement submitted is between XXXXX and XXXXX and is dated May 1, 1990. XXXXX has assigned the Agreement to XXXXX

10. The terms of the agreement are summarized as follows:

•   a "supplier" enters a supplier agreement with XXXXX and receives the right to designate itself as an official supplier of the championships.

•   a "sponsor" enters a sponsorship agreement with XXXXX and receives the right to designate itself as an official sponsor of the championships and receives commercial rights such as television, product identification or hospitality rights.

•   in summary, XXXXX makes the following commitments to XXXXX under the terms of the agreement:

•   the right for XXXXX to earn commission revenue;

•   a guarantee issued by a XXXXX bank to XXXXX as security for payment of its commission;

•   the exclusive right for XXXXX to solicit sponsors;

•   a commitment to exchange pertinent information about potential sponsors;

•   co-operation in developing a marketing plan and making marks and other rights available to sponsors;

•   where appropriate, to publicize XXXXX role as marketing consultant.

•   suppliers and sponsors receive the right to use the XXXXX "marks" in association with promoting their products, as well as "advertising rights and concessions at the sites for distribution or utilization of (their) products....".

•   The agreement provides that XXXXX has no authority to bind XXXXX unless so authorized by XXXXX Accordingly, XXXXX will not enter agreements on XXXXX behalf. Contacts will be between XXXXX and the respective sponsors and suppliers.

•   The supplies that XXXXX makes to XXXXX under the Agreement may be summarized as consulting services and services of identifying and negotiating with potential sponsors and suppliers.

•   The agreement provides for commission payable to XXXXX based on a percentage of the cash or the value of goods in kind provided by sponsors and suppliers. The rate of commission varies according to whether the sponsors and suppliers are Canadian or internationally based.

•   The value of goods in kind for commission purposes is "... the value ascribed thereto in the contract with the Sponsor or Supplier as consideration payable in lieu of cash."

•   XXXXX has provided a "performance commitment" guaranteeing that XXXXX will realize consideration of at least XXXXX from contracts with Sponsors and Suppliers. If this amount is not realized by the time of the opening ceremonies, XXXXX will pay the difference between XXXXX and the amount realized by XXXXX has provided an international irrevocable letter of credit to XXXXX as security for the guarantee.

11. In your submissions, sponsors are referred to as the "main sponsors". It was anticipated that there will be ten (10) main sponsors; i.e. one for each of the main events. The main sponsors will share the television identification with respect to product or name identification at that event, particularly on number bibs and prime television boards. Also, main sponsors will receive "programme advertisement, use of the event logo, and VIP hospitality facilities."

12. In your letter of November 9, 1993, you indicate that "Official Suppliers", in return for the free supply of their products, may receive:

i) use of the title "Official (product category) Supplier to the XXXXX

ii) display of products and sales opportunities;

iii) 10 VIP accreditation's per day:

iv) one black and white page of advertising in the official programme:

v) use of official event logo and mascot on promotional and public relation materials (suppliers must negotiate a separated licensing agreement if they wish to use the logo and/or mascot on actual products for sale; and

vi) a special area of signage has been allocated for thirteen (13) "Official Suppliers". XXXXX have indicated that, for consideration of XXXXX , ... the designated area will be in TV camera view and will be visible as the athletes enter the stadium or pass through to commence another circuit ... an Official Supplier will receive two advertising boards."

13. It is our understanding that, as of the date of this letter, XXXXX has entered into only one contract with sponsors or suppliers. A copy of this agreement, with S XXXXX dated September 27, 1994, has been submitted for our review. XXXXX is a non-resident and is not a GST registrant. The terms of the agreement are summarized as follows:

•   XXXXX provides XXXXX "Sponsorship Rights Offering Television Visibility" including the display of the XXXXX logo and name on the start and finish banners of all cross country events, on the back-drop and exit gate of each jump competition, and on the back-drop of the winner's podium of the jump and cross country competitions.

•   XXXXX provides XXXXX " Non-televised Presenter Sponsorship Rights" including reference to " XXXXX presented by XXXXX at the media centre and other administrative facilities, on official printed materials (programmes, event bulletins, press releases) and on advertising boards at the venues. Also, XXXXX may use this designation in promoting its products XXXXX

•   XXXXX receives the right to print the XXXXX logo on the competitors bibs at specified jumping and cross country events (seven events).

•   XXXXX receives 50% of the advertising boards in the stadium at specified cross country events (12 events), four advertising boards on-course at six events, display of the XXXXX logo on the start/finish banner at six events, and eight advertising boards at five jumping events.

•   XXXXX will also provide XXXXX promotional opportunities in its programme, VIP accreditations, use of hospitality facilities, and the right to display and market its products in specified areas.

•   You have masked reference to the consideration payable to XXXXX by XXXXX in our copy of the agreement.

Merchandising

14. XXXXX has entered an agreement with XXXXX with respect to the use of "licensed property" XXXXX trademarks, mascot, logo) on XXXXX "products" (T-shirts and sweat shirts). In summary, the terms are as follows:

•   XXXXX provides XXXXX exclusive rights to use its licensed property with respect to the "manufacture, ... sale and distribution" of XXXXX products as well as in "advertising, publicity, promotional material ... and on packaging relating to the Products." The exclusive rights apply to a specified territory ( XXXXX

•   XXXXX undertakes to "diligently ... promote the Products ... with a view to gaining maximum ... sales."

•   The consideration payable by XXXXX for these rights is XXXXX upon signing, plus a specified royalty percentage for each shirt sold. There is a minimum guaranteed royalty of XXXXX payable on January 17, 1994 XXXXX and February XXXXX .

 Broadcasting

15. Broadcasting rights are held by the XXXXX and XXXXX contracts with international broadcasters for the sale of these broadcasting rights. XXXXX then transfers 60% of the revenues realized from these supplies to XXXXX This transfer is part of the agreement between XXXXX and XXXXX when XXXXX was granted the right to host the championships. This income is indicated as "Broadcast Rights" revenue of XXXXX on the most recent budget, and is treated as consideration for a taxable supply. In return for this revenue, XXXXX has undertaken to contract for the production of the international broadcast. XXXXX is not a resident in Canada and is not a GST registrant. We have not been provided a copy of the agreement between XXXXX and XXXXX

16. Television coverage will be by international broadcasters only. Coverage in Canada will be limited to newsclips. There is no revenue earned by XXXXX with respect to the limited Canadian coverage.

17. XXXXX produces the television signal and XXXXX pays on a fee-for-service basis for doing so. We have been provided a copy of the agreement with XXXXX dated January 17, 1994. Under its terms, XXXXX agrees, in summary, to:

•   supply and maintain the broadcast equipment as well as the required personnel and services for the production of the live international radio and television signals;

•   produce, to international standards, live coverage of the events;

•   to "ensure maximum visibility of all sponsors particularly including commercial identification of number bibs, board identifications in the stadium and on the cross country course, ski jumping table identification, start identification for jumping and cross country, commercial feed stations, arrival banners, exit gate and commercial victory podium." XXXXX agrees to pay XXXXX as consideration, in specified installments, and as well agrees to provide:

•   appropriate venues and free access to the venues;

•   accommodation and transportation for required personnel;

•   a television "compound", scaffolding, power, data and timing feeds, and camera positions.

Accommodation

18. We have been provided a copy of an agreement of April 26, 1994 between XXXXX and XXXXX et al ( XXXXX regarding accommodations and meal service to be supplied to athletes, coaches, media and other officials.

To summarize the terms of this agreement:

•   XXXXX confirms availability of 265 rooms and 600 beds as specified rates, as well as a meal plan and other services (waxing facilities, meeting rooms, security, dispatch centre).

•   XXXXX will reserve the accommodation (i.e. will arrange for the booking of the rooms and will collect the accommodation charges, ranging from $75 to $160 per person per day, from the participating countries and/or athletes).

•   XXXXX promises to pay XXXXX the amounts received for the rooms by specified deadlines. It does not appear that XXXXX guarantees a minimum number of bookings. However, bookings are required to be made by September 30, 1994 and XXXXX is required to confirm, by November 30, 1994, that this number of rooms will be available.

•   The supply of the rooms to the athletes and other participants will be on a short term basis (i.e. from XXXXX

•   The agreement also provides for a commission to be payable by XXXXX to XXXXX this is described in XXXXX most recent budget as an "Accommodation Fee" of $ XXXXX .

19. As indicated above, XXXXX has reserved hotel rooms for the athletes and officials. It will charge the participating countries, or the athletes directly, for these accommodations. On the most recent budget, the amount that XXXXX is to receive from the athletes and/or their respective countries is estimated at XXXXX , and this amount is described as revenue from XXXXX

Capital Personal Property

20. The amount of furniture, fixtures and equipment that XXXXX will be required to purchase is limited. According to the E XXXXX letter of September 23, 1994, only XXXXX has been expended to date. The organization has claimed a 50% rebate of the GST incurred and has not claimed any ITC's to date.

Construction Projects

To be addressed under separate cover.

Status as Qualifying Non-Profit Organization

21. On the basis of its budgets, XXXXX projected the following levels of government funding.

 XXXXX

 XXXXX

22. On the basis of the above funding levels, XXXXX projected that more than 40% of its total revenues qualifies as government funding in accordance with Section 2 of the Public Service Body Rebate Regulations, and therefore it reports as a "qualifying non-profit organization" entitled to a 50% rebate of "non-creditable tax".

23. On the basis of its financial statements for its fiscal years ending June 30, 1993, and June 30, 1994, XXXXX actual revenue and government funding levels were as follows:

Total Revenues (includes funds received from federal, provincial and municipal governments)

 XXXXX

 XXXXX

Status of Government Funding

24. The City of XXXXX won the right to host the Championships. In a five party agreement, dated October 13, 1992, (" the Agreement"), the City of XXXXX transferred all rights to XXXXX for the purpose of doing things necessary to stage the Championships. The parties to the Agreement are Her Majesty in right of Canada, represented by the Minister of Health and Welfare, ("Canada"), Her Majesty in right of XXXXX represented by the Minister of Tourism and Recreation, XXXXX the City of XXXXX is a Schedule III Crown Corporation of the Province of XXXXX

25. Contributions toward capital costs were made by XXXXX and XXXXX XXXXX . All contributions were cash; the value of land, donated time or goods or services shall not be considered as the equivalent of cash. (Agreement, subsections 1(2) and 1(3)).

26. Contributions toward operating expenses were made by Canada XXXXX and XXXXX XXXXX (Agreement, subsection 2(1)).

27. XXXXX shall contribute the use of facilities identified in Schedule "D" of the Agreement as a no cost "in kind" contribution to the Championships. (Agreement, section 1(4)). Schedule D, Section 1.1, is as follows: "Facilities provided by XXXXX at no charge shall include all buildings (inclusive of fixtures), lands and premises owned by, leased or under the control or supervision of XXXXX specifically including that relating to the cross-country ski trail system and the ski-jumping venue ("the ski venues")."

28. XXXXX mandate is to organize, manage, arrange for construction of the approved capital improvements, promote and conduct the Championships. (Agreement, paragraph 7(1)(a))

29. XXXXX is required to submit the following information to XXXXX and XXXXX : audited financial statements on capital costs and operating costs. (Agreement, section 6).

30. XXXXX is required to publicly identify the contributions of XXXXX and XXXXX (for example, on promotional banners, in programs, etc.). (Agreement, paragraph 7(1)(a))

31. XXXXX agrees to indemnify XXXXX and XXXXX against claims or suits arising out of any act or omissions of XXXXX its employees, agents, etc., whatsoever, including, but not limited to those connected with the construction, renovation of the facilities, the organization and the staging of the Championships. (Agreement, section 8) In the event a lien is registered against lands and premises provided by XXXXX to XXXXX for the Championships, XXXXX shall indemnify XXXXX for same. (Agreement, subsection 7.5)

32. Under subsection 9(1) of the Agreement, XXXXX and XXXXX make available to the Championships any of their own lands, buildings or facilities, subject to the following terms:

•   the Championships may not obtain ownership of the land, building, facility or part thereof, including any improvement made or facilities built, but will obtain a leasehold or similar interest expiring within a reasonable period after the holding of the Championships;

•   where permanent facilities or improvements have been built or where improvements have been made to any lands, buildings or facilities owned or provided by XXXXX and XXXXX , each shall accept title to the facilities or improvements and the responsibility for the operation and maintenance thereof.

33. Even though subsection 9(1) of the Agreement permits XXXXX and XXXXX to provide sites, all the capital projects are being constructed on lands owned by XXXXX . A memorandum dated June 24, 1994, from XXXXX to Mike Place, describes the proposed construction and improvements to real property at XXXXX

•   Trails. A new trail system designed with some incorporation to existing trails. The race courses for the Championships will incorporate both. The trails have been widened and the surfaces regraded. Ditching and culverts to control runoff will be installed.

•   Two bridges have been constructed over the trail system. Two additional pedestrian bridges are also proposed.

•   A new stadium with an access road to the stadium and a parking lot has been constructed.

•   A two story wood frame building is under construction for use as an official's administration building and for equipment storage.

•   snowmaking system,

•   ski-jumps (porcelain, foundation, electrical),

•   video tower,

•   electronic scoreboard (used, from XXXXX

•   crosswalk (pedestrian bridge for the competitors from the top of the chair lift to the 120m tower),

•   electrical underground - The site electrical system will be upgraded and all overhead wires removed. The new system is underground with pad-mounted transformers.

Interpretations

Ceremonies and Competitive Events

1. What will be the tax status of admissions to the opening ceremonies and the competitive events?

Reply

Section 11 of Part VI of Schedule V of the ETA provides, that the supply of a right to be a spectator at a performance will be exempt where:

•   all or substantially all (generally 90% or more) of the performers, athletes or competitors taking part in the performance or event do not receive, directly or indirectly, remuneration for doing so (other than a reasonable amount as prizes, gifts, or compensation for travel or other (incidental) expenses ... or grants paid by a government or a municipality) ... and

•   no advertisement or representation in respect of the performance features participants who are remunerated directly or indirectly other than a reasonable amount as prizes, gifts, travel or compensation for travel or other incidentals.

This exemption will not apply where there are admissions to "... a competitive event in which cash prizes are awarded and in which any competitor is a professional participant in any competitive event."

The admissions to XXXXX competitive events will be tax exempt on the basis that:

•   all or substantially all of the competitors will not receive, directly or indirectly, remuneration for taking part in the events, other than a reasonable amount as prizes, gifts, or compensation for travel or other incidental expenses, and

•   there is no competitive event in which cash prizes are awarded and in which any competitor is a professional participant in a competitive event.

The admission to the opening ceremonies will be exempt on the basis that substantially all of the performers will not be remunerated other than a reasonable amount as prizes, gifts or compensation for travel or other expenses incidental to the performer's participation in the event, and no advertisement will feature participants who are remunerated other than as just described.

Apportioning ITCs

2. In its letter of September 23, 1994, XXXXX proposes a revenue-based method of apportioning the GST paid on purchases that are used to make both taxable and exempt supplies. The method is based on the ratio of revenues from taxable supplies to revenues from taxable plus exempt supplies. XXXXX application of this method resulted in an apportionment ratio of 73.84%, based on total budgeted revenues for the championships (i.e. total of 1993, 1994, and 1995 revenues). Is this an acceptable ratio to be used for current and past reporting periods, and for all reporting periods up to the end of the championships?

Reply

Subsection 141.01(4) of the ETA provides that the apportionment method used in determining the extent to which such purchases are used in a commercial activity (and thus the extent to which ITCs may be claimed) must be "fair and reasonable and shall be used consistently by the person throughout the year."

We confirm that the revenue-based method you have described is a fair and reasonable method for XXXXX to use to apportion tax paid in respect of purchases that are used to make both taxable and exempt supplies. We also confirm that it is reasonable for XXXXX to develop a project ratio which is based on the total projected revenues for the XXXXX championships project. Since projected revenues may change over time, XXXXX is required to periodically review its revenue projections to determine whether the apportionment ratio should be adjusted.

For example, suppose revenue projections as of January 1, 1993, indicate an apportionment ratio of 70%. This ratio could be used in determining ITCs for all claim periods in 1993. Suppose further that, as of January 1, 1994, revenue projections have changed, indicating a ratio of 67%. The 67% ratio should then be used for 1994 claim periods.

We are unable to confirm whether the specific apportionment ratio of 73.84%, as outlined in the September 23, 1994, letter is a "fair and reasonable" ratio. The purpose of this letter is to confirm the methodology used, rather than any specific ratio determined. However, we will be pleased to review this matter further in our forthcoming discussions.

Sponsorships

3. What is the tax status of promotional supplies made by XXXXX to main sponsors?

Reply

Section 135 of the ETA provides that "where a public service body makes a supply

(a) of a service, or

(b) by way of licence, the use of copyright, trade-mark, trade-name or other similar property of the body, to a person who is the sponsor of an activity of the body for use by the person exclusively in publicizing the person's business, the supply by the body of the service or the use of the property shall be deemed not to be a supply, except where it may reasonably be regarded that the consideration for the supply is primarily for a service of advertising by means of radio or television or in a newspaper, magazine or other publication published periodically. ..."

Where section 135 applies, the revenue received from sponsors is not subject to tax.

Therefore, in order to be a taxable supply, a promotional supply made by XXXXX to its main sponsors must meet the following conditions:

1) it must be a service of advertising;

2) the consideration paid by the sponsor must be primarily for an advertising service by means of television, radio or in a periodic publication.

We have reviewed the XXXXX sponsorship agreement and it is the Department's opinion that the consideration payable by XXXXX is reasonably viewed as "primarily for a service of advertising by means of radio or television or in a newspaper, magazine or other (periodic) publication." Examples of such services include display of XXXXX logo and name on a number of start and finish banners, back-drops, competitors bibs, and advertising boards. It is evident that the primary purpose of these advertising services is related to television exposure.

Therefore, the promotional supplies made by XXXXX under the agreement with XXXXX are taxable supplies. The determination as to whether advertising services supplied to other possible sponsors are taxable must be made on a case-by-case basis, on the basis of the factors outlined above.

4. Is XXXXX required to collect and remit GST on supplies made to Main Sponsors?

Reply

Pursuant to subsection 165(1) of the ETA, "every recipient of a taxable supply made in Canada" is required to pay a tax of 7% on the "value of the consideration" for that supply. Under the provisions of sections 222 and 225, the person making the supply (the "supplier") is required to collect the tax from the recipient, and to remit it to this Department. On this basis, and subject to the comments below, XXXXX would be required to collect and remit GST on the value of consideration paid for taxable advertising services made to main sponsors.

Where a taxable supply of an advertising service is made to a non-resident who is not registered for the GST, such as XXXXX the supply will be zero-rated pursuant to section 8 of Part V of Schedule VI of the ETA.

5. On what amount will the GST apply in respect of supplies made by XXXXX to main sponsors?

Reply

Pursuant to subsection 165(1), "every recipient of a taxable supply made in Canada" is required to pay a tax of 7% on the "value of the consideration" for that supply.

Pursuant to subsection 153(1), the value of the consideration for a supply shall be deemed to be equal to:

(a) where the consideration or that part is expressed in money, the amount of the money, and

(b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made."

Accordingly, where XXXXX provides property or services to its main sponsors, the value of the consideration for those supplies will be equal to the amount of money received from these sponsors, plus the fair market value of goods and\or services received from main sponsors. GST will apply to this value.

6. Are main sponsors required to collect and remit GST on supplies made to XXXXX Reply

It is apparent that XXXXX provides consideration in the form of money, but not in the form of supplies of goods or services. Money is not considered a supply for GST purposes. On this basis, XXXXX makes no taxable supplies to XXXXX and so will not be required to collect or remit GST.

If main sponsors are found who do provide goods and services to XXXXX such supplies are likely to be taxable. However, pursuant to subsection 143(1) of the ETA, supplies made by non-resident main sponsors will be deemed to be made outside Canada, and not subject to GST, unless the supply is made in the course of a business carried on in Canada or the non-resident is a GST registrant.

If a main sponsor does supply goods and services to XXXXX and is required to collect and remit GST, the tax is calculated on the value of the consideration paid or payable by XXXXX for these supplies (i.e. generally the value of the advertising services).

It should also be noted that even though a non-resident main sponsor may not be required to charge tax to XXXXX on the basis of the preceding provisions, these goods and services may be subject to GST upon importation. With respect to goods, section 212 of the ETA provides for imposition of GST on the importer of record (i.e. "the person who is liable under the Customs Act to pay duty ...."). With respect to services, section 218 provides for imposition of GST on the recipient of an imported taxable supply as defined under section 212 of the ETA, unless the service is acquired for exclusive use in commercial activities (other exceptions are also listed under that section).

7. Assuming GST is exigible with respect to supplies made to one or more sponsors, when is the GST required to be remitted?

Reply

Where the sponsor is a non-resident, and is not a GST registrant, and the supply by XXXXX qualifies as a zero-rated advertising service, no GST is exigible. Accordingly, the following comments will not apply in these situations.

Pursuant to subsection 168(1) of the ETA, XXXXX is required to collect the GST that is payable in respect of taxable rights and services supplied to official sponsors on the earlier of when the consideration for the supply of advertising services is paid or becomes due. If part of the consideration paid for the taxable supplies may be in the form of property and services, this consideration will be considered to have been "paid" when the property or services are provided to XXXXX Pursuant to subsection 228(1), XXXXX is required to remit the tax on or before the day that the return for that period in which the tax is collected is required to be filed (i.e. within one month after the end of the reporting period).

8. Is XXXXX required to collect and remit GST on supplies made to official suppliers?

Reply

The provisions of section 135 are outlined under Question 3 above.

Since there are no official supplier agreements to date, the following comments are based on the description of official suppliers outlined in XXXXX contract with its marketing agent, XXXXX

Based on the XXXXX contract, XXXXX provides official suppliers a number of promotional supplies. Except for the designated signage areas purchased for an additional fee of XXXXX (see comments below), these supplies are promotional rights (e.g. the right to use XXXXX title, event logo, and mascot in promoting its products; VIP accreditations; the right to display its products) rather than promotional services.

Since the consideration from official suppliers is for rights rather than "primarily a service of advertising by radio or television ...", the deeming provisions of section 135 will apply and the rights provided by XXXXX will be deemed not to be supplies.

We also note that the XXXXX agreement addresses the possibility that, for a fee of XXXXX , certain official suppliers will be provided designated areas for televised exposure of their advertising boards. It is evident that this consideration is primarily for a service of television advertising. Accordingly the deeming provisions of section 135 will not apply: the supply of this advertising will be a taxable supply, subject to GST.

9. Is a main sponsor or official supplier a "sponsor of an activity of the body", as referred to under section 135?

Reply

In your letter of November 9, 1993, you addressed the distinction between a sponsorship and the purchase of media advertising. You submitted that section 135 need not be considered in the present situation since this section applied only to the "sponsor of an activity of the body". You indicated that "Revenue Canada clearly distinguishes between sponsoring an organization's activities and purchasing advertising services" and that XXXXX sponsors and suppliers were advertising purchasers and not "sponsors" of an activity of XXXXX To clarify this issue, it is our policy that a business that purchases the right to use trademarks, logos, mascots and promotional services with respect to a sporting event organized by a public service body such as XXXXX is, without doubt, a "sponsor" as referred to in section 135.

10. Should revenues from supplies made to official suppliers be included as consideration from taxable supplies in the use of the output-based method of apportioning ITCs ?

Reply

Since this method is based on a comparison of revenues from taxable supplies compared to revenues from total supplies (i.e. taxable plus exempt supplies), then the supplies to official suppliers which are deemed not to be supplies under section 135, should be ignored for purposes of determining this ratio. That is, revenue from these supplies should not be included as revenue from either taxable supplies or total supplies.

11. Where section 135 applies to the supplies made by XXXXX to an official supplier, so that they are deemed not to be supplies, will XXXXX be required to pay tax on the supplies received from these suppliers?

Reply

Where section 135 applies to supplies made by XXXXX to official suppliers, the official suppliers will not be required to collect GST on supplies made to XXXXX XXXXX

12. What will be the tax status of supplies made to XXXXX

Reply

The agreement with XXXXX indicates that XXXXX will supply XXXXX with the rights to use XXXXX intellectual properties for use by XXXXX in marketing its T-shirts and sweatshirts.

It is our interpretation that a supply of this nature is not that described under section 135 of the ETA. The promotional supplies that are deemed not to be supplies under section 135 are those that are made to a "sponsor of an activity of the body for use by the body exclusively in publicizing the person's business." It is our view that XXXXX is not a sponsor of XXXXX Therefore, the supply of rights to XXXXX will be taxable supplies and XXXXX will be required to collect and remit GST on the consideration payable by XXXXX for these supplies.

Status of Marketing Agreement with XXXXX

13. Is a payment, if any, by XXXXX under the terms of the performance commitment, in the agreement with XXXXX consideration for a taxable supply?

Reply

Under the terms of their agreement, XXXXX supplies certain rights and services to XXXXX (e.g., the right to earn commission revenue, the exclusive right to solicit sponsors, publicizing XXXXX role as marketing consultant).

If it can be substantiated that a supply of rights may not be used in Canada, or if a supply of services are wholly performed outside Canada, then subsection 142(2) will apply to deem such supplies to have been made outside Canada.

The agreement with XXXXX however, indicates that any services performed by XXXXX to XXXXX are, at least in part, performed in Canada, and that any rights supplied to XXXXX may be used in Canada. For instance, according to the agreement, XXXXX has supplied XXXXX the exclusive right to identify and solicit sponsors anywhere in the world, including Canada. On this basis, the deeming provisions of subsection 142(2) described above will not apply. The supplies made by XXXXX are taxable supplies made in Canada.

It is the Department's position that any amount payable under the terms of XXXXX performance commitment would be consideration for the taxable supplies made by XXXXX Although the supplies are deemed to have been made at the time of the agreement (pursuant to section 133), there would be no tax payable by XXXXX until such time that the consideration was paid or became due.

14. Is XXXXX required to remit GST on the commission payments made to XXXXX Reply

The GST applies to the supply of goods and services that are made in Canada. Pursuant to subsection 142(1), a supply of a service will be deemed to be made in Canada if the service is performed, in whole or in part, in Canada.

As outlined under the Facts, XXXXX supplies a service to XXXXX of identifying and negotiating with potential sponsors. XXXXX earns a commission for every sponsorship agreement XXXXX enters.

It appears, on the basis of the submissions, that the services supplied by XXXXX are all made outside Canada. That is, the potential sponsors that XXXXX will identify and negotiate with are all based outside Canada, so that XXXXX services have been, and will be, performed outside Canada. Further, it appears that no part of these services will be performed in Canada.

Section 218 imposes GST on the value of consideration for an imported taxable supply. A service made outside Canada to a person resident in Canada is an imported taxable supply, unless the service is used exclusively in the course of commercial activities of the person (other exceptions are also listed under section 218).

Since the services provided by XXXXX are used exclusively by XXXXX in its commercial activities (supply promotional rights and services), XXXXX will not be subject to the imposition of importation tax under section 218.

Status of Amount Received from the XXXXX

15. What is the tax status of funds received from the XXXXX

Reply

When awarded the championships to XXXXX agreed to contribute 60% of its revenues from international broadcasters to XXXXX In return for the funding from XXXXX agreed to contract for the production of an international broadcast signal, and XXXXX has contracted with XXXXX for this purpose.

Since the agreement with XXXXX was not available for our review, we are unable to confirm the nature or tax status of the supply made by XXXXX to XXXXX If this agreement provides that XXXXX supply to XXXXX the right to a broadcast signal produced by XXXXX and this signal may not be used in Canada, then the supply will be deemed to be made outside Canada pursuant to paragraph 142(2)(c) of the ETA. In this case, the funds received from XXXXX will be consideration for a taxable supply, but XXXXX will not be required to collect tax from XXXXX since supplies made outside Canada are outside the scope of GST.

If the agreement provides that the supply by XXXXX is a service performed in Canada, it may treated as a zero-rated export pursuant to section 7 of Part V of Schedule VI, unless the service is viewed as one that is "primarily for consumption, use or enjoyment (by XXXXX in Canada." If the supply is zero-rated, the funds received from XXXXX will be consideration for a taxable supply, but XXXXX will not be required to collect tax from XXXXX since there is no tax collected on a zero-rated supply.

If the supply by XXXXX is a service that is primarily for consumption, use or enjoyment by XXXXX in Canada, or is the supply of a right to XXXXX that may be used in Canada, XXXXX will be required to collect and remit GST from XXXXX Accommodation

16. As indicated on its budget, XXXXX will earn an "accommodation fee" from hotels for its service of booking accommodation for athletes and other participants, as well as revenue from the supply of accommodation. What is the tax status of these supplies?

Reply

An exempt supply is defined under subsection 123(1) as a supply included in Schedule V to the ETA.

Various hotels referred to variously in the documentation as XXXXX or XXXXX will pay XXXXX an "accommodation fee" for its service of booking hotel rooms for the athletes and other participants. This fee (estimated at XXXXX is treated as consideration for a taxable supply on XXXXX budget. Since this supply is not described as exempt in Schedule V, we agree that this supply is taxable.

The participating hotels supply accommodation to XXXXX pursuant to the contract described under "Facts". As discussed above, XXXXX then resupplies the accommodation to the participating countries and athletes. XXXXX will collect an estimated XXXXX from participating countries and athletes for the supply of accommodation to them. The real property exemption under section 25 of Part VI of Schedule V does not apply to short term accommodation (i.e. less than a month); accordingly, the supply of accommodation is taxable, and XXXXX is required to remit GST on the amounts charged.

However, it should be noted that the non-resident athletes and other participants may claim a rebate of this tax pursuant to subsection 252.1(2) of the ETA ("Accommodation Rebate to Non-resident Consumers). As well, there may be other methods of tax relief depending on the circumstances. We will examine other options, if any, in our forthcoming discussions with you.

Treatment of capital personal property

17. XXXXX will have limited purchases of capital personal property. To what extent will it be entitled to recover the GST paid on these purchases?

Reply

Under subsection 199(2) of the ETA, where a purchase of capital personal property is used primarily in commercial activities, it is deemed to be used exclusively in commercial activities. As a result, where a purchase is used primarily in commercial activities, full ITCs may be claimed in respect of the GST paid.

If a purchase of capital personal property is not used primarily in commercial activities, no ITCs may be claimed.

Treatment of government/municipal funding

18. Are the funds contributed to the Championships by the Province of XXXXX consideration for a supply or a grant?

Reply

Application of the grants and subsidies policy indicates that XXXXX contribution for capital expenses incurred by XXXXX is not consideration for a supply and would be a grant. Such a grant would meet the definition of "government funding" in subparagraph 2(a)(i) of the Public Service Body Rebate (GST) Regulations. ("the Regulations").

19. Are the funds contributed to the Championships by the City of XXXXX consideration for a supply or a grant?

Reply

Applying the criteria described above, XXXXX capital and operating contributions are grants and not consideration for a supply.

These grants would meet the definition of "government funding" in the Regulations.

20. Are the funds contributed to the Championships by the Government of Canada consideration for a supply or a grant?

Reply

Applying the criteria described above, Canada's capital contribution is a grant and not consideration for a supply.

Qualifying Non-profit Organization

21. Is XXXXX a qualifying non-profit organization?

Reply

A non-profit organization must be a "qualifying non-profit organization" in order to be entitled to a 50% rebate of GST paid on purchases for which no ITC can be claimed ("non-creditable tax"), pursuant to section 259 of the ETA. The Public Service Body Rebate Regulations provide that a "qualifying non-profit organization" is one in which at least 40% of its revenues are from government or municipal grants. The 40% test may be applied to either the current fiscal year's operations, or the total of the two immediately fiscal year's operations.

As indicated under "Facts", XXXXX total revenues in 1993 XXXXX . It is clear, then, that XXXXX meets the 40% test in each of those years. Although the 1995 revenues have not yet been ascertained, it is clear that XXXXX will meet the 40% test on the basis of its two preceding fiscal years (1993 and 1994). Accordingly, we confirm that XXXXX is a qualifying non-profit organization in 1993, 1994 and 1995.

Treatment of construction projects to follow

Provided under separate cover.

Please contact Joanne Houlahan at (613) 954-7936 or Michael Place at (613) 954-7936 if you have any questions concerning these interpretations. As you discussed with Mr. Place, we are prepared to meet at your convenience to further review these matters.

For other questions concerning the GST, you may contact the XXXXX GST Excise office XXXXX

Yours truly,

J.A. Venne
Director
Tax Policy - Special Sectors
GST Policy and Legislation

c.c.:

J.A. Venne Audit Programs J. Houlahan M. Viger S. Farb XXXXX M. Place XXXXX