12 May 2000 GST/HST Interpretation 30504 - Subsections 259(4.1) and 259(8) of the Excise Tax Act

Dear XXXXX

Thank you for your letter of March 17, 2000, concerning the rebate of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) available to public service bodies.

Interpretation Requested

You are requesting our opinion on the application of subsection 259(4.1) and subsection 259(8) of the Excise Tax Act (the "ETA") to a public institution operating a public hospital and a nursing home.

Interpretation Given

Subsection 259(8) of the ETA applies to property and services purchased by persons who are selected public service bodies. Specifically, this provision applies where the person falls into more than one category of selected public service body which is defined in subsection 259(1) as:

a) a hospital authority;

b) a school authority that is established and operated otherwise than for profit;

c) a university that is established and operated otherwise than for profit;

d) a public college that is established and operated otherwise than for profit; or

e) a municipality.

A person who falls into more than one category of selected public service body listed above is entitled to a GST/HST rebate on its purchases of goods and services on the basis of which category of selected public service body the person primarily consumed, used or supplied the goods and services. For example, if a person is a designated hospital authority as defined in subsection 123(1) of the ETA and a university as described above, and the person purchases a computer to be used primarily in the course of activities engaged in by the person acting in the capacity of a university, then the person claims a GST/HST rebate at the prescribed percentage of 67%, which is the prescribed percentage for universities and public colleges as provided in section 5 of the Public Service Body Rebate (GST/HST) Regulations.

Subsection 259(8) does not apply to a person who falls into only one category of selected public service body as there is no requirement for this person to apply a "primary use test" on its purchases. GST/HST rebates are not payable to a person on the basis of the "primary use test" where the person acts in the capacity of only one selected public service body.

A person that is a public institution does not claim a GST/HST rebate under subsection 259(8).

A "public institution" is 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 hospital authority means an organization that is designated as such by the Minister of National Revenue because it operates a public hospital, as explained in Chapter 25 of the GST/HST Memoranda Series, Special Sectors: Hospital Authorities. A public institution that operates a public hospital and a nursing home as described in your letter would be entitled to a GST/HST rebate in accordance with subsection 259(4.1) which provides specific rebate apportionment rules where the person is:

a) a charity, public institution, or qualifying non-profit organization, and

b) a selected public service body.

A public institution that is a hospital authority for the purposes of the ETA is entitled to a GST/HST rebate at the prescribed percentage of 83%, but only with respect to the tax it paid on purchases that it consumed, used or supplied in the course of operating a public hospital. Pursuant to the apportionment rules provided in subsection 259(4.1), a public institution operating a nursing home and a public hospital would claim a GST/HST rebate of 50% on all its non-creditable tax charged. However, as it is a designated hospital authority, the public institution 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 instance, if the total non-creditable tax charged during a claim period for the purchase of medical supplies was $100 (GST), and the person used 60% of the medical supplies in the course of operating the public hospital and the remaining 40% in the course of operating the nursing home, the calculation of the GST rebate payable in respect of the purchase of the medical supplies would be 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

The apportionment rules ensure that a person that is a public institution 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. Consequently, this person does not calculate the GST/HST rebate on the basis of the "primary use test" described in subsection 259(8). To ensure that this person receives the rebate to which it is entitled, this person calculates the GST/HST rebate by claiming 50% of the non-creditable tax charged and, since the person is also a designated hospital authority, by claiming an additional amount of 33% for the non-creditable tax charged in respect of purchases used in the course of operating a public hospital. Since the purchases consumed, used or supplied in the course of operating the nursing home are not in respect of activities engaged in by the person in the course of operating the public hospital, the GST/HST paid on these purchases does not qualify for the higher prescribed rebate percentage of 83%; rather, the GST/HST paid in the course of operating the nursing home qualifies for the rebate at the prescribed percentage of 50%.

With respect to your comments about the Consolidated Explanatory Notes to the ETA legislation, please note that these Explanatory Notes are issued by the Department of Finance.

The Explanatory Note to subsection 259(8) was written prior to the introduction of the apportionment rules provided in subsection 259(4.1) and the amendment to the definition of "hospital authority" in subsection 123(1) that removed the reference to a "part" of an organization as a result of the addition of subsection 259(4.1). This Explanatory Note was not revised to reflect the apportionment requirements for persons that are charities, public institutions, and qualifying non-profit organizations, and consequently, the example used in the Explanatory Note is not valid. The Explanatory Note to subsection 259(4.1) refers to subsection 259(8) and clearly states that subsection 259(8) applies to organizations that act in the capacity of more than one type of selected public service body and have no other activities. The text contained in the Explanatory Note to subsection 259(4.1) clarifies the application of subsection 259(8).

Please note that the interpretation of a statute must be confined to an examination of the words used in the statutory provision in question and the context of that provision within the statute. The Explanatory Notes do not replace the law and may contain information that is no longer applicable. As subsection 259(8) specifically refers to a person that acts in the capacity of two or more selected public service bodies, the Explanatory Note does not authorize the use of the "primary use test" described in this legislative provision by a public institution that acts in the capacity of only one selected public service body.

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