21 November 1997 GST/HST Interpretation HQR0000747 - Tax Status of a Supply of Membership by a Non-Profit Organization

                                                                        GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Ottawa, ON K1A 0L5

Dear XXXXX

Thank you for your letter of June 13, 1997 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of a membership by a non-profit organization.

Interpretation Requested

Where advertising and marketing activities are the primary function of the organization, what is the tax status of the supplies of memberships to the organization? Would each franchisee member be considered to receive a significant benefit by virtue of the advertising undertaken by the organization?

On the basis of the information provided, our understanding of the facts is that retail franchises across Canada are required to join a common association. The association is a non-profit organization, the purpose of which is to:

•   foster, promote, and engage in activities and programs that reflect the common interests of its members;

•   co-operate for general improvement and stabilization of the retail industry;

•   distribute information on competitors in the retail industry;

•   distribute information among its members and improve the overall operation of each member;

•   promote clear and friendly relationships among its members; and

•   engage in and commission advertising and marketing research and conduct marketing and promotional activities for the benefit of its members.

Each franchisee pays a specified percentage of its monthly sales as a membership fee to the association. The fee is calculated and paid on a monthly basis. The advertising may be national or regional. The revenue collected from each franchisee is accumulated by region across Canada. The costs of each advertising activity is charged to the specific region to which it relates. The board of directors, comprised of representatives of franchisees, monitor costs by region to ensure the members are receiving their similar share of advertising activities.

Interpretation Given

It is the Department's opinion that, on the basis that members receive the right to promotional and advertising benefits, they receive direct, significant benefits in respect of their membership fee. This will be the case even where the services of the organization are aimed at promoting the interest of the members as a whole, rather than particular members. The members of the association in question have paid their membership fee and in return, are entitled to promotional and advertising services which is the primary function of the association. When members pay a membership fee to the association, they are paying consideration for the right to receive supplies provided to them throughout the year according to the mandate of the association. Please note that we have ruled that an "indirect benefit" under paragraph 17(a) of Part VI of Schedule V to the Excise Tax Act ("ETA") is a benefit which accrues to members in an incidental or secondary manner. That is, the benefit to members must be incidental to a broader objective of the organization. This would not appear to describe the situation on hand.

Therefore, the memberships are taxable as the benefits are in excess of the permissible benefits listed in section 17 of Part VI, Schedule V to the ETA. Also note that as the supply of a membership is a supply of a right (and therefore intangible property), the direct cost exemption provided in section 6 of that Part would not apply as this exemption does not apply to supplies of intangible property.

On April 1 1997, the HST replaced the GST and the provincial sales tax in the three participating provinces of Nova Scotia, New Brunswick, and Newfoundland with a harmonized rate of 15%. If the association supplies goods that are delivered or made available in a participating province, services to be performed in a participating province, or intangible property that may be used in a participating province, to the extent that they are taxable supplies, tax must be collected at the harmonized rate.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6761.

Yours truly,

Susan Eastman
Charities, Non-Profit Organizations and Educational Services Unit
Public Service Bodies and Governments Division
File no. 11930-7

Legislative References: Excise Tax Act, section 17, Part VI, Schedule V