2 March 2001 GST/HST Interpretation 8262/HQR0001868 - Application of the GST/HST to "Donations" Made to a Charity

Dear Sir :

Thank you for your letter concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on "donations" made under different circumstances by a GST/HST registrant engaged exclusively in commercial activities to an organization which is a charity for purposes of the Excise Tax Act (the "Act"). We apologize for the delay in responding to your enquiry

We offer the following comments related to the situations discussed in your letter.

Situation 1

A GST/HST registrant makes a cash donation to a charity.

No GST/HST is accounted for by either the donor or the charity provided that the cash donated is not consideration for a taxable supply of property or a service made by the charity. This is so regardless of whether the donor is or is not engaged in commercial activities and whether the amount donated is $100, $1,000, $1,000,000 or $10,000,000.

Situation 2

A corporation that is a GST/HST registrant engaged exclusively in commercial activities makes a donation to a charity of property acquired for supply in the course of those activities.

A GST/HST registrant (e.g. an automobile dealership), engaged exclusively in selling automobiles, donates to a charity a new automobile from its inventory of new automobiles which were previously acquired for re-sale purposes. The corporation does not receive any consideration in return from the charity for the new automobile. The new automobile will be used by the charity as a prize in a fund-raising raffle. The donation of the automobile is a taxable supply made by the dealer to the charity for no consideration. No GST/HST will be payable with respect to the donation provided that it is an arm's length transaction. However, if the dealer and the charity were not dealing with each other at arm's length with respect to the supply of the new automobile, tax would be payable on the fair market value of the automobile at that time.

The automobile was acquired by the dealer for the purpose of making taxable supplies for consideration in the course of the commercial activities of the dealer. Hence, the dealer will be eligible to claim the related input tax credits for the purchase of the automobile in accordance to the provisions of section 169 of the Act provided that other conditions in that section are also met.

Situation 3

A corporation that is a GST/HST registrant engaged exclusively in commercial activities acquires land and constructs a building which once completed is donated to a charity.

Instead of making a large cash donation to a charity so that the charity may use the amount to acquire land and build facilities, a corporation undertakes these activities directly and, having acquired the land and constructed the facilities, donates the completed structure to the charity for no consideration. In this case, no GST/HST will be applicable to the transfer of the facilities to the charity where the supply is made for no consideration and the corporation and the charity are dealing with each other at arm's length.

Since the structure is specifically constructed for the purposes of being given away for free, all the property or services acquired in the construction cannot be said to have been acquired for the purpose of making taxable supplies for consideration. As such, pursuant to paragraph 141.01(2)(b) of the Act, these property or services will be deemed to have been acquired for consumption or use otherwise than in the course of the commercial activities of the corporation. However, because the corporation acquired the property and services for the purpose of making a free supply (i.e., a taxable supply for nil or nominal consideration), the application of subsection 141.01(4) must be considered.

If the building was donated by the corporation to the charity for no consideration in the course of the corporation's business for the purpose of facilitating, furthering or promoting its business, to the extent that the corporation acquired a particular property or service for the purpose of making the donation or for consumption or use in the course of making the donation, the corporation will be deemed, under paragraph 141.01(4)(c), for purposes of subsection 141.01(2), to have acquired the particular property or service for use in the course of its business and for the specified purpose of facilitating, furthering or promoting its business, and not for the purpose of making the donation. Furthermore, under paragraph 141.01(2)(a), the corporation will be deemed to have acquired the property or service for use in the course of its commercial activities to the extent that the property or service was acquired by the corporation for the purpose of making taxable supplies for consideration in the course of the business. The corporation will be eligible to claim the related input tax credits for the acquisition of the property or service for use in the course of its commercial activities, provided that the other conditions in section 169 are met.

It is a question of fact whether the property or service was donated to the charity for the purpose of facilitating, furthering or promoting the acquisition, consumption or use of other property or services by any other person, or the business of any other person. It is also a question of fact whether the particular property or service was acquired by the corporation for the purpose of making taxable supplies for consideration in the course of its business.

If the corporation deliberately seeks anonymity or secrecy in donating the building to the charity, then it is unlikely that the donation can be said to have been made for the purpose of "facilitating, furthering or promoting" the business of the corporation. In this situation, it appears that the donation may be made for the purpose of facilitating, furthering or promoting the activities of the charity. As a result, if the charity is engaged exclusively in activities that are not commercial activities, the deeming provisions of paragraph 141.01(4)(c) will apply to deem the property or service acquired by the corporation for consumption or use in making the donation to have been acquired for use in the course of and for the specified purpose of facilitating, furthering or promoting the non-commercial activities of the charity. In this situation, no input tax credits can be claimed by the corporation related to the acquisition of those property or services.

Additional

Comments

It should be noted that under section 135 of the Act, where a public sector body, such as a charity, receives a sponsorship from a person in return for which the body undertakes to supply a service or the right to use its logo or similar property for use by the person exclusively in publicizing the person's business, the provision of the service or the right by the body is deemed not to be a supply, except where the sponsorship is primarily for a service of advertising by means of radio or television or in a newspaper, a magazine or other publication published periodically. Also, the person will not be required to collect GST/HST on any taxable supplies it made to the body in making the sponsorship; that is, the body will not be liable to pay tax on these acquisitions. Hence, in situation 2 or 3 discussed above, if the automobile or the building was provided by the corporation to the charity in sponsoring an activity of the charity in return for a service of promoting the corporation's business, the provision of the promotional service by the charity will be deemed not to be a supply by virtue of that section unless the automobile or the building was provided to the charity primarily for one of the excluded services described in that section. Furthermore, where section 135 deems the supply of the charity not to be a supply, the corporation will not be required to collect GST/HST on the automobile or the building supplied to the charity in making the sponsorship.

It is important to note that pursuant to subsection 141.01(7), the deeming provision in section 135 will not apply for purposes of any of subsections 141.01(1) to (4).

If in situation 2 or 3 the charity provided a promotional service to the corporation as consideration for the supply of the automobile or the building and the deeming provision in section 135 did not apply, the application of subsection 153(1) of the Act must be considered. The effect of this provision is that the value of consideration for the supply of the promotional service provided by the charity would be the fair market value of the property (i.e., the automobile or the building) at the time the supply was made. In this case, no tax would be payable on the supply of the promotional service provided by the charity as it would be exempt. However, tax would be payable by the charity to the corporation on the fair market value of the promotional service provided by the charity as this amount would be deemed to be the value of consideration received by the corporation for the automobile or the building.

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 Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above or any other GST/HST matter, please do not hesitate to contact me at (613) 954-1433.

Yours truly,

Phil Tang
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate