21 July 2000 GST/HST Interpretation 26961 - Application of Subsection 259(4.1) of the Excise Tax Act

Dear XXXXX

Thank you for your letter of February 4, 2000, concerning the rebate of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) available to a person that is a public institution and a selected public service body (i.e., a hospital authority).

As discussed in our telephone conversation of April 17, 2000, we are providing you with a general interpretation on the application of section 259 of Excise Tax Act (the "ETA"). Specifically, this letter will discuss the application of subsection 259(4.1) of the ETA, which contains rebate apportionment rules for a person that is a charity, public institution, or a qualifying non-profit organization, as well as a selected public service body.

Interpretation Requested

You are requesting clarification on the following two issues:

1. Whether a public institution that is a hospital authority is entitled to claim the hospital authority rebate of 83% of tax paid in respect of expenses incurred for goods and services acquired, consumed, or supplied in the course of delivering "hospital services."

2. Whether a public institution that is a hospital authority is required to apportion the non-creditable tax charged between hospital activities or services and non-hospital activities or services where more than 90% of its activities are hospital activities or services [subsection 259(4.1) of the ETA].

Interpretation Given

Issue no. 1: GST/HST rebate with respect to "hospital services"

As explained below, the entitlement of a public institution that is a hospital authority to the GST/HST rebate at the prescribed percentage of 83% is not based on the performance and delivery of "hospital services" by the person. Rather, the 83% GST/HST rebate is payable to such a person in respect of goods and services acquired for use, consumption or supply by the person in the course of operating a facility that is a public hospital.

Subsection 259(3) of the ETA provides for a GST/HST rebate to a selected public service body, charity, or qualifying non-profit organization equal to a prescribed percentage of the non-creditable tax charged in respect of a property or service. A selected public service body is defined in subsection 259(1) and includes a hospital authority. A hospital authority means an organization that is designated as such by the Minister of National Revenue because it operates a facility that is a public hospital, as explained in section 25.2 of Chapter 25 of the GST/HST Memoranda Series. To be considered a public hospital for the purposes of the ETA, the facility must meet the following four criteria:

a) the facility must be recognized as a public hospital by the government of the province in which it is located;

b) the facility must be established and operated otherwise than for profit;

c) the facility must be operated for the medical and surgical treatment of the sick or injured; and

d) the facility must provide and maintain inpatient beds and services.

The calculation of the GST/HST rebate is subject to subsection 259(4.1) which provides specific rebate apportionment rules for a person that is a charity, public institution or qualifying non-profit organization in addition to being a selected public service body. The apportionment rules ensure that such a person receives the GST/HST rebate at the prescribed percentage of 50% for its activities undertaken otherwise than in its capacity as a selected public service body. For example, a hospital authority engaged in activities as a charity that are separate from operating a public hospital must apply these apportionment rules to the calculation of its GST/HST rebate.

A "charity" is defined in subsection 123(1) of the ETA to mean "a registered charity or registered Canadian amateur athletic association within the meaning assigned to those expressions by subsection 248(1) of the Income Tax Act, but does not include a public institution." A "public institution" is also defined in subsection 123(1) of the ETA and means "a registered charity (within the meaning assigned by subsection 248(1) of the Income Tax Act) that is a school authority, a public college, a university, a hospital authority or a local authority determined under paragraph (b) of the definition "municipality" to be a municipality." A "qualifying non-profit organization" is described in subsection 259(2) of the ETA as a non-profit organization whose percentage of government funding for the year is at least 40%.

The apportionment rules contained in subsection 259(4.1) do not provide for payment of the higher prescribed percentage of 83% on the basis of the nature and character of the services provided by the person. Rather, these rules provide that payment of the higher prescribed percentage is based on the activities undertaken by the person in the person's capacity as a selected public service body, i.e., in the course of operating a specific type of facility or organization enumerated in subsection 259(4.1). A person's designation of hospital authority for ETA purposes is based on the fact that the person operates a public hospital as described above and only those activities that constitute the operation of the public hospital are considered to be activities undertaken in the person's capacity as a selected public service body.

Consequently, a public institution would claim a GST/HST rebate of 50% on all its non-creditable tax charged. Since it is a designated hospital authority, this person would claim an additional GST/HST rebate of 33% for the non-creditable tax charged in respect of its purchases used in the operation of the public hospital as determined by the formula "A x B x C" provided in subsection 259(4), but substituting:

•   the reference to "prescribed percentage" in element "A" of the formula with 33%, i.e., the applicable prescribed percentage of 83% less 50%; and

•   the reference to "designated activities" in element "C" of the formula with activities engaged in by the person in the course of operating a public hospital.

For example, a public institution operates the following facilities: a public hospital, a medical clinic, and a long-term care facility. The public institution is a designated hospital authority since it operates a public hospital. The operation of the public hospital is a selected public service body activity. However, the operation of the medical clinic and the long-term care facility is not considered to be an activity undertaken by the person in the person's capacity as a selected public service body as these facilities are not public hospitals, i.e., they do not satisfy all four criteria noted above to be considered to be public hospitals. For instance, both the medical clinic and the long-term care facility do not meet the criterion of being recognized as public hospitals by the government of the province in which they are located. Furthermore, the long-term care facility does not meet the criterion of being operated for the medical and surgical treatment of the sick or injured. If the total non-creditable tax charged during a claim period for the purchase of medical supplies was $100, and 60% of the medical supplies were used in the operation of the public hospital and the remaining 40% was used in the operation of the medical clinic and the long-term care facility, the person would calculate the GST/HST rebate payable in respect of the purchase of the medical supplies as follows:

•   claim 50% of $100 of total non-creditable tax charged PLUS

•   an additional amount based on the formula "A x B x C" where:

"A" is 33% (83% less 50%)

"B" is $100 (total non-creditable tax charged)

"C" is 60% (the extent to which the medical supplies are used in the course of operating the public hospital)

= ($100 x 50%) + (33% x $100 x 60%)

= $50 + $19.80

= $69.80 - total rebate for the claim period for the GST paid on medical supplies

To summarize, a person's entitlement to the GST/HST rebate at the higher prescribed percentage is not based on the nature and character of the services provided by the person. Although certain services provided in a medical clinic and a long-term care facility may be characterized as "hospital services" because they are similar to those services provided in a hospital, the provision of these services does not give rise to entitlement to the higher prescribed percentage of 83% for expenses consumed, used or supplied in the course of providing these services. Hospital activity, for the purposes of the higher prescribed percentage of 83%, means the operation of a facility that is a public hospital as described above. Consequently, only those expenses that were consumed, used or supplied by a public institution in the course of operating a public hospital qualifies for additional GST/HST rebate of 33%.

Issue no. 2: Requirement to apportion between hospital activities/services and non-hospital activities/services if more than 90% of the activities are hospital activities/services [subsection 259(4.1) of the ETA].

Subsection 259(4.1) of the ETA does not contain a reference to "exclusively" or "all or substantially all," i.e., what is referred to as the "90% or more test." This test is generally used in the ETA to establish the tax status of a person's supplies and entitlement to input tax credits.

As explained above under Issue no. 1, the hospital authority GST/HST rebate of 83% is payable under subsection 259(4.1) of the ETA to a public institution only with respect to purchases and other expenses that are used, consumed, or supplied by the person in the course of the activity for which the person has been designated as a hospital authority, i.e., activities engaged in by the person in the course of operating a public hospital. Consequently, where the person purchases medical supplies for use in the operation of a public hospital as well as the operation of a medical clinic, only the GST/HST paid on the portion of the medical supplies allocated to the public hospital qualifies for the hospital authority GST/HST rebate of 83%. The person would therefore have to apportion the GST/HST paid on the medical supplies between the portion used in activities with respect to the operation of the public hospital and the portion used in activities with respect to the operation of the medical clinic.

Please also note that the apportionment rules in subsection 259(4.1) are not based on a ratio of total activities vs. a particular activity; rather, these rules apply on a purchase-by-purchase basis where a particular property or service is used in different activities (i.e., the legislative provision provides that the rebate is payable "in respect of a property or service for a claim period ..."). If, for example, a particular purchase of medical supplies is made solely for the operation of the public hospital, then no apportionment of the tax is required for that particular purchase. However, if a particular purchase of medical supplies was allocated between the public hospital and another type of facility such as a medical clinic, then the apportionment rules would apply.

With respect to your comment about the statement contained in Technical Information Bulletin B-075, Proposed Changes to the GST, that says "where the property or service is acquired or imported exclusively for use in the activities of a charity, qualifying non-profit organization, or a particular kind of selected public service body (i.e., no apportionment is required), the organization will apply under subsection 259(3) for the rebate in respect of its non-creditable tax charged using a single rebate rate;" please note that in the context of Technical Information Bulletin B-075, "exclusively" is given the common dictionary meaning of the term, e.g., "solely", and not the ETA definition of exclusive provided in subsection 123(1).

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 Canada Customs and Revenue Agency 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) 952-6761.

Yours truly,

Susan Eastman
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division