23 September 1999 GST/HST Interpretation HQR0001462 - Memberships Supplied by a Non-Profit Trade Association

Dear XXXXX

Thank you for your letter of November 9, 1998 in which you request a Goods and Services Tax (GST)/Harmonized Sales Tax (HST) Interpretation concerning the application of the tax to supplies of memberships by a non-profit trade association.

Background Information

A non-profit trade association provides services to its members who are generally corporations in a predominantly GST exempt service-based industry. The association is a non-profit organization ("NPO") and a ("public sector body") for purposes of the GST/HST. Membership fees are proportionate to the size of the member corporations. The head office of the association is in the XXXXX but it has a branch office in XXXXX[.] The association provides the following benefits to its members:

1) Research - The member companies provide data, principally on the distribution of industry related products, to the association for use in the research program conducted by the association. As members, the companies are entitled to receive copies of the research results, and many receive scheduled mailings of periodicals. For example, members receive a monthly magazine that contains general information relevant to the industry.

2) Networking - Networking opportunities are provided to member companies through conferences, and participation in committees and study groups. Members receive a 33% discount on the advertised conference registration fee charged by the association (these benefits extend to the employees of the member companies). Only members attend the conferences.

3) Publications - The association supplies a variety of magazines on topics ranging from research to training. The members of the association may purchase publications at a 33% discount from the published list price. Quantity discounts apply to all members and non-members. Although the publications are available to non-members, nearly all sales of publications are to members.

4) Selection and Assessment Products - Members can purchase selection products at a 33% discount from the published list price. Selection products are employee aptitude tests that have been prepared by the association based on its vast industry knowledge. The tests are processed at the head office in the United States. As a practical matter, the published list price would not be a competitive price, and the real discount from the price of competing products is likely 10% to 20%. All sales of the selection products thus far have been to members.

5) Consultation - A client manager meets regularly with the member companies to discuss the latest research and information sent to them. Fees may be charged where the member requests more individualized or specialized consulting work. The association has a consulting practice in certain specialized areas such as compensation, and a member company can purchase consulting services at competitive rates. Non-members would be charged 50% higher rates than members, but whether such higher rates are competitive with the market is questionable. Most of the consulting services are acquired by members and the "real" discount is likely 10% to 20% less than what competing firms may charge. In practice, non-members have not purchased the consulting services.

6) Educational programs - The association presents regularly scheduled training programs, and designs custom programs for executives and management. Some of these programs lead to industry recognized designations, although none are required certifications for work in the industry. Members receive a 33% discount for the programs, but again the real discount is probably 10% to 20% less than competing programs. In practice, non-members have not enrolled in the education programs.

7) Compliance services - The association provides services in the compliance area through its XXXXX and beginning in 1998, XXXXX[.] Under the XXXXX the association surveys new purchasers of industry products to ensure that salespersons complied with legally mandated disclosure requirements, while the XXXXX is a background investigation service for compliance with regulatory requirements for background checks on newly appointed salespeople. Non-members would be charged an additional XXXXX, but there are no non-members using XXXXX is not offered to non-members.

It is your contention that the benefits provided by the trade association fall within those set out in subsections 17(a) through (f) of Part VI of Schedule V to the ETA, and thus the supply of the membership is exempt. In particular, you indicate that the services identified in #1 above fall within the parameters of 17(a) and/or (b) and the remaining benefits described in #2 to #7 satisfy the conditions of 17(d) and/or (e).

As agreed in our telephone conversation of XXXXX of your office, this reply will not address the possible tax implications of the "non-resident" status of the association on the supply of the memberships in Canada.

Interpretation Requested

You have requested our opinion, with reasons, as to whether the association's membership is GST exempt under section 17 of Part VI of Schedule V to the ETA.

Interpretation Given

A "benefit" of membership is the right to any property or service of value regardless of the extent to which the right is actually exercised by individual members. As you are aware, section 17 of Part VI of Schedule V to the ETA, exempts a supply of a membership in a public sector body (other than a body the main purpose of which is to provide dining, recreational, or sporting facilities) provided the members do not receive any benefits other than those specified in the paragraphs under this section, which you have itemized in your letter.

Indirect Benefit

In accordance with paragraph 17(a), a member of an NPO may receive "an indirect benefit that is intended to accrue to all members collectively" without causing an otherwise exempt membership to be taxable. The fact that a benefit is available to all members does not necessarily signify that the benefit is "indirect." In fact, benefits that are meant to accrue only to members by reason of their membership are generally direct benefits. It is only when the benefit accruing to a member is incidental, in the sense that it is a secondary consequence of an objective involving more than just the interests of the members, that it will be viewed as indirect. For example, the benefits of a lobbying activity might be regarded as indirect if the activity is carried out on behalf of a broad public sector so that individual members and non-members alike benefit in an incidental or "indirect" manner.

Given the above, the supply of the research data by the association to its members may not be an indirect benefit under paragraph 17(a). If the research information has commercial applications for the members, i.e., the members are able to benefit directly from the research results, the supply of the information could not be considered a secondary or unintended consequence of membership. In essence, the members would be recipients of a direct benefit since it is solely available to members and it has a direct commercial impact on the members' business.

Settling Disputes

Regarding your contention that the supply of the research data and information may be a benefit described in paragraph 17(b), based on the information provided, we believe paragraph 17(b) would not apply to this supply. Paragraph 17(b) describes a supply of a right to services involving "investigating, conciliating or settling complaints or disputes involving members." We perceive no basis for finding that the provision of the research data and information, in this particular case, could in any way be described as "in the nature of investigating, conciliating, or settling complaints or disputes involving members."

Discounts

The discount on the fees charged by the association for members (and their employees) to attend conferences, as described in #2 above, would not be considered an indirect benefit, nor would it be a benefit to which paragraph 17(b) would apply. This supply may more appropriately be considered under paragraph 17(e).

Because of paragraph (e), an NPO may provide supplies to members at a discount without affecting the exempt status of the membership, so long as the cumulative value of such discounts is insignificant compared to the membership fee. In order for discounts to be considered insignificant in relation to the membership fee, the discounts in total must be less than 30% of the value of the consideration for the membership.

For purposes of paragraph (e), the discount is the difference in the fee payable by the members for property or services and the fair market value (FMV) of the property or services. Generally, where an NPO supplies property and services to members and non-members alike, the discount available to members is the difference between the fee for members and the fee for non-members (assuming the fee for non-members is at fair market value). If the fee for non-members exceeds the fair market value of the property or services being provided, the amount of the discount to the members is the difference in the fee payable by members and the fair market value of the supply.

Besides the discount on conference fees, discounts described under paragraph 17(e) include the discount on the fees for the publications, selection and assessment products, specialized consultation, educational programs and the customer satisfaction program. Again, the cumulative value of all such discounts must be considered in relation to the value of the consideration for the membership. Unless the total value of all such discounts is insignificant in relation to the membership fee, this paragraph will not apply to exempt the membership.

Generally, unlimited discounts will not fall under paragraph 17(e). For example, if an NPO offers members a $5 discount when a good is purchased from the NPO, and there are no limits on how many purchases each member may make, the membership will be taxable regardless of the amount of the membership fee. However, this restriction will be applied with some discretion in situations where it is apparent that the "unlimited" discounts have, in fact, very limited value.

In accordance with paragraph 17(d), if one of the benefits of membership in an NPO is the opportunity to acquire property and services from a third party, that benefit will not cause the membership to be taxable as long as the members pay a separate fee equal to the FMV of the property or services. This requirement that members pay a separate fee equal to the FMV of purchases from third parties will also be applied with reasonable discretion. For example, the fact that members may be entitled to a 5% discount if staying in a particular hotel in a particular city, or to a 4% car rental discount in some cities, may not in itself cause a membership to be taxable if it is evident that the discount is of very little or no value. In this situation, we may not view the member as having received a "benefit by reason of membership" as specified in the preamble to section 17.

On the other hand, such discounts may cause the membership to be taxable if, for example, the NPO represents members who travel a lot, and they are entitled to a 4% car rental discount in particular cities they generally travel to. In this situation the discount may be of obvious value to the members, so that it would be viewed as a "benefit by reason of membership" that is not included in the "allowable" benefits described under section 17.

Publications

Publications supplied as part of a membership will not change the exempt status of the membership provided that the conditions under paragraph 17(f) are met. If members may receive periodic newsletters, reports and publications that provide information on the activities of the body, or its financial status, the membership will remain exempt unless the value of the publication is significant in relation to the membership fee and a fee is ordinarily charged to non-members. If the members may receive periodic newsletters, reports and publications that do more than provide information on the activities of the organization or its financial status, the membership will still remain exempt if the value of the publication is insignificant in relation to the membership fee.

Even if the supply of the publication fails to meet the conditions under paragraph 17(f), it is still possible that the membership will remain exempt under paragraph 17(e). That is, even if the value of the publication is significant, relative to the membership fee, paragraph 17(e) may still apply where members are entitled to a discount on the fee for the publications, and the total value of all such discounts are insignificant in relation to the membership fee. As well, the membership will remain exempt if the conditions under paragraph 17(d) are met (i.e., if an additional fee payable by the members for a supply of publications made by the NPO is equal to the fair market value of the publications - paragraph 17(d) is generally, but not necessarily, applicable to supplies made by third parties).

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 & Governments Division
GST/HST Rulings and Interpretations Directorate

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