20 November 1998 GST/HST Ruling HQR0001156 - Application of the GST/HST to Forest Renewal Activities

Dear XXXXX

Thank you for your letter of September 30, 1997 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is a not-for-profit company registered for GST/HST. The purpose of XXXXX is to manage the forest on behalf of the local forest industry and for the benefit of XXXXX[.]

2. XXXXX entered into a new business relationship with XXXXX forest industry. This involved the transfer of forest renewal and forest management planning responsibilities to the forest industry. This transfer would occur through the issuance from the XXXXX of a XXXXX, as legislated by XXXXX[.]

3. XXXXX encouraged the industry to form cooperative partnerships or forest industry consortiums for the purpose of obtaining a XXXXX is a consortium made up of XXXXX shareholders and XXXXX logging shareholders. These shareholders were the traditional forest operators on the land base in question.

4. The shareholders have surrendered their traditional Forest Resource Licences in exchange for shares in this new forest management company. The shares have been distributed on a pro rata basis, relative to the distribution of traditional harvesting rights held by each member before the establishment of XXXXX[.] The distribution of these shares is the mechanism by which the shareholdersmembersowners maintain their traditional rights (i.e. the right to harvest).

5. The main benefit for the land base and XXXXX as a whole, is the dedication and guarantee of funds to plan and complete the forest renewal activities. This funding comes from the XXXXX (the Fund) which is financed through the collection of crown stumpage fees paid by the local forest industry to the XXXXX for harvested timber. XXXXX does not collect GST on these fees. As forest renewal activities are completed, XXXXX will submit invoices for the reimbursement of eligible expenses from the Fund. Those eligible expenses amount to about XXXXX annual budget.

6. Most of the actual forest renewal activities provided by XXXXX are completed by contractors. These contractors invoice XXXXX for services rendered and include GST. XXXXX pays GST on all invoices but does not collect GST with respect to amounts it receives from the Fund. XXXXX only receives reimbursement from the Fund for its actual costs, excluding taxes.

7. Further, only expenses attributed to the direct delivery of the forest renewal program are eligible for reimbursement from the Fund. Expenses not directly attributed to this program must be financed directly by the shareholders. These expenses are costs associated with forest management planning and administration. That portion amounts to about XXXXX annual budget. Each shareholder contributes directly its annual pro rata share of that planning and administration cost. XXXXX has not been collecting GST from the shareholders/owners of XXXXX[.] Although XXXXX is paying GST on the goods and services purchased, it has not collected GST from its funding sources and thus has not been remitting GST.

Ruling Requested

You have requested that we rule with respect to your "current GST remittance procedure" in which you "have not been remitting GST because we have been paying GST for goods and services rendered and (are) are not able to collect GST from our funding sources."

Rulings Given

It is our ruling that, since XXXXX is registered for the GST/HST, it is required to collect and remit GST with respect to its taxable supplies. Based on the facts given, the services provided to shareholders (the services of forest planning and administration, and the harvesting rights) in return for their contributions are taxable supplies. However, the payments from the Fund to XXXXX are grants, and not consideration for supplies.

XXXXX may claim input tax credits in order to recover the GST paid on purchases used to make taxable supplies, and it may claim a 50% rebate of the remaining (i.e. non-creditable) tax for any claim period in which it is a qualifying non-profit organization. For your information and assistance, we are providing the following explanations concerning this ruling.

1. Is the payment from the Fund to XXXXX a grant or consideration for a supply, and what is the tax status of the contributions paid by the shareholders?

As indicated in the above-noted ruling, the payment from the Fund to XXXXX is a grant and not consideration for a supply. However, the services of forest planning and administration, and the harvesting rights, provided by XXXXX to its shareholders are taxable supplies. Therefore, the reimbursements received from the shareholders are consideration for taxable supplies.

That is, the payments received from the Fund are not directly linked to a supply of any activity which would benefit the XXXXX or the Fund. Rather, the payments in question are made for a public purpose, which is to manage the forest renewal program for the benefit of the people of Ontario. Therefore, the payments from the Fund to XXXXX are grants rather than consideration for a supply and therefore are not subject to GST.

As outlined in the Facts, the reimbursements received from the shareholders are used to fund forest planning and administration. As well, shareholders are provided the right to harvest in return for their contributions. Since there is no exemption for these supplies, they are taxable, and their reimbursements are subject to GST.

2. Is XXXXX required to be registered for GST/HST purposes?

XXXXX is required to be registered when its revenues from annual taxable supplies (i.e. forest planning and administration) exceed $50,000.

Pursuant to subsection 148(1) of the Excise Tax Act (ETA), a public service body, such as XXXXX is a small supplier if its total revenues for taxable supplies (other than supplies of financial services and sales of capital property) for its previous four quarters or for any particular quarter are $50,000 or less. Where its annual revenues from taxable supplies is $50,000 or less, it may voluntarily register for GST/HST purposes. If its annual revenues from taxable supplies exceeds $50,000, it is required to register for the GST/HST. If XXXXX is a small supplier, it may apply to deregister using form GST 11, "Request for Cancellation of Registration", which is available at any Revenue Canada tax services office.

3. To what extent may XXXXX claim input tax credit or rebates ?

As XXXXX is already registered, the organization is required to charge GST on its taxable supplies and is entitled to claim input tax credits to recover the GST paid on its purchases used to make taxable supplies (i.e. forest planning and administration).

Further, since XXXXX received XXXXX of its funding from the government for the period(s) in question, it is a qualifying NPO and therefore is eligible for a 50% rebate of the tax paid on purchases in respect of which it is ineligible for ITCs. This is referred to as "non-creditable tax". XXXXX will remain a qualifying NPO as long as it meets the 40% government funding requirement described below for any particular fiscal year.

A qualifying non-profit organization is a non-profit organization that receives at least 40% of its annual revenues in the form of "government funding" in either its current fiscal year or over its two immediately preceding fiscal years.

"Government funding" means an amount of money that is readily measurable and is paid or payable to a non-profit organization by a grantor (e.g. government or municipality) for the purpose of:

-    financially assisting the organization in carrying out its objectives and not as consideration for supplies made by the organization, or

-    payment for exempt supplies of property or services provided to persons other than the grantor or a person related to the grantor.

We trust the information above will assist you in making a determination as to whether XXXXX is a qualifying non-profit organization for any particular fiscal year.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. To the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0329.

Yours truly,

Gabrielle Nadeau
Charities, Non-Profit Organizations Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate