28 February 2001 GST/HST Ruling 31901 - Public Service Body Rebate

Dear XXXXX

Thank you for your letter of July 5, 2000 (with attachments), concerning whether XXXXX (ABC Inc.) is entitled to a Public Service Body (PSB) rebate in respect of the fiscal year ending December 31, 2000.

Statement of Facts

Our understanding of the facts is as follows.

1. ABC Inc. was incorporated under the Canada Business Corporations Act. ABC Inc. has issued XXXXX shares. XXXXX of the Articles of Incorporation state that "... (a) the shares shall entitle their respective holders to participate pari passo in any surplus or profits. ..." The Minister of XXXXX is the sole registered holder of the shares and holds them in trust for Her Majesty in Right of Canada.

2. ABC Inc. receives funding from the Federal Government enabling it to fulfill its mandate of providing the public with XXXXX services and assisting it to acquire capital assets. Amounts received or receivable from the Federal Government for years ending December 31, 1999, and December 31, 1998, represent at least 40% of ABC Inc.'s annual revenues.

3. For the period January 1, 2000 to December 31, 2000, ABC Inc. has entered into two agreements with XXXXX: the 2000 Subsidiary Capital Agreement and the 2000 Subsidiary Operating Agreement. Both are subject to parliamentary approval.

4. 2000 Subsidiary Capital Agreement

The capital agreement sets out that, pursuant to section 124 of the Financial Administration Act, Treasury Board approved ABC Inc.'s capital budget for 2000. Capital funds are paid out under this agreement. If an overpayment is made, ABC Inc. is to repay the amount on demand or the amount of the overpayment is to be offset against subsequent payments made under the capital agreement.

5. 2000 Subsidiary Operating Agreement

In consideration for the XXXXX service provided by ABC Inc., the Minister of XXXXX is to pay the monthly payments for the period January to December, 2000. Pursuant to XXXXX (Fares and Rates) ABC Inc. is to charge the public service fees as approved in writing by the Minister of XXXXX and it is not to amend its fares and rates unless as directed by the Minister of XXXXX[.] If an overpayment is made, ABC Inc. is to repay the amount on demand or the amount of the overpayment is to be offset against subsequent payments made under the capital agreement.

6. Although ABC Inc. is a Crown corporation listed in Schedule III, Part I of the Financial Administration Act, ABC Inc. is not an agent of Her Majesty based on its constituting legislation; consequently, it does not fall within the meaning of "government" set out in subsection 123(1) of the ETA. Nor is ABC Inc. a "charity" as defined in subsection 123(1) of the ETA.

7. XXXXX services provided by ABC Inc. are exempt from GST/HST under XXXXX Schedule V to the ETA.

Ruling Requested

Is ABC Inc. entitled to claim a PSB rebate of its non-creditable tax charged in respect of the fiscal year ending December 31, 2000?

Ruling Response

Based on the facts set out above, we rule that in accordance with section 259 of the ETA, as a qualifying non-profit organization, ABC Inc. is entitled to a PSB rebate equal to 50 % of its non-creditable tax charged in respect of the fiscal year ending December 31, 2000.

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

Pursuant to subsection 123(1) of the ETA, a "non-profit organization" is:

"... a person (other than a ...charity ... or a government) that was organized and is operated solely for a purpose other than profit, no part of the income of which is payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder thereof ....".

Accordingly, in order to qualify as a "non-profit organization", and as discussed in detail below, an entity must meet all of the following conditions:

(a) it must be organized solely for non-profit purposes;

(b) it is in fact operated solely for non-profit purposes; and

(c) it does not distribute or otherwise make available for the personal benefit of any proprietor, member or shareholder any of its income ....

To determine whether ABC Inc. meets these conditions, we refer to Policy Statement P-215: Determination of Whether an Entity is a "Non-Profit Organization" For Purpose of the Excise Tax Act ("ETA").

Organized Solely For Non-Profit Purposes

Pursuant to Policy Statement P-215, we examine the governing documents or purposes for which an entity was organized to determine whether the entity was organized solely for non-profit purposes. ABC Inc. was incorporated under the Canada Business Corporations Act (legislation for corporations with share capital) and its Articles of Incorporation state that shareholders are entitled to share in surpluses or profits. Accordingly, ABC Inc.'s incorporating documents would be appropriate for a for-profit business.

However, it is our view that notwithstanding the nature of its governing documents, ABC Inc. is organized for a purpose other than profit. We have reached this conclusion because the federal government is the only shareholder of ABC Inc. and, because if a dividend were ever paid to a shareholder, the payment would be to the Federal Government. Therefore, the structure in which ABC Inc. operates is indicative that it is organized for a purpose other than profit.

Operated Solely For Non-Profit Purposes

To be a non-profit organization under the ETA, ABC Inc. must be operated solely for a purpose other than profit. The determination of whether ABC Inc. is operated solely for non-profit purposes is based on facts and cannot be made in advance. Therefore, past and current activities are normally reviewed to determine whether an organization is operated solely for non-profit purposes. In accordance with P-215, the fact that ABC Inc. did not operate and has never operated on a profit basis and was able to continue operating only by virtue of government funding, indicates that for the period in question (January to December 2000), ABC Inc. operated solely for non-profit purposes.

Does Not Distribute or Otherwise Make Available any of its Income for the Personal Benefit of any Proprietor, Member or Shareholder

A non-profit organization may have shareholders but the shareholders may not derive a personal benefit from its shareholdings. As a corporation, ABC Inc. likely has the authority to pay dividends out of retained earnings; however, since ABC Inc. is never in a profit position, dividends would not be likely. Even if a dividend were to be paid to its sole shareholder, the payment would be made to the Federal Government. Consequently, although ABC Inc. does have a shareholder, it is our view that ABC Inc. would not distribute income for the "personal benefit of any proprietor, member or shareholder." That is, a dividend payable to the Federal Government would not be viewed as conferring a "personal" benefit.

Funding received from the Federal Government

Pursuant to section 259, a non-profit organization that receives at least 40% of its annual revenues in the form of "government funding" is regarded as a qualifying non-profit organization and is entitled to a 50% rebate of GST/HST for "non-creditable tax charged." It should be noted that for purposes of calculating the percentage of government funding, the Public Service Body Rebate (GST/HST) Regulations provide that a non-profit organization can use amounts received in a particular year to calculate its percentage of government funding for that year or the two preceding years. More specifically, in accordance with subparagraph 3(1)(b) of the Regulations, the percentage of government funding for a particular year is the greater of the percentage of amounts received or receivable in that year, and the percentage determined for the two previous years.

"Government funding" as defined in the Regulations includes an amount of money paid or payable to a non-profit organization by a government for the purpose of:

(i) financially assisting the organization in carrying out its objectives and not as consideration for supplies made by the organization, or

(ii) payment for exempt supplies of property or services provided to persons other than the grantor or a person related to the grantor.

The funds ABC Inc. receives from the Federal Government enabling it to fulfill its mandate of providing the public with XXXXX services and to acquire capital assets, falls within the meaning of "government funding." That is, amounts received pursuant to the 2000 Subsidiary Capital Agreement fall within (i) above. Amounts received pursuant to the 2000 Subsidiary Operating Agreement may fall within (i) above or, alternatively, may be regarded as consideration for exempt XXXXX services provided to persons other than the federal government; as such they would fall within (ii) above. In either event, amounts received or receivable from the Federal Government for years ending December 31, 1999, and December 31, 1998, fall within the meaning of "government funding" and represent at least 40% of ABC Inc's annual revenues, Consequently, ABC Inc. is regarded as a qualifying non-profit organization in respect of the fiscal year ending December 2000, for purposes of section 259 of the ETA.

For purposes of determining the "percentage of government funding," we will accept that certain deferrals of government grants may qualify as such in subsequent years rather than the year received. This will be the case, however, only where there are restrictions in the funding agreement whereby the recipient non-profit organization is precluded from using the funds received until a subsequent period.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0420.

Yours truly,

Lorrie McAnulty
Charities, NPO's and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate