8 November 1999 GST/HST Interpretation HQR0001883 - Application of the GST/HST to the Supply of Expert Health Care Consultation and Services

Dear XXXXX

Thank you for your letter of May 19, 1999, (with attachments) sent to the XXXXX concerning the application of the Harmonized Sales Tax (HST) to the activities of XXXXX[.] The XXXXX has asked us to respond to your query.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX was incorporated in XXXXX as a non-profit organization (NPO) to provide expert health care consultation and services through contractual arrangements.

2[.] XXXXX intends to supply services outside Canada involving human resource management, education, regulatory services, and primary health care.

3. Some of these services will be provided by employees of XXXXX[.] Others will be purchased from third parties (e.g., universities, agencies, etc.) and resupplied by XXXXX[.] Although it has not yet been determined, these services may be funded by a government agency or alternatively, consideration for the services may be paid by the recipient of the service.

4. Revenues of XXXXX to date, are from the following sources:

XXXXX

5. Pursuant to a letter to XXXXX from XXXXX the XXXXX item above represented XXXXX portion of contributions to XXXXX to help fund a business plan for the development of products for sale to international primary health care markets, to confirm marketing strategies and to resolve financial and legal issues impacting XXXXX[.]

6. Pursuant to an agreement between XXXXX and XXXXX the XXXXX item above was to be used by XXXXX in developing a business plan for delivering contract services in primary health care in foreign countries.

7[.] XXXXX also contributed XXXXX to assist XXXXX in the development of its business plan.

8[.] XXXXX was registered for the GST/HST on April 16, 1999.

9. Prior to becoming a GST/HST registrant, XXXXX incurred HST costs of XXXXX on the acquisition of services and other miscellaneous items related to the development of its business plan.

Rulings Requested

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

2. Is XXXXX entitled to claim input tax credits (ITC's) for the acquisition of services and other miscellaneous items related to the development of its business plan?

Ruling/Interpretation Given

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

We are unable to provide a ruling on whether XXXXX is required to be registered for GST/HST purposes because, from the information available, there is apparent uncertainty as to whether the supplies that XXXXX intends to make will be taxable or exempt. This question is relative in determining whether XXXXX is engaged in a commercial activity, which is a prerequisite for registration. The following will provide further information concerning these provisions.

Subsection 240(1) of the Excise Tax Act ("the ETA["]), provides in part that a "person who makes a taxable supply in Canada in the course of a commercial activity ... in Canada ..." is required to register for the GST/HST. The provision also sets out certain exceptions (such as that for small suppliers). Further, subsection 240(3) provides, in part, that registration is permitted only if a person is "engaged in a commercial activity in Canada."

"Commercial activity" is defined in subsection 123(1) of the ETA, in part, as follows:

a) "a business carried on by the person ..., except to the extent to which the business involves the making of exempt supplies by the person. ..."

Based on your submission, it is apparent that XXXXX will be carrying on a "business" based on the rather broad meaning of that term in subsection 123(1); i.e., "a profession, calling trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, ..."[.] However, as noted above, since the "making of exempt supplies" is excluded from the meaning of "commercial activity," XXXXX would not be required or permitted to register (and may be subject to deregistration) if its only activity is the making of exempt supplies.

We understand that XXXXX is not presently making supplies. However, if XXXXX determines that the supplies it is planning will be taxable (i.e., made in the course of a commercial activity), the present activities undertaken in preparation for making such supplies are deemed under subsection 141.1(3) to be commercial activities, so that XXXXX may choose to remain a GST/HST registrant.

The comments under the second question (below) provide information concerning the possible exemptions that might apply to XXXXX[.] It is important to note that even if XXXXX is engaged in a commercial activity in Canada, XXXXX is not required to be registered if its worldwide revenues from taxable supplies do not exceed $50,000 in its current quarter and for the previous four consecutive calendar quarters. Furthermore, XXXXX may request to cancel its registration if its taxable supplies are below the $50,000 threshold.

2. Is XXXXX entitled to claim ITC's for the acquisition of services and other miscellaneous items related to the development of its business plan?

We are not able to provide a ruling on this matter since, at this time, it is not possible to determine whether XXXXX meets the requirements for claiming ITCs. That is, in order to claim ITCs, the purchases in question must be for the purpose of making taxable supplies for consideration <subsections 141.01(2) and (3)> and there is insufficient information to determine whether XXXXX future services would be taxable or exempt. However, we will provide the following general information for your assistance.

Generally, the supply of a service in the course of a commercial activity would be taxable unless a specific exemption applies. For example, a supply of a service by a PSB would be exempt if substantially all supplies of that service are made for no consideration, pursuant to section 10 of Part VI of Schedule V to the ETA. Thus, assuming that the government funding received by XXXXX is viewed as a grant or subsidy rather than consideration for a supply, XXXXX services would be exempt if they are to be funded in this manner.

On the other hand, if XXXXX charges a fee to the recipient, the "no consideration" exemption would not apply. In this situation, it is possible that the "direct cost" exemption (section 6 of Part VI) may apply, although where services are concerned, this exemption applies only where a service is purchased by XXXXX and resupplied for an amount equal to or less than the direct cost. Generally, it would not apply where XXXXX uses its own staff in providing services and receives compensation for this. Further, it would not apply if the nature of the supply made differs from that acquired (for then it would not be viewed as a "resupply").

As mentioned above, XXXXX would not be entitled to claim ITCs with respect to purchases that are used to make exempt supplies.

Please note that if XXXXX is making taxable supplies, and is a registrant, it would not be required to charge tax on supplies of services that are wholly performed outside of Canada <subsection 142(2)>. As well, pursuant to subsection 165(3) and Part V of Schedule VI, certain services provided in Canada to non-residents are zero-rated (i.e., taxed at the rate of zero percent so that, in effect, no tax is charged). Since, in both of these situations the supplies are taxable, notwithstanding that no tax is charged on them, XXXXX would still be entitled to claim ITCs with respect to related purchases.

Subsection 169(1) provides that a person who is claiming an ITC must be a GST/HST registrant in the reporting period in which the tax becomes payable or is paid without having become payable. It isn't clear whether XXXXX was registered when the purchases in question were made. In the event that it may not have been, we will point out that section 171 provides somewhat of an exception to this section 169 "timing" requirement. In particular, subsection 171(2) provides, in part, that where an organization incurs tax on the purchase of a service before the organization becomes a registrant, the GST/HST attributable to services to be supplied after the organization becomes a registrant may be claimed as an ITC, assuming that the organization uses the services in its commercial activities. A similar exception is provided in regards to property that is held by a person immediately before it becomes a registrant for GST/HST purposes.

Finally, please note that if XXXXX is not entitled to claim ITC's on the acquisition of services and other miscellaneous items related to the development of its business plan, it may, if it is a "qualifying non-profit organization," claim a 50% public service body rebate in respect of such tax. A "qualifying non-profit organization" is one that receives 40% or more of its revenues as government funding. The calculation of this percentage may be based on either its current fiscal year, or the total of the two immediately preceding fiscal years. The authority for this treatment is found in subsection 259(2) as well as the Public Service Body Rebate Regulations. A qualifying NPO is entitled to this rebate whether or not it is registered for GST/HST purposes.

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 us with respect to a particular situation.

As you will notice, in order to reply to your query, we have referred to a significant number of provisions. If any of these still seem unclear, or if you would like us to forward you a transcript of the sections cited, please do not hesitate to contact me at (613) 952-0420.

Yours truly,

Lorrie Grannary
Charities and Non-Profit Organizations Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate