GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Road
Ottawa ON
XXXXX K1A 0L5
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XXXXX
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March 3, 1998
XXXXX
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Subject:
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GST/HST INTERPRETATION
XXXXX
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Dear XXXXX
This is in reply to your memorandum of January 21, 1997, with attachments, addressed to J. Adrien Venne, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX and XXXXX
Interpretations Requested
You requested confirmation:
1. that the corporations involved, i.e., XXXXX and XXXXX, are "for profit" organizations and therefore cannot be "qualifying non-profit organizations" as determined for purposes of section 259 and as described under subsection 259(2) of the Excise Tax Act ("ETA");
2. that the monies received from the Ministry of Health XXXXX are "government funding" as defined in the Public Service Body Rebate (GST) Regulations, that is, the monies received are consideration for a supply of ambulance services and would qualify as "government funding" under subparagraph 2(a)(ii) of the Regulations where the ambulance service is an exempt supply.
You also requested an interpretation as to whether these corporations and others providing ambulance services could be determined to be "municipalities" under paragraph (b) of the term "municipality" defined in subsection 123(1) of the ETA. Further, you asked whether an ambulance service could be included as a municipal service which would enable these organizations to be designated as municipalities for the purposes of section 259.
Based on documentation provided to our office as well as additional research, our understanding of the facts is as follows:
XXXXX
1. XXXXX is a corporation registered for GST (BN XXXXX that operates an ambulance service in XXXXX and the surrounding area. XXXXX is incorporated under the laws of the Province of XXXXX but not as a corporation without share capital under XXXXX of the XXXXX which is the legislation under which nonprofit organizations would generally incorporate in XXXXX is funded by the Ministry of Health of XXXXX (the "Ministry"). The Ministry funds are used to pay for XXXXX operating expenses. At year end, the Ministry recovers any excess funding or makes up for shortfalls incurred by the ambulance service during the year.
3. The Ministry also funds a management compensation plan that XXXXX pays to its parent corporation and owner, XXXXX for administrative services.
4. The Ministry allocated XXXXX to XXXXX for the 199697 fiscal year subject to the terms and conditions of XXXXX submission concerning its ambulance services, approved staffing plan, the Ambulance Act and Regulations, yearend financial statements, financial guidelines, and the Ministry of Health Audit. Of that amount, XXXXX was for the management compensation plan paid to XXXXX, and XXXXX was to cover XXXXX operational expenses.
5. XXXXX has applied for GST rebates as a "qualifying nonprofit organization." On its rebate application form dated October 18, 1996, XXXXX stated that its percentage of government funding was 100% for the fiscal years ended March 31, 1995 and March 31, 1996, and it claimed a GST rebate in the amount of XXXXX submitted a subsequent rebate application dated June 30, 1997, stating that its percentage of government funding was 100% for the period April 1, 1997 to June 30, 1997, and claimed a GST rebate of XXXXX "Statement of Income and Deficit" for the years ending March 31, 1996 and March 31, 1997 show nil net income.
8. XXXXX authorize the corporation to issue shares and pay dividends to shareholders. The XXXXX limit the shareholders, exclusive of employees, to XXXXX In the event of liquidation, dissolution or windingup, the XXXXX provide for the distribution of the assets of XXXXX among the shareholders and specify that the holders of preference shares receive, before any distribution of assets among the other shareholders, the amount paid up and any dividends declared and unpaid.
9. There is no clause in XXXXX that blocks the distribution of dividends to shareholders.
10. XXXXX has a XXXXX shareholder, XXXXX
11. Historically and currently, XXXXX has not been filing income tax returns as a nonprofit organization.
12. XXXXX had dividends that became payable in 19 xx and that were paid.
XXXXX
1. XXXXX is a privately owned and operated ambulance service. It is not separately incorporated, but is owned and managed by XXXXX
2. XXXXX is incorporated under the laws of the Province of XXXXX but not as a corporation without share capital under XXXXX of the XXXXX which is the legislation under which nonprofit organizations would generally incorporate in XXXXX is owned by XXXXX who draws a salary in respect of the activities of XXXXX and XXXXX are registered for GST purposes under the same BN account number (BN XXXXX represents the "management account" and XXXXX represents the "operational account."
5. XXXXX receives funding in the name of XXXXX from the Ministry of Health of XXXXX (the "Ministry") to pay for XXXXX operating expenses. At year end, the Ministry recovers any excess funding or makes up for shortfalls incurred by XXXXX during the year through a settlement process.
6. In addition to the operating fund, the Ministry pays XXXXX a management compensation package of approximately XXXXX per year to manage the ambulance service.
7. Early in 1991, XXXXX applied for GST rebates as a "qualifying nonprofit organization" in respect of purchases by XXXXX However, XXXXX was later advised by his auditors that the ambulance service did not meet the requirements of the GST rebate. Consequently, XXXXX returned all GST monies to Revenue Canada.
8. In October 1996, the Ministry instructed XXXXX to claim GST rebates pursuant to subsection 259(4) of the ETA, to initiate action to claim past years' GST rebates, and to reflect such recoveries in XXXXX budget and settlement submissions.
9. XXXXX authorize the corporation to issue shares and pay dividends to shareholders. In the event of liquidation, dissolution or windingup, the articles provide for the distribution of the assets of the corporation among the shareholders and specify that the holders of preference shares receive, before any distribution of any part of the assets of the company among the other shareholders, the amount paid up and any dividends declared and unpaid.
10. There is no clause in the XXXXX that blocks the distribution of dividends to shareholders.
11. XXXXX is the XXXXX shareholder of XXXXX
INTERPRETATIONS GIVEN
1. Do XXXXX and XXXXX qualify as nonprofit organizations for purposes of the ETA?
To qualify as a nonprofit organization for purposes of the ETA , the definition of "nonprofit organization" in subsection 123(1) sets out the following conditions:
a. the person must be organized solely for nonprofit purposes;
b. the person must be operated solely for nonprofit purposes; and
c. there must be no part of the person's income payable to, or otherwise available for the personal benefit of, any proprietor, member, or shareholder.
To determine whether a person is a nonprofit organization for the purposes of the ETA, we consider the relevant information with respect to the three conditions listed above.
To qualify as a nonprofit organization, ideally the governing documents should contain a statement that the entity is organized for nonprofit purposes. However, in some situations they may not. In those situations, the Department will examine the purposes for which the entity was organized to determine whether the entity was organized solely for nonprofit purposes. Entities which are organized solely for noncommercial public purposes will be considered to be organized for nonprofit purposes. This public purpose may include: social welfare, civic improvement, pleasure, recreation, relief of poverty, advancement of education or religion, or other similar purpose.
Regarding the operational factor described in (b) above, it is the Department's view that an association is not operated exclusively for nonprofit purposes when its principal activity is the carrying on of a commercial business. Some characteristics of a commercial business are where: it is operated in a normal commercial manner, its goods or services are not restricted to members and their guests, it is operated on a profit basis rather than a costrecovery basis, or it is operated in competition with taxable entities carrying on the same trade or business. A determination of whether an association was operated exclusively for and in accordance with its nonprofit purposes in a particular year must be based on the facts of each case which can be obtained only be reviewing all of its activities for that year.
With respect to item (c), please note that certain types of payments made, whether directly or indirectly, to proprietors, members, or shareholders, will not, in and by themselves, disqualify a person from being a nonprofit organization. This view applies to salaries, wages, fees or honorariums for services rendered to the person, provided that amounts paid are reasonable and in line with those paid in arm's length situations for similar services. However, an association may fail to comply with this requirement in a variety of ways, including if the association has the power at any time in current or future years to declare and pay dividends out of income or in the case of a windingup, dissolution, or amalgamation, the association has the power to distribute income to a proprietor, member, or shareholder.
Finally, please note that the facts that a corporation has shareholders and that its net income may or may not be "nil" in any particular reporting period are not relevant under our present policy in determining whether the corporation is a nonprofit organization for GST purposes.
XXXXX
(a) Is XXXXX "organized solely for nonprofit purposes"?
Based on the information at hand, XXXXX does not meet this requirement. In this situation, in order to be considered a nonprofit organization, there would have to be clear evidence that the corporation's mandate is solely for a purpose other than the private, commercial interests of its shareholder. While its agreement with the government of XXXXX precludes XXXXX from retaining a surplus for the years in question, it also protects XXXXX from incurring any operating losses. Furthermore, XXXXX stands to benefit commercially from the portion of XXXXX government subsidy paid to it. Finally, XXXXX incorporating documents indicate that XXXXX is organized for private, commercially related purposes. That is, the broad purpose of XXXXX is stated as "generally to carry on business as an ambulance service". For these reasons, it is not our view that XXXXX is organized solely for nonprofit purposes since its objectives appear related, at least in part, to the private, commercial interest of its shareholder and the parent company.
(b) Is XXXXX "operated solely for nonprofit purposes"?
For its fiscal years ending March 31, 1996 and March 31, 1997, XXXXX appears to have met this requirement based on its statements of income and deficit, and based on the fact that any surplus monies remaining after XXXXX operational expenses have been paid must be returned to the Ministry through a settlement process. However, we would not consider XXXXX to be operated solely for nonprofit purposes if it could be said that XXXXX principal activity is the carrying on of a trade or business; i.e., where it is operated in a normal commercial manner, where its services are not restricted to members or shareholders, and where it is operated in competition with taxable entities carrying on the same trade or business. Whether XXXXX will be considered to be organized exclusively for any other purpose except profit with no part of its income payable or otherwise available for the personal benefit of any member so that in any year in which it in fact operates on that basis is a question of fact the determination of which can only be made retrospectively for each year.
(c) Does XXXXX meet the requirement "that no part of its income is payable to ... (its) shareholders"?
It does not appear that XXXXX meets this requirement as its incorporating documents authorize XXXXX to issue shares and pay dividends to its shareholders, and in 1976, a dividend was paid. Further, it appears that XXXXX income may be distributed through share redemptions upon liquidation, dissolution, or winding up of the corporation. Finally, the clause relating to the return of Ministry funds (should the operating expenses be less than the amount authorized by the Ministry) does not appear to preclude XXXXX from paying future dividends to its shareholders.
Therefore, XXXXX does not meet the definition of "nonprofit organization" for purposes of the ETA.
XXXXX
(a) Is XXXXX "organized solely for nonprofit purposes"?
It appears that XXXXX is not a separate entity from XXXXX Based on the information at hand, XXXXX of which XXXXX is a part, does not meet the requirement that it is organized solely for nonprofit purposes. For instance, while its agreement with the government of XXXXX precludes XXXXX from retaining a surplus in the years in question, it also protects the corporation from incurring any operating losses. Finally, while the incorporating documents of XXXXX submitted to us do not point out any specific objectives, we must assume that its mandate is related to the commercial interests of its only shareholder who stands to benefit from the management fee paid from the government of XXXXX subsidy to XXXXX holding company.
(b) Is XXXXX "operated solely for nonprofit purposes"?
While XXXXX is a separate activity that may operate in a nonprofit manner, XXXXX is a forprofit corporation. Furthermore, we would not consider XXXXX to be operated solely for nonprofit purposes if it could be said that its principal activity is the carrying on of a trade or business, e.g., it is operated in a normal commercial manner, and where its services are not restricted to members or shareholders, and it is operated in competition with taxable entities carrying on the same trade or business. Whether XXXXX will be considered to be organized exclusively for any other purpose except profit with no part of its income payable or otherwise available for the personal benefit of any member so that in any year in which it in fact operates on that basis is a question of fact the determination of which can only be made retrospectively for each year.
(c) Does XXXXX meet the requirement that no part of its income is payable to ... (its) shareholders"?
It does not appear that XXXXX meets this requirement as its incorporating documents authorize the corporation to issue shares and pay dividends to its shareholders. Further, it appears that the corporation's income may be distributed through share redemptions upon liquidation, dissolution, or winding up of the corporation. Finally, the clause relating to the return of Ministry funds (should the operating expenses be less than the amount authorized by the Ministry) does not appear to preclude the corporation from paying future dividends to its shareholders.
Therefore, XXXXX does not meet the definition of "nonprofit organization" for purposes of the ETA.
2. Do the monies paid by the Ministry of Health of XXXXX as consideration for a supply of ambulance services qualify as "government funding" as defined in the Regulations?
Monies paid by the Ministry to organizations as consideration for the supply of ambulance services qualify as government funding as provided for in section 2 of the Public Service Bodies Rebate (GST) Regulations under the definition of "government funding" in subparagraph 2(a)(ii).
However, since XXXXX and XXXXX do not meet the definition of "nonprofit organization" for purposes of the ETA, they are not eligible to claim rebates under section 259 of the ETA, even though they are substantially funded by government sources and certain of their activities are carried on without any expectation of profit. In other words, the proportion of government funding is not relevant for purposes of determining whether these corporations qualify for rebates.
Municipal Determinations and Designations
Technical Information Bulletin B046, Administrative Guidelines for Municipalities identifies the types of organizations that may be determined to be municipalities. Since XXXXX and XXXXX were not created by a municipality or a province, these corporations do not fall within any of the following categories outlined in TIB B046:
• unincorporated municipal government unit;
• special purpose provincially or territorially established authority; or
• paramunicipal corporation, board, or commission.
With respect to municipal designations for the purposes of section 259 of the ETA, an ambulance service is not considered to be a municipal service for the purposes of the definition of "municipality" in section 259. Therefore, operators of ambulance services cannot be designated as municipalities for the purposes of section 259. Previous designations of private ambulance operators have been revoked by Headquarters.
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
Rulings Officer
Charities, NonProfit Organizations, and Educational Services Unit
Public Service Bodies and Governments Division
| c.c.: |
J.A. Venne
M. Place
S. Eastman |
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| Legislative References: |
Excise Tax Act: section 123 definitions of "nonprofit organization" and "municipality", section 259, section 4 of Part II of Schedule V, ·Public Service Body Rebate (GST) Regulations, |
Income Tax Act: paragraph 149(1)(l)
NCS Subject Code(s) I 19, 118941, 119251, 119253
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