20 November 1998 GST/HST Interpretation HQR0001192 - GST Rebate Claims by a Hospital for Taxable Inputs Purchased for Re-Supply to an NPO

Dear XXXXX

This is in response to the letter of May 19, 1998, of XXXXX formerly from your office, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. An incorporated non-profit organization (the NPO) engages in research activities which they supply to a hospital.

2. Based upon the fact that the hospital claims the GST/HST selected public service body rebate at the rate of 83% this interpretation is based upon the assumption that the hospital has been designated a hospital authority by the Department. If the facts differ, the substance of this interpretation may change.

3. The research activities are performed on the premises of the hospital. It is our understanding that the NPO is a qualifying non-profit organization for the purposes of subsection 259(2) of the Excise Tax Act (ETA). The NPO has applied to Revenue Canada (the Department) for registered charity status. We have not been advised by you whether the Department has granted the NPO registered charity status.

4. From its inventory of supplies, the hospital makes supplies to the NPO. Consideration is paid to the hospital by the NPO. The payment is affected by the hospital, who administers the grant funds. The hospital debits the funds for the amount of the consideration for the supplies. The amount debited equals the consideration paid by the hospital authority net of the 83% GST rebate claimed by the hospital authority.

5. The hospital authority and a university provide staff to work within the NPO. The staff remain employees of the hospital authority or university and are not employees of the NPO. The hospital authority debits the NPO's grant money for the salaries and benefits of the employees of the hospital authority and of university who work at the NPO.

Interpretation Requested

You would like to confirm the rebate implications for the hospital authority with respect to the GST/HST.

Interpretation Provided

Section 6 of Part VI to Schedule V applies where goods are purchased by a hospital authority and resold to an NPO for direct cost. The direct cost of a good or service acquired for the purpose of resale is the amount of consideration paid by the supplier on the acquisition or importation of the good or service plus the GST/HST or QST payable by the supplier and any non-recoverable tax, duty or fee prescribed for the purposes of section 154 (e.g. provincial sales tax). It also includes an article or material incorporated into or a constituent or component part of the good or a good used in the manufacturing, processing or packaging of the good.

Under the direct cost rules a public service body that sells goods or services on an cost recovery basis can choose to sell them as either taxable or exempt. Based on the facts set out above, it is our interpretation that the supplies of property by the hospital authority to the NPO meets the conditions of the direct cost exemption under section 6 of Part VI of Schedule V to the ETA. Therefore the supplies of goods made to the NPO may be made on a GST/HST exempt or a GST/HST taxable basis.

However, pleased be advised that the GST/HST paid on the purchase of goods for re-supply to the NPO may not be claimed by a hospital authority for an 83% rebate. Only the GST/HST paid on goods purchased for use in exempt hospital activities may be claimed for the 83% rebate. Goods purchased for resupply are not purchased for use in exempt hospital activities.

Where hospital and university staff provide services to the NPO while remaining hospital or university staff it is our view that a supply of GST/HST taxable services has been made to the NPO. A supply of services has been made by the hospital authority (or the university as the case may be) to the NPO. Only services which are acquired from another supplier and resupplied can be included in the direct cost exemption. Supplies by employees of the hospital are not exempt under the direct cost exemption. GST/HST should be collected on the amounts debited from the NPO grant funds.

Where a supply made to the NPO is a made under conditions which meet the direct cost exemption and the supplier opts for the supply to be exempt, there is no rebate available to the NPO since no tax would be exigible on the supply.

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.

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/HST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9590.

Yours truly,

Ken Syer
Senior Rulings Officer
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate