1 November 1999 GST/HST Interpretation HQR0001481 - Calculation of Government Funding for a PSB Rebate

Dear XXXXX

Thank you for your telephone call of November 27, 1998 concerning a lump sum payment made by a grantor to a non-profit organization (NPO) and its impact on the calculation of the percentage of government funding of the NPO. As described below, the percentage of government funding is used in determining whether the NPO is a "qualifying non-profit organization" for purposes of the 50% public service body rebate.

In our discussion you indicated that an NPO has been established with a mandate to provide certain services over a 5 year period. The NPO receives a lump sum contribution in its start-up year from a government grantor to provide these services. It has no other revenue, other than interest income earned on the investment of the contribution. For accounting purposes the NPO uses a deferral method of accounting for the contribution, i.e. contribution amounts related to expenses of future periods are deferred and recognized as revenue in the period in which the related expenses are incurred.

Interpretation Requested

Can the contribution amounts that are deferred and recognized as revenue in future periods be used to calculate the percentage of government funding for the periods in which they are recognized as revenue?

Interpretation Given

Under section 259 of the Excise Tax Act (ETA), a qualifying NPO may claim a rebate equal to 50% of the "non-creditable tax charged," which is generally GST (or the federal portion of the HST) which cannot be recovered by input tax credits. In accordance with subsection 259(2) of the ETA, an NPO is considered to be a qualifying NPO where its percentage of government funding for the year is at least 40%.

For purposes of this interpretation the lump sum amount is assumed to meet the definition of government funding in section 2 of the Regulations. In general, government funding is an amount of money paid to a person by a grantor for the purpose of financially assisting a person in carrying out the purposes of the person, and not as consideration for a supply other than an exempt supply provided to a person other than the grantor, or persons related to the grantor.

Pursuant to subsection 3(1) of the Regulations, an amount of government funding is considered to be government funding for a particular year if it is "... identified in the annual financial statements of the particular person for the year as government funding ...," and it "was received or became receivable in the year (depending upon the method used by the particular person for determining revenue for the year) ... ."

It should be noted that for purposes of calculating the percentage of government funding, the Regulations provide that an NPO can use the contribution received in a particular year to calculate its percentage of government funding for that year or the two following years. More specifically, in accordance with subparagraph 3(1)(b) of the Regulations, the percentage of government funding for a particular year is the greater of the percentage determined by the formula for amounts received or receivable in that year, and the percentage that is equal to:

(i) where the year is the first fiscal year of the particular person, zero;

(ii) where it is the second fiscal year, the percentage determined for the first year;

(iii) in any other case, the percentage determined for the two previous years.

In other words, for purposes of determining whether it meets the 40% funding threshold, an NPO may base its calculations either on its current year's revenues and government funding, or the average of the amounts over the two preceding years.

The Department will accept that certain deferrals may qualify as government funding in subsequent years rather than the year received. This will be the case where there are restrictions in the funding agreement whereby the recipient NPO is precluded from using the funds received until a subsequent period. In such situations, the deferred amounts may be treated as government funding in that subsequent period. You may wish to request a ruling with respect to any such situations, since a determination must be made on a case-by-case basis subject to a review of the funding agreement.

Please note that, pursuant to section 3 of the Regulations, an amount that is government funding as defined in section 2 of the Regulations must be identified as government funding in the annual financial statements of an NPO, in order for that amount to be used to calculate the percentage of government funding of the NPO. If an amount that is government funding is paid to an NPO, but is not identified in the annual financial statements of the NPO as such, that amount will not be considered government funding for purposes of the percentage of government funding calculation. Therefore, where the Department accepts that a deferred amount is government funding for a participating year, that amount should be identified in the financial statements for that year as government funding.

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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4206.

Yours truly,

Dwayne Moore
Charities and Non-profit Organizations Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate