5 February 1999 GST/HST Ruling HQR0001261 - Eligibility to Claim GST Rebate

GST/HST Rulings and  Interpretations Directorate Place Vanier, Tower C, 9th Floor 25 McArthur Avenue Ottawa ONXXXXXAttention: XXXXX XXXXX

Case: HQR0001261February 5, 1999

Subject:

GST/HST APPLICATION RULING XXXXX

Dear XXXXX

Your letter of June 5, 1998, with attachments, addressed to the XXXXX XXXXX was forwarded to us for reply. We are providing the following rulings on the eligibility of the XXXXX XXXXX) to claim a rebate for the Goods and Services Tax ("GST") they pay on their purchases.

Statement of Facts

Based on the information provided as well as our telephone conversation of October 16, 1998, our understanding of the facts is as follows:

1. XXXXX was incorporated under the ["]XXXXX XXXXX" and later changed its name to ["]XXXXX XXXXX"[.] It is a non-profit organization for the purposes of subsection 123(1) of the Excise Tax Act (the "ETA"), and was established to provide access to the internet in the XXXXX

2. XXXXX is not a registrant for GST/Harmonized Sales Tax ("HST") purposes.

3. XXXXX has its own financial statements which record revenues, expenses, assets and liabilities; however, it does not have its own bank account.

4. XXXXX is comprised of the following six members:

a) XXXXX

b) XXXXX

c) XXXXX

d) XXXXX

e) XXXXX

f) XXXXX

5. XXXXX does not charge a membership fee. The members and the XXXXX XXXXX contribute financial support to XXXXX which enables XXXXX to provide internet services to the community through public access locations. As noted in Fact #3 above, XXXXX does not have its own bank account so these contributions are paid to the XXXXX which holds these funds "in trust" for XXXXX. It is understood that the amounts paid the XXXXX are in fact to support XXXXX.

6. The contributions made by each of the six members and the XXXXX entitle each of them to supplies from XXXXX of uninterrupted, unlimited access to the internet, a web page, and 10 E-mail accounts. Each member and the XXXXX have at least one computer linked to a dial-in server (a 56K dedicated internet line) located at the XXXXX XXXXX[.] The public can access the internet at each member's location and the XXXXX. Some members have dedicated "internet" computers for their exclusive use, and other dedicated "internet" computers for public use. Others have one "internet" computer that they share with the public.

7. For the fiscal year ending December 31, 1997, the following amounts were recorded as revenue in XXXXX's financial statements:

Contributions from participants $XXXXX Sale of web space XXXXX[.]

XXXXX[.] The participants contribute the following percentages to the overall revenue of XXXXX

a) XXXXX

b) XXXXX

c) XXXXX

d) XXXXX

e) XXXXX

f) XXXXX

g) XXXXX

h) XXXXX[.]

8. For the fiscal year ending December 31, 1997, the following expenses were recorded in XXXXX financial statements:

Telephone services	XXXXX
Licenses and software maintenance	XXXXX
Equipment maintenance	XXXXX
Miscellaneous	XXXXX
	$XXXXX

9. The XXXXX incurs the expenses listed in Fact #8 above related to the provision of the internet services. It is subsequently "reimbursed" by XXXXX by the funds it holds "in trust" for XXXXX[.] For instance, the telephone bill from XXXXX is addressed to, and paid by, the XXXXX and the telephone lines used by XXXXX are located at, and owned by, the XXXXX. A sample copy of a telephone bill from XXXXX addressed to XXXXX care of the XXXXX was submitted. The XXXXX advised that it has an agreement with XXXXX that it is legally liable for the payment of the line rental and internet usage fees, and is exclusively responsible for these debts.

10. The XXXXX has not claimed a GST rebate for the cost of the telephone services.

11. The XXXXX is a "XXXXX as defined in subsection 123(1) and a "selected public service body" for the purposes of subsection 259(1). It is not a registrant for ETA purposes.

12. The XXXXX is funded by XXXXX and as well receives funding from XXXXX[.] It is a qualifying non-profit organization for the purpose of subsection 259(2) of the ETA.

Rulings Requested

1. Is XXXXX a qualifying non-profit organization for the purposes of the section 259 rebate?

If the ruling is that XXXXX is not a qualifying non-profit organization, what is the Department's position on the following scenarios:

2. As the XXXXX pays all XXXXX expenses out of its general operating fund, is the XXXXX entitled to claim a rebate for public service bodies as provided under section 259?

1. Alternatively, if the XXXXX cannot claim the rebate, could the members claim a GST rebate based on their individual rebate factors if XXXXX pays the phone bill and subsequently invoices each member for reimbursement based on their proportionate share of the cost?

2. As noted in Fact #9, the phone bill is paid by the XXXXX[.] As all of the telephone lines are located at, and owned by, the XXXXX can the XXXXX claim the rebate for the GST payable on the phone bill? In this scenario, the XXXXX recovers the net amount from the individual members by invoicing them for their proportionate share of the cost.

While we can provide rulings for items (1) and (2), we are not able to provide application rulings with respect to items (3) and (4) since they are hypothetical scenarios. However, for your assistance, we will provide general information about how the ETA applies to these situations.

Rulings Given

On the basis of the facts provided, we provide the following rulings.

Ruling No. 1

Is XXXXX a qualifying non-profit organization for the purposes of the section 259 rebate?

With respect to its fiscal year which ended December 31, 1997, XXXXX was not a qualifying non-profit organization for the purposes of the rebate in section 259 of the ETA. Please note that since its status as qualifying non-profit organization depends on its level of XXXXX at a particular time, this ruling does not preclude XXXXX from being a qualifying non-profit organization in another fiscal year.

Ruling No. 2

As the XXXXX pays all XXXXX expenses out of its general operating fund, is the XXXXX entitled to claim a rebate for public service bodies as provided under section 259?

On the basis of the information provided, it is our understanding that the XXXXX has purchased the supplies, e.g., the telephone services from XXXXX and subsequently resupplied them to XXXXX[.] As such, the XXXXX has incurred the tax payable on these supplies and is therefore entitled to claim a partial rebate of non-creditable tax charged. However, pursuant to subsection 259(4.1), the XXXXX[.] It is not entitled to claim the XXXXX rebate XXXXX is not using the supplies of XXXXX services XXXXX[.] The resupplies of the goods an d services, e.g., the telephone services, by the XXXXX XXXXX are exempt supplies pursuant to section 6 of Part VI of Schedule V.

These rulings are 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, or to departmental interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

Ruling No. 1

To be eligible for a rebate provided for in subsection 259(3), an organization must be a "qualifying non-profit organization" as described in subsection 259(2). This is a non-profit organization whose percentage of government funding is at least 40% of total revenues. In its first year of operation, the organization must meet the 40% test for the year. In its second year, the organization can qualify by meeting the 40% threshold for either its first or second fiscal year. For all subsequent years, the organization may qualify by meeting the 40% threshold in either its current fiscal year, or the average of its two immediately preceding fiscal years.

"Government funding", for the purposes of section 259, is defined in the Public Service Body Rebate (GST/HST) Regulations (copy enclosed) and means an amount of money that is readily measurable and is paid or payable to an organization by a "grantor" to:

a) support the organization's objectives (but not to pay for goods or services provided by the organization); or

b) pay for exempt supplies of goods or services provided by the organization to a third party (i.e., that are not for the grantor's use or consumption).

XXXXX[.] As the definition of "government funding" does not include reimbursements of expenses incurred to provide a supply to the grantor, the payments made by the XXXXX and XXXXX do not qualify as "government funding" due to the limitation described in paragraph (a) of the definition above. Furthermore, the payments from the other members and the XXXXX do not qualify as government funding because these organizations are not "grantors" as defined in the Regulations.

Also note that it is the Department's view that the contributions made to XXXXX are consideration for the supply of internet services, i.e., in return for their contributions, the members and the XXXXX receive supplies of uninterrupted, unlimited access to the internet, a web page, and 10 E-mail accounts.

Therefore, for its fiscal year ending 1997, XXXXX did not meet the 40% government funding threshold and so is not a qualifying non-profit organization for the year.

Ruling No. 2

In accordance with subsection 259(3) of the ETA, charities, qualifying non-profit organizations, and selected public service bodies, such as a school authority that is established and operated otherwise than for profit, are entitled to a partial rebate of the "non-creditable tax charged." The "non-creditable tax charged" in respect of a property or service is defined in subsection 259(1) as (in summary) the total of all tax that became payable by the person on the property or service during the claim period less the total of all input tax credits claimable by the person in that period. Organizations qualifying for the rebate are thus eligible for a partial rebate in respect of purchases for which they cannot claim input tax credits.

Since the tax is payable by the XXXXX for the supply of telephone services made by XXXXX it is the XXXXX that is eligible to claim the rebate. Evidence that the XXXXX is liable for the tax is reflected in the terms of the agreement between the XXXXX which specifies that the XXXXX accepts legal liability for the billing of the telephone services, and is exclusively responsible for this debt. Furthermore, the invoice from XXXXX is issued to the XXXXX XXXXX[.] As a selected public service body, the XXXXX is entitled to claim a partial rebate of the non-credible tax charged under subsection 259(3).

Please note, however, that subsection 259(3) is subject to the provisions of subsection 259(4.1) which provides specific rebate apportionment rules for selected public service bodies that act in different capacities. Subsection 259(4.1) requires these organizations to apportion their purchases accordingly.

Thus, according to the apportionment provision, the XXXXX is entitled to a 68% rebate for purchases related to the operation of its schools. However, it is only entitled to a 50% rebate for the purchases of telephone services since the XXXXX is not consuming the telephone services in the course of operating a XXXXX[.] With respect to the supply of the telephone services to XXXXX, the facts indicate that the XXXXX has purchased these services for the purpose of resupplying them to XXXXX. As the resupply by the XXXXX is on a cost-recovery basis, i.e., for an amount not exceeding the "direct cost" of these services, the resupply is exempt in accordance with section 6 of Part VI of Schedule V. "Direct cost" is defined in subsection 123(1) and includes the consideration paid by the supplier XXXXX XXXXX to acquire the service, the GST/HST payable by the supplier, and any non-recoverable tax, duty, or fee, such as provincial sales tax.

General Information

As previously noted, since the following are hypothetical situations with incomplete facts, our comments should be viewed as general observations rather than definitive statements. They are not binding rulings.

When the phone bill is paid by XXXXX[.] You had asked about the Department's possible position if XXXXX pays the invoice for the telephone services provided by XXXXX and distributes the invoice to its members for reimbursement. You proposed that the members could claim a GST rebate based on their individual rebate factors. In our telephone conversation, you had also inquired as to whether XXXXX could claim a GST rebate.

As previously stated, only the person who incurs the tax payable can claim the rebate. If XXXXX was the person that incurred the tax payable for the telephone services, then the members would not be entitled to claim the rebate for the tax paid to the telephone company. However, the reimbursements paid by the members to XXXXX would be treated as consideration for the supply of the internet services. Such supplies would be taxable and therefore if XXXXX chose to register for the GST/HST, or if its annual taxable supplies exceeded $50,000 and it was therefore required to register, XXXXX would then be required to charge tax on the reimbursements. XXXXX could claim an input tax credit to recover the amount of tax paid to XXXXX and the members could claim a rebate of the tax paid to XXXXX[.] When the phone bill is paid by the XXXXX[.] You had asked about scenario where the XXXXX pays the invoice for the telephone services provided by XXXXX and invoices the other members of XXXXX and the XXXXX for reimbursement. This scenario appears to be the same as described in Ruling Request #2. As the XXXXX is the person that incurs the tax payable for the telephone services, it is entitled to claim a partial rebate for the non-creditable tax charged pursuant to section 259. Please also note that the resupply of the telephone services by the XXXXX is an exempt supply. As such, there is no GST payable by XXXXX on the exempt resupply of telephone services.

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
Charities and Non-Profit Organizations Unit
Public Service Bodies and Governments Division

Encl.: Public Service Body Rebate (GST/HST) Regulations

c.c.:

P. Bertrand, A/Director M. Place S. Eastman XXXXX

Legislative References:	section 259, Public Service Body Rebate (GST/HST) Regulations
NCS Subject Code(s):	R-11925-3-3; 11900-7