7 May 1998 GST/HST Interpretation HQR 367 - Health Districts in

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

This refers to your memorandum dated October 18, 1996, in which you requested our assistance in applying the GST to the operations of the XXXXX and the XXXXX[.]

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

Facts

1) Pursuant to XXXXX XXXXX (the "Board') were created in 19 xx to provide health services in the district.

2) Each union hospital that is located within the XXXXX is disestablished and the union board for each union hospital was dissolved.

3) Each ambulance XXXXX that is located within the health XXXXX is disestablished and the ambulance board for each of those ambulance districts is dissolved.

4) Pursuant to XXXXX all the assets, liabilities, rights and obligations of the health care facilities such as the hospitals, ambulance boards and nursing homes that are dissolved are transferred to and become the assets, obligations, liabilities and rights of the Board.

5) Subsection 23(1) of the XXXXX provides that the district board is a not-for-profit corporation. The Board is a registered charity under the Income Tax Act.

6) The Board has one central computerized accounting system for all the health facilities in XXXXX that tracks all facilities within the district. The facilities are identifiable by separate account numbers in their general ledger and are treated as separate cost centres for financial reporting.

7) The Board operates the following facilities:

a) the district's main administrative office which handles the payment of bills, purchasing for the health facilities within the district, payroll and human resource services.

b) three hospitals that provide 24 hour acute care, minor surgery and post surgical and medical care, in and out-patient care and chronic care. Before the creation of the XXXXX board these hospitals were recognized by the province as public hospitals.

c) one combined hospital and special care centre (nursing home) that provides 24 hour acute care, minor surgery and post surgical and medical care, in and out-patient care and accommodation, meals and 24 hour long-term care to residents requiring personal care. Before formation of XXXXX it was recognized by the province as a public hospital.

d) one home care operation providing home based care for patients. As part of the operation the district operates a meals on wheels program whereby the Home Care Operation purchases prepared meals from cafeterias operated by other care facilities in the district and sells these meals to the residents.

e) two health centres that were hospitals prior to the formation of the XXXXX[.] After the creation of XXXXX these facilities were converted to health centres which were drop-in day clinics providing doctor and nursing care and 24 to 48 hour recovery and observation care as well as accommodation, meals and long term care. These two facilities were converted again to nursing homes providing accommodation, meals and 24 hour long-term care to residents requiring personal care.

f) XXXXX nursing homes providing accommodation, meals and 24 hour long-term care to residents.

g) ambulance services provided by private ambulance operators contracted to the district.

8) The Board's total revenue for the year ending March 31, 1996, was approx. $16 million and included revenue from the following supplies:

•   cafeteria sales from the facilities located within the district including meals on wheels sales to residents of the nursing homes.

•   meals sold to employees.

•   coin operated vending machines dispensing carbonated beverages.

•   electricity provided to employees for plugging cars in winter.

•   charges to employees for using photocopiers and fax machines for personal use.

•   television rentals to patients.

•   sale of medical supplies like incontinence products and other supplies such as Kleenex to patients at the health care facilities.

9) The Board is not registered for GST purposes and has not collected the GST on any of its supplies.

You have asked for clarification of the following:

Question 1

a) How does the GST apply to the following supplies:

i) cafeteria sales - prepared meals sold to employees;

ii) vending machines - sale of carbonated beverages;

iii) recovery of electricity for staff parking;

iv) use of office equipment;

v) television rentals;

vi) sale of medical supplies.

b) How will the GST apply to the above supplies after 1996?

Question 2

Is the Board required to register for the GST and if so should their registration be backdated to the date they exceeded the small supplier threshold? If their registration is backdated should they be assessed retroactively?

Question 3

Can the Board use the section 129 election and, if so, can it be backdated?

Question 4

How does the Board calculate its rebate with respect to its activities mentioned in fact 5) above?

Response Given

The following is our response to the above questions you have raised. It is based on the fact that the Board is both a hospital authority and registered charity for GST prior to January 1, 1997.

Question 1

Prior to January 1, 1997, the GST applies to the supplies listed below as follows:

i) The cafeteria sales of prepared meals sold by the Board to employees is taxable at 7 per cent unless the direct cost rules apply.

ii) The sale of carbonated beverages by the Board through vending machines is taxable at 7 per cent unless the direct cost rules apply.

iii) Recovery of the cost of electricity for staff parking. In your letter you have explained that the Board charges each of its employees $0.06 for each hour they plug in their cars at work and that this charge is intended to recover the Board's cost of electricity consumed. In these circumstances it is our view that the charge is for the supply by the Board of a right to use their plug-ins and qualified for exemption pursuant to section 2 of Part VI of Schedule V to the Excise Tax Act (the "Act") prior to January 1, 1997.

iv) The tax status of the supply of the right to use photocopiers and fax machines is currently under review. You will be advised when a decision has been made.

v) The supply of television rentals by the Board to the patients in the health care facilities is taxable at 7 per cent.

vi) The sale of Kleenex by the Board would be taxable unless the direct cost rules apply. The supply of incontinence products specially designed for use by an individual with a disability is zero-rated pursuant to section 37 of Part II of Schedule V[I] to the Act.

The tax status of the above-noted supplies remains the same after 1996. For GST purposes the Board falls within the definition of public institution in section 123 of the Act effective January 1, 1997.

Question 2

(a) Yes, the Board will be required to be registered for the GST unless, of course, it qualifies as a small supplier.

(b) & (c) You have asked whether the Board's registration should be backdated to the date it exceeded the small supplier threshold and, if so, should the Board be assessed retroactively. It is our view that it would not be appropriate to assess the Board retroactively in these circumstances. If the Board's registration is not backdated this eliminates any need to assess. However, if you decide to backdate the Board's registration it is our opinion that a retroactive assessment may be avoided by applying section 129 in these circumstances as explained in our response to question 3.

Question 3

As you know, in order for the Board to be eligible to treat each of its branches or divisions separately for purposes of section 129 of the Act, one of the requirements is that it must keep separate records, books of account and accounting systems in respect of each of its branches or divisions. You mention in your letter that in your view the Board cannot meet this requirement as it has one central computerized accounting system that tracks all facilities that are part of the board.

We have discussed this issue with our audit division as it is their responsibility to determine whether separate records, books of account and accounting systems are maintained in respect of a branch or division for purposes of section 129 of the Act. They advised that if the Board can identify the accounting activities for each branch or division of the Board in any manner then it will meet this requirement. For example, even though the Board may have one central computerized accounting system, if they have a tracking system for each branch or division that can identify that branch or division's costs, revenues, etc. then it may qualify for purposes of section 129 of the Act. If you require additional information regarding this issue please call Brenda Ginsberg of our Verification, Enforcement, Compliance and Review Unit here in Ottawa. Her telephone number is (613) 957-3591.

If the conditions outlined in the preceding paragraph are met and the Board is eligible to use section 129 it is our view that in these circumstances if you decide to register the Board retroactively section 129 can be applied retroactively as well. This would eliminate the need to assess retroactively unless, of course, some of the Board's branches or divisions do not qualify as small supplier branches or divisions. Please note that the decision applies in these circumstances only.

Question 4

The XXXXX Health Board has been designated as a hospital authority pursuant to subsection 123(1) of the Act effective October 1, 1993, the date it was created by the Province of XXXXX

The Board is registered as a charity under the Income Tax Act and as such met the definition of a charity in ss. 123(1) of the Act prior to January 1, 1997. Effective January 1, 1997, hospital authorities that are registered charities fall within the definition of public institution and are excluded from the definition of charity in the Act. As a public institution effective January 1, 1997, and a charity before that date, the Board is entitled to a rebate of 50 per cent paid on its inputs for which it is not entitled to input tax credits. Since the Board has been designated as a hospital authority effective October 1, 1993, it is also entitled to a rebate of 83 per cent but only with respect to the GST paid on its purchases used in its exempt hospital activities. Pursuant to ss. 259(4.1), the Board will be required to apportion between its exempt hospital activities and exempt activities as a charity prior to January 1, 1997, and as a public institution from January 1, 1997.

Based on the above, the Board will be entitled to a rebate of 83 per cent of the GST paid on inputs used in exempt activities related to operating its hospital facilities (i.e. public hospitals) including that portion of expenses used in operating its main administrative office that relates to its exempt hospital activities. In addition, it will be entitled to a rebate of 50 per cent of the GST paid on inputs used in exempt activities as a charity (and a public institution effective January 1, 1997) such as its health centres (facilities formerly recognized as public hospitals by the province which were converted into health centres) and nursing homes. With respect to the combined hospital and special care centre, the Board will have to apportion between the hospital and non-hospital activities of the centre. It will also be entitled to claim a rebate of 50 per cent of the GST paid on inputs used in the operation of the administrative office that relates to its exempt activities as a charity or public institution.

Please note that the Board will not be eligible for the 83 per cent rebate with respect to the activities of any health facility that it operates that was formerly recognized as a public hospital by the province but that is no longer so recognized.

For your information, the Department is currently conducting a review of the health care industry by meeting with all the provincial health departments with the main focus being the review of the criteria that we use for purposes of designating organizations as hospital authorities. As part of this review we will also be looking at what constitutes hospital activities for GST purposes and it will be determined at that time whether ambulance services and home care services provided by hospital authorities are hospital activities for GST purposes and eligible for the 83 per cent rebate. As a public institution and before that a registered charity the Board is currently entitled to a rebate of at least 50 per cent with respect to these supplies.

The Department has not developed any written guidelines or methods that organizations can employ to apportion its rebates. However, the method used by the Board has to be reasonable in the circumstances and must be used consistently throughout the year.

If you require any further information regarding this matter please contact the undersigned at 954-4395 or Owen Newell, A/Manager, Municipalities and Health Care at 954-4280.

Yours truly,

N. Minken
Policy Officer
Municipalities and Health Care Services
GST/HST Rulings and Interpretations Directorate

c.c.:      E. Vermes
S. Eastman
L. Dixon
J. Crago
N. Minken
XXXXX