7 August 1998 GST/HST Ruling HQR0001080 - Application of the GST/HST to Supplies of Literature Made by a Registered Charity

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, ON
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of January 20, 1998 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) with respect to the XXXXX (the Society).

All legislative references are to the Excise Tax Act (the Act) and regulations thereunder, unless otherwise specified. Please note than on April 1, 1997, the provincial sales tax (PST) in three participating provinces, Nova Scotia, New Brunswick, and Newfoundland was unified with the GST to create the HST. The HST, at a rate of 15%, replaces both PST and GST on supplies that are made or deemed to be made in the participating provinces and applies to the same base of goods and services as the GST. This letter does not reflect any legislation regarding the provincial component of the HST. Please contact our office if you require further information regarding the application of the HST to your supplies.

Further, please note that we are unable to provide you with an advance ruling as per GST Memorandum 1.4 Goods and Services Tax Rulings (enclosed) since an advanced ruling refers to specific transactions and specific time periods within which the transactions must be completed. Instead, for your assistance, we are providing you with an interpretation and application ruling since they will be applicable to the ongoing transactions that you are contemplating.

Our understanding of the facts from your letter and our conversations of April 27, 1998 and July 2, 1998 is as follows.

Statement of Facts

•   The Society is registered for GST purposes with business number XXXXX[.]

•   For GST purposes, the Society x qualifies as a charity.

•   The Society x is dedicated to providing information and skills that promote safety in, on and around water. The Society's Mission is XXXXX[.]

•   The Society's activities include:

XXXXX

XXXXX

XXXXX

XXXXX[.]

•   The XXXXX consists of a national body (National XXXXX individual provincial branches (Branches).

•   The National and each of the Branches is a separately registered charity and each is considered a separate "person" for GST purposes.

•   The National's responsibilities include acting as the sole distributor of all the XXXXX national programs, products, services and activities to the Branches.

•   Revenue is generated through the sale of awards, literature, equipment and merchandise, grants, and donations and miscellaneous fund raising.

•   XXXXX of the National's revenues are derived from the sale of awards and literature to the Branches.

•   Currently the sale of literature by the Society is treated as the sale of new goods so that the GST is charged. The Society literature is sold with a mark-up included in the selling prices to the Branches. The majority of the GST remitted to the Receiver General is derived from the sale of literature.

•   The National remits XXXXX of the total GST collected (as per section 225.1 of the Act) less a rebate equal to 50% of the amount of the GST that the National has paid on purchases.

•   Under the proposed new funding model, effective January 1, 1999, the National's activities will be funded by way of allocation of the National's operating costs to the Branches. Funding will be made by way of quarterly installments to National by each Branch, based on a budget of expenses for the National activities. Any excess funding of National's activities will be carried forward to the following year, to be applied against that year's expenses.

•   The proposed installment payment amount will differ from Branch to Branch; however, this difference will be based on the revenues of each Branch rather than on an allocation of the services or supplies by the National actually used by each Branch. It is still uncertain as to how these payments will be accounted for on the books or financial statements of either organization.

•   Notwithstanding the change to the method of funding the National's activities, inventory will continue to be managed by the National Office, in the same manner as in prior years. The impact on inventory will be that the Branches will purchase products at "cost". The amount that the Branches are charged will be a blend of the cost of the English and French versions of each item in order to have one set price for each publication, regardless of the language. Technically then, English publications will be sold at a profit with French publications sold at a loss. On average, the profit and loss is expected to balance each year.

Rulings Requested

•   Under the proposed new funding model, are the payments made by the Branches to the National of their share of the National's expenses taxable for GST purposes?

•   Is the sale of inventory by the National to the Branches taxable for GST purposes under the new model?

As the new revenue model will have no impact on the Society's sales of equipment, grants, donations and miscellaneous fundraising efforts, it has not asked for comments on those areas.

Rulings

Interpretations Given

•   Under the proposed new funding model, are the payments made by the Branches to the National of their share of the National's expenses taxable for GST purposes?

Because we have insufficient information in respect of the installment payments that are to be made by each Branch to the National, we are unable to provide a ruling as provided in the enclosed section 1.4 of Chapter 1 of the GST Memoranda Series. However, for your guidance we will provide the following interpretations which may be applicable to your transaction with the Branches.

If the National itself incurs the liability for purchases which are then supplied to the Branches, and the National is then reimbursed by the Branches, the reimbursement represents consideration for those supplies. However, the reimbursement would not necessarily be consideration for a taxable supply for GST purposes since most supplies by a charity are exempt of the GST pursuant to section 1 of Part V.1 of Schedule V to the Act.

In the situation where the National incurs the liability for the GST paid on its purchases, it will be entitled to recover the GST paid through either a rebate or input tax credit, depending on whether the purchase is used to make a taxable supply or an exempt supply. Allocations to the Branches in respect of apportioning usage would be consideration for the resupply of the item in question from the National to the Branch, but only when the allocation is used as a reimbursement of the expense incurred by the National (it is noted that the "allocations" are in the form of cash advances from the Branches, and that it is possible that not all advances are used to offset expenses in a given reporting period).

Paragraph 1(d) of Part V.1 of Schedule V (see attached) to the Act excludes from exemption new goods acquired, manufactured or produced for resale purposes, as well as services supplied in respect of such goods. Accordingly, allocations that represent reimbursements for the purchase and distribution of such supplies will be viewed as consideration for taxable supplies.

Another possibility is that at least a portion of the payments from the Branches to the National may be consideration for the supply of management or administration services. In this case such payments would be viewed as consideration for an exempt supply and thus not subject to tax, since these services fall under the general exemption of section 1 of Part V.1 of Schedule V to the Act.

Is the sale of inventory by the National to the Branches taxable for GST purposes under the new model?

The sale of inventory by the National to the Branches is subject to the GST at a rate of 7%.

As previously noted, most supplies by a charity are exempt from the GST pursuant to the general exemption under section 1 of Part V.1 of Schedule V to the Act. However, as you will note from paragraph 1(e) of this section, excluded from the exemption is the supply of new goods acquired, manufactured or produced for resale purposes. Thus these supplies are generally taxable for GST purposes unless another exemption applies such as the direct cost exemption. Generally this exemption applies where the consideration for the supply does not exceed the direct cost of the supply. More specifically, a supply by a charity is exempt where the charity does not charge the recipient an amount as tax and the total charge by the charity for the supply is equal to or is less than the tax-included direct cost of the goods or service. However, if the charity charges the recipient an amount as tax, the supply will remain taxable as long as the amount charged (excluding the tax) is at least equal to the cost of the item(s) to the charity, net of the GST/HST paid.

As the statement of facts indicate that the English publications are sold at a profit, and that tax was charged, the supply of the publications do not meet the above exempting criteria and are therefore taxable for GST purposes. The Society should continue to collect the GST on the sale of its literature and continue remitting the tax under its current business registration number.

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 transactions) for which you requested a ruling.

If you require an application ruling once you are aware of specific details concerning these arrangements, please send us a written request in accordance with the attached memorandum.

Should you have any further questions or require clarification on the above matters, please contact me at (613) 952-9214.

Yours truly,

Doris Rist
Charities and Non-Profit Organizations
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

Legislative References:           ETA ss. 123(1), 165(1), sched. V/V.1/1, V/V.1/5.1,
case no. 2000-2,
GST Memoranda Series Chapter 1.4, 2.1, 2.4

Log of Action

980418 I called XXXXX as I could not reach XXXXX and she had signed the letter on XXXXX behalf. I wanted to question why the Society XXXXX is only remitting XXXXX of the GST collected and I wanted to clarify that the expense sharing is just a transfer of moneys from the Branch to the National. I wanted to find out how this money is being recorded in their books as they are separate charitable entities.

980418 I spoke with XXXXX who stated that they were only remitting XXXXX of the tax collected due to last year's amendments and was not able to answer my question regarding the sharing of expenses. He said he would have XXXXX call me back.

980417 I lmtc XXXXX[.]

980420 I lmtc XXXXX[.]

980421 I returned XXXXX call. lmtc.

980427 I spoke with XXXXX[.] She stated that the installment payments made by each Branch to National will only start early next year. They have not yet decided how these payments will be accounted for on the books of either organization. The installment payment will differ from Branch to Branch, however, this difference will be based on the revenues of each Branch rather than an allocation of the services or supplies actually used by each Branch.

980507 gave M. Place draft response for review

980624 I lmtc XXXXX[.] In her letter she states that the National body and the Provincial Branches are separately registered charities. I would like to determine whether or not they are 'persons' for GST purposes (as per GST Memorandum 2.4).

980702 I lmtc XXXXX. Went through guidelines listed in Memorandum 2.4 to determining whether Provincial Branches and National body are separate "persons". It appears that they are. Each branch is capable of holding property in its own name; the parent body is not liable for the debts and obligations of the branches; each branch has its now constitution and by-laws; each branch has its own board of directors; each branch enjoys a considerable degree of autonomy in its day-to-day operations; the accounting activities of each branch is separate from those of the parent; each branch has its own distinct seal where they have one; the financial andor fiscal year of the branches are not determined by the parent although they all use the calendar year end. XXXXX was, however, unsure as to whether persons automatically become members of the parent body or of another branch by becoming members of a branch ( but she thought the members of each branch was different than the members of the parent body, although they might have the option). Note: each branch is currently separately registered for GST purposes.

980706 I submitted a redraft of the response to M. Place for review.

980729 I resubmitted draft to M. Place for review.

980804 I submitted final copy of letter to M. Place.