12 June 2000 GST/HST Ruling 13411 - Qualifying Non-profit Organization

Dear XXXXX:

Thank you for your letter of November 19, 1999, concerning the calculation of the percentage of government funding of the XXXXX ("the Foundation") for purposes of determining whether it is a qualifying non-profit organization as described in subsection 259(2) of the Excise Tax Act (ETA).

Statement of Facts

Our understanding of the facts is as follows:

1. The Foundation is a corporation established under Part II of the Canada Corporation's Act (CCA). Corporations established under this Act are required to comply with the accounting and reporting requirements outlined in the Canadian Institute of Chartered Accountants (CICA) Handbook.

2. The Foundation is a non-profit organization as defined in subsection 123(1) of the ETA.

XXXXX

8. In accordance with XXXXX, the Foundation "may pay, subject to XXXXX, all costs of the projects in accordance with the guidelines established in XXXXX thereof."

9. XXXXX describes those costs that are ineligible for funding. For example, "the cost of purchasing, directly or indirectly, real property or of repairing or maintaining real property owned directly or indirectly by the Eligible Recipient is not an Eligible Cost, except in exceptional cases where, in the opinion of the Board, such costs are necessary and ancillary to the effective implementation of the Eligible Project."

10. Pursuant to XXXXX, the Foundation "shall make best efforts to commit the Amount over a period of four years from either the date of approval of the first Eligible Project or from one year following the signing of this Funding Agreement, which ever comes first."

11. Pursuant to XXXXX the Foundation "shall disburse the Amount over a ten year period from the date of approval of the first Eligible Project, or from one year following the signing of the Funding Agreement, whichever comes first."

12. XXXXX states that the Foundation "shall make periodic payments to Eligible Recipients to whom funding has been committed in accordance with a schedule of payments agreed to by the Foundation and the Eligible Recipient, (which schedule shall match as closely as possible the expected disbursements to be made by the Eligible Recipient) or, if the Foundation and the Eligible Recipient so agree, a lump sum payment may be made on the condition that the part of the amount not needed for immediate disbursement be invested and the proceeds of that investment be accounted in the project."

13. Under the terms of the Funding Agreement the Foundation cannot "borrow money, issue any debt obligation or securities, give any guarantees to secure debt or other obligations of another Person or mortgage, pledge, or otherwise encumber property of the Foundation."

14. XXXXX of the Funding Agreement provides that the books of account and other records of the Foundation must be maintained in accordance with generally accepted accounting principles. Furthermore, through these records, the Foundation must be able to demonstrate that its business and affairs are conducted in accordance with the provisions of the Funding Agreement.

15. In accordance with XXXXX, the Foundation must prepare an annual report which should include its Financial Statement, the Auditor's report, objectives, list of projects including progress reports and the steps taken to ensure that the contribution was equitably disbursed.

16. The report, which is to be made public, must be approved by the Board of Directors and the members of the Foundation. A copy of the report must be sent to the Minister who in turn must provide a copy to Parliament.

17. The Foundation uses the Deferral Method to account for the contributions in accordance with paragraphs 4410.28 - .56 of the CICA Handbook. Under the Deferral Method, restricted contributions related to expenses of future periods are deferred and recognized as revenue in the period in which the related expenses are incurred. Restricted contributions for which the related restrictions remain unfulfilled are accumulated as deferred contributions.

18. The contribution provided under the Funding Agreement is "government funding" as defined in section 2 of the Public Service Body Rebate (GST) Regulations.

Ruling Requested

Is the Foundation entitled to calculate the amount of its government funding for purposes of subsection 259(2) of the ETA, based on the amount identified as government funding using the Deferral Method, as recorded in its financial statements?

Ruling Given

Based on the facts above, we rule that for purposes of determining whether it is a qualifying non-profit organization as described in subsection 259(2) of the ETA, the Foundation may use restricted contributions that are deferred and recognized as revenue in a year subsequent to the year received in order to determine the percentage of government funding for that year.

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, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

XXXXX[.] It is our position that a contribution made by a grantor to an NPO, the reporting of which is deferred and recognized as revenue in a later period rather than in the period in which it was received, may be used to determined the percentage of government funding of the NPO for the later period provided the following conditions apply:

•   the contribution received is government funding as defined in the PSB Rebate Regulations;

•   the contribution is subject to restrictions in the funding agreement that specify when the amount may be expended, and the expenditure of certain amounts is thereby deferred until subsequent reporting periods;

•   the NPO complies with accepted accounting and reporting requirements (i.e., as outlined in the CICA Handbook) with respect to using a deferral method of accounting to recognize restricted contributions as revenue in its financial statements; and

•   the deferred contribution is identified as government funding for the period in which it is recognized as revenue in the financial statements.

Upon review of the funding agreement, it is apparent that the contribution made by XXXXX to the Foundation is intended to assist the Foundation in the carrying out of its purpose, and is not consideration for a supply. In other words, the contribution is "government funding" as defined in section 2 of the PSB Rebate Regulations.

With respect to the second condition described above, your submission confirms that the Foundation is prohibited from distributing the contribution except for the purpose, and under the conditions specified, in the Funding Agreement. The agreement sets out conditions related to the time period for the disbursement of the funds, the nature of the program eligible for funding, and the criteria each project must meet in order to be eligible for funding. Furthermore, the Foundation is accountable to both XXXXX and to Parliament for the use of the contributions. In essence, the contribution is subject to externally imposed restrictions that are satisfactory for our purposes in determining whether deferred amounts may be considered government funding in a later period.

Concerning the remaining requirements, the Foundation is required under the CCA to comply with the accounting procedures set out in the CICA Handbook. As well, the Funding Agreement stipulates that the books and records of the Foundation must be maintained in accordance with generally accepted accounting principles. As indicated by Fact 17, you have confirmed that the Foundation uses the Deferral Method of accounting for purposes of reporting the restricted contribution in its financial statements.

Assuming the deferred amounts are identified as government funding in the financial statements in the period in which they are recognized as revenue, all of the above conditions will have been satisfied. Therefore, contribution amounts that are deferred and recognized as revenue in a later period may be used in calculating the percentage of the government funding of the Foundation for that period.

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, NPOs, and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate