5 March 1999 GST/HST Ruling HQR0000662 - Application of the GST/HST to Operational Expenses

Dear XXXXX

This is in response to your letter of February 19, 1997, sent to the XXXXX XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the activities of XXXXX has asked us to respond to your query.

Statement of Facts

Our understanding of the facts is as follows:

•   The XXXXX is a "for-profit" corporation that is incorporated under the XXXXX XXXXX and is not registered for GST/HST purposes. XXXXX is a wholly owned subsidiary of the XXXXX[.]

•   The XXXXX sources of revenue include a long term no-interest loan from the XXXXX which the XXXXX will be required to repay if it realizes returns from granting research funds to other persons. In addition XXXXX expects to receive a tax rebate ($XXXXX through XXXXX[.]

•   The XXXXX main activity is the funding of persons to conduct research projects. The XXXXX acquires ownership in the development of intellectual property in accordance with its contribution to a research project. In the event that XXXXX I realizes returns, it will repay the long term no interest loan to XXXXX[.]

•   XXXXX owns farm equipment valued at approximately $XXXXX which it leases to the XXXXX[.]

Ruling Requested

1. Is the XXXXX required to register for GST/HST purposes?

2. Is the XXXXX entitled to voluntarily register for GST/HST purposes?

3. Is the XXXXX required to collect GST/HST on its revenue sources?

4. Is the XXXXX entitled to claim input tax credits for GST/HST paid on its operational expenses?

Ruling Given

Based on the facts set out above, we rule that

1. The XXXXX is not required to register for GST/HST purposes.

2. The XXXXX is entitled to voluntarily register for GST/HST purposes.

3. If XXXXX were to register for the GST/HST, it would be required to collect GST/HST on its supply of farm equipment. It is not required to collect GST on the loan from XXXXX nor on the tax rebate received through XXXXX[.]

4. The XXXXX is not entitled to claim input tax credits for GST/HST paid on its operational expenses.

On April 1, 1997, the (HST) replaced the (GST) and the provincial sales tax in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. If you require additional information regarding the application of the HST to your activities please contact the Department.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act (ETA), or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

In accordance with subsection 240(1) of the ETA, XXXXX is not required to register since it is a small supplier (i.e., its annual revenues from taxable supplies are less than $30,000). The long term loan from XXXXX and the tax rebate from Revenue or from the XXXXX are not consideration for taxable supplies and therefore these amounts are not included in determining whether it exceeds the $30,000 small supplier's threshold. However, since XXXXX is making a taxable supply of farm equipment, pursuant to subsection 240(3), it may voluntarily register for GST/HST purposes.

In accordance with subsection 169(1) of the ETA, a registrant is entitled to an input tax credit for any expense that is for use or supply equal to the extent to which the property or service is for use or supply in the course of the registrant's commercial activities. Further, subsection 141.01(2) and 141.01(3) provide that a GST/HST registrant is entitled to claim input tax credits only to the extent that a purchase was acquired or used for the purpose of making taxable supplies for consideration and not for the purpose of making supplies that are not taxable supplies, nor for a purpose other than the making of supplies. However, subsection 141.01(1.1) states that for the purposes of subsections 141.01(2) and 141.01(3) the term "consideration" does not include nominal consideration.

Since XXXXX is making a taxable supply of farm equipment for nominal consideration (i.e., four dollars per year), it is not entitled to input tax credits for the tax paid on expenses acquired or used in relation to the supply of farm equipment. Nor is XXXXX entitled to input tax credits for the tax paid on expenses acquired or used for a purpose other than the making of supplies. In conclusion, even if XXXXX became a GST/HST registrant, based on its present activities, it would not be entitled to input tax credits in relation to any of its operational expenses.

Should you have any further questions or require clarification on the above matter, 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

Analysis:

In accordance with subsection 240(1) of the ETA XXXXX is not required to register as it's annual revenues from taxable supplies are not more than $30,000. Monies from the long term loan from XXXXX or from the XXXXX are not regarded as consideration for taxable supplies. However, since XXXXX is making a taxable supply of farm equipment, pursuant to subsection 240(3), it may apply to register for GST/HST purposes

In accordance with subsection 169(1) of the ETA, a registrant is entitled to an input tax credit for any expense that is for use or supply equal to the extent (expressed as a percentage) to which the property or service is for use or supply in the course of the registrant's commercial activities. More specifically, subsection 141.01(2) and 141.01(3) provide that a GST/HST registrant is entitled to claim input tax credits in respect of its purchases only to the extent that the property or service was acquired or used for the purpose of making taxable supplies for consideration and not for the purpose of making supplies that are not taxable supplies, nor for a purpose other than the making of supplies. However, subsection 141.01(1.1) states that for the purposes of subsections 141.01(2) and 141.01(3) the term "consideration" does not include nominal consideration.

Since XXXXX is making a taxable supply of farm equipment for nominal consideration (i.e., four dollars per year), it is not entitled to input tax credits for the tax paid on expenses acquired or used in relation to the supply of farm equipment. Nor is XXXXX entitled to input tax credits for the tax paid on expenses acquired or used for a purpose other than the making of supplies. In conclusion XXXXX  is not entitled to input tax credits in relation to any of its operational expenses.

Conclusion

1. The XXXXX is not required to register for GST/HST purposes.

2. The XXXXX is entitled to voluntarily register for GST/HST purposes.

3. As a GST/HST registrant, the XXXXX is required to collect GST/HST on its supply of farm equipment. It is not required to collect GST on the loan from XXXXX, nor on the tax rebate received through XXXXX[.]

4. The XXXXX is not entitled to claim input tax credits for GST/HST paid on its operational expenses.