25 February 1999 GST/HST Interpretation HQR0001332 - Sponsorship of a Public Sector Body

Dear XXXXX

Thank you for your letter of September 14, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below. Since you have not identified the particular daycare, our reply is in the nature of an interpretation, rather than an application ruling.

A non-profit daycare centre enters into an agreement with a toy company to distribute the company's pamphlets to the parents of the students in the daycare. The teachers at the daycare distribute the pamphlets to the parents of the students in their class. Any of the parents wishing to purchase toys from the company must complete an order form and provide it to their child's teacher along with a cheque payable to the company. The teachers consolidate all the forms and submit an order to the toy company, along with the cheques they receive from the parents. On receipt of the order, the toy company provides the daycare centre with free toys based on the dollar value of the order placed. The toys are provided to the daycare in exchange for the services rendered by its teachers.

Interpretation Requested

You have requested our interpretation of the Excise Tax Act (ETA) as it applies to the transactions described above.

Interpretation Given

Based on the information provided, it is our interpretation that the service provided by the daycare through its employees (the teachers) is a taxable supply. If the daycare is a GST/HST registrant, it is required to charge tax on the consideration payable for these services. However, if it is an unregistered small supplier, (i.e., its annual revenue from taxable supplies does not exceed $50,000) then it is not required to collect tax.

Pursuant to section 135 of the ETA, where a public sector body (which includes a non-profit organization) makes a supply of a promotional service or rights to a person who is the sponsor of an activity of the body, the supply made by the body is deemed not to be a supply where the requirements of this provision are met. One of these requirements is that the supply of the service provided by the public sector body must be used by the sponsor exclusively in publicizing the sponsor's business. It is our opinion that the services rendered by the daycare are not for use exclusively by the toy company in publicizing its business. Rather, based on the information you have provided, the daycare is supplying a service of procuring customers for the toy company by actively distributing the pamphlets to the parents. In addition, it also performs an administrative service, by collecting the order forms and cheques, and submitting them to the company. Therefore, the deeming provision of section 135 does not apply in this situation.

Paragraph 153(1)(b) provides that where the consideration for a supply is other than money, the value of the consideration for that supply is equal to the fair market value of the goods and services received. On this basis, the toys that the daycare receives from the toy company are consideration for the supply of the services rendered by the daycare. Thus, if the daycare is a GST/HST registrant, it is required to charge tax on the fair market value of the toys.

Please note, if the toy company is a registrant, it is required to charge the daycare tax on the value of the consideration for the supply of the toys. The value of the consideration for the supply of the toys is the fair market value of the services provided by the daycare in accordance with paragraph 153(1)(b) as described above. Therefore, the toy company will be required to charge tax on the fair market value of the services provided by the daycare.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

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

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