9 January 2001 GST/HST Ruling 25986 - Application of the GST/HST to the Supply of Funding for Research and Development of Effective Training Materials

Dear XXXXX:

Thank you for your letter of February 7, 2000 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to funding provided by the XXXXX (the "Funder") to XXXXX (the "Society"). You have asked that we review XXXXX, on the tax status of this funding. As explained in the letter to you dated August 2, 2000, the XXXXX Tax Services Office referred your request to this office.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1) XXXXX (the "Program") was a collaborative initiative between the XXXXX (the "Council"), the XXXXX (the "Union") and the Funder.

2) The Funder is a provincial government entity that is relieved from paying GST/HST on its purchases.

XXXXX

3) XXXXX

4) XXXXX

5) XXXXX

6) XXXXX

7) XXXXX

8) XXXXX

9) The Society incorporated under the XXXXX. It operates as a non-profit organization, with program management and supervision provided by XXXXX from the Council, the Union and the Funder. The primary reason for forming the Society was to provide an independent vehicle for the three parties to have joint input into the research and development of effective training materials. The Society is fundamentally a conduit for the management of the Project which was conducted primarily by XXXXX.

10) The purposes of the Society, as outlined in its constitution, are:

XXXXX

11) The Funder and the Society entered into a written Agreement XXXXX, for the purpose of meeting the objectives identified in XXXXX.

You advise that this Agreement more correctly describes the relationship between the Funder and the Society than the terms set out in the earlier Resolution.

12) XXXXX of the Agreement states that the Funder will provide funding to the Society according to the terms set out in the XXXXX Schedule. The XXXXX Schedule indicates that the Funder agrees to contribute funding to the Society to deliver certain services. The Society agrees to:

XXXXX

13) All revenues received by the Society from materials, training or work related to the Project shall be directed to the Project and reported on the financial statements for the Project.

14) XXXXX of the Agreement states that the Funder has the right to use, duplicate or distribute any report/document/training material or finding produced as a consequence of this Agreement at any time and in any manner it considers useful or helpful to the administration of XXXXX. The Society shall have the right to apply for copyright or patent of this material, but upon dissolution of the Society, all such rights shall be transferred to the Funder, unless other arrangements are agreed to in writing by the Funder.

15) You explained in our telephone conversation of December 13, 2000, that physical possession of the reports, documents and training material remains with the Society. However, distribution of this material is done by the Funder or by the Society at the direction of the Funder.

16) XXXXX of the Agreement states that the Society must not assign any of its rights under the Agreement without the prior written consent of the Funder. No subcontract involving the Services of the Agreement relieves the Society from any obligations under the Agreement. The Society must ensure that any subcontractor fully complies with the Agreement in performing the subcontracted Services.

Rulings Requested

1) The funding provided by the Funder to the Society is consideration for a taxable supply.

We understand your position is that the funds were provided by the Funder to the Society for a purchase purpose and therefore, represent consideration for a taxable supply.

You mention in your letter that part of the Funder's mandate is XXXXX. The Funder entered into an Agreement with the Society which requires the Society to XXXXX. You believe the overriding purpose of the contract is development of new training materials; therefore, there is a direct link between the funding received by the Society and the provision of materials and services by the Society to the Funder. In your view, payments from the Funder to the Society should be treated in the same manner as payments from the Society to its contractor.

2) The Society is exclusively engaged in a commercial activity.

It is your view that the funds provided by the Funder are consideration for supplies provided by the Society to the Funder. You believe no exemptions apply to supplies made by the Society; therefore, it is exclusively engaged in a commercial activity and should be entitled to claim input tax credits for the GST paid on purchases related to this activity.

Rulings Given

Based on the facts set out above, we rule that:

1) Funding provided by the Funder to the Society is not consideration for a supply.

2) The Society is not exclusively engaged in a commercial activity as supplies made under the Agreement are exempted by section 10 of Part VI to Schedule V of the Excise Tax Act (i.e., the "ETA").

Explanation

Ruling 1

XXXXX under the policy set out in Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies, Canada Customs and Revenue Agency will consider funding to be a grant and not consideration for a supply where it is made in the public interest and where the grantor does not derive a direct benefit.

The Funder XXXXX has been established for a public purpose - XXXXX.

It is actively involved in funding educational programs XXXXX. It also supports research in matters relating to its responsibilities.

According to the Agreement dated XXXXX, the XXXXX Program was established under a XXXXX Funding Request put forward to the Funder by the Council and the Union. Phase 1 of the Project was undertaken by the Council, which was reimbursed by the Funder for all amounts paid to XXXXX for costs connected with Phase 1.

The Society was subsequently established to administer the project and to accept funding from the Funder.

The Society is a non-profit organization that has also been established for a public purpose - XXXXX[.] The funding provided to the Society is part of a regular on-going program of financial support. The Agreement between the Society and the Funder provided that the Society would carry out the XXXXX Program, Part 1 ("the Project"). XXXXX[.] The Agreement between the Funder and the Society stipulates that the Society is to provide certain services in return for the funding. These services are performed by the Society, by its contractor, XXXXX and by suppliers hired by XXXXX.

XXXXX[.] The Society also gives the Funder the right to distribute reports, documents and training material. The Society may apply for copyrights, but upon its dissolution, ownership of this material is given to the Funder. This benefit is in our view, secondary to the direct benefit derived by the public XXXXX. That is, the purpose of the funding is not to secure rights to this material.

Our conclusion therefore is that the funding described above is not consideration for a supply as it has been made in the public interest. While the Society is required to carry out certain activities under the terms of the Agreement with the Funder, we do not see a direct link between the funding provided by the Funder and the supplies made by the Society. These supplies confer a direct benefit on the public and only an indirect benefit on the Funder. As the funding is not consideration for a supply, it will not be subject to the GST/HST.

Ruling 2

The Society is a non-profit organization and therefore meets the definition of a "public sector body" for the purposes of the ETA. Its main source of revenue is funding received from the Funder. As indicated above, this funding is not consideration for supplies made by the Society.

Section 10 of Part VI to Schedule V of the ETA exempts from the GST/HST a supply made by a public sector body of any property or service where all or substantially all of the supplies are made for no consideration. The exceptions to this rule are supplies of blood and blood derivatives. Supplies made by the Society under the terms of the Agreement with the Funder are supplies made for no consideration and therefore, fall under this exemption.

A commercial activity does not include the making of exempt supplies. As a result, the Society is not engaged exclusively in a commercial activity. It is not entitled to claim input tax credits to recover the GST paid on purchases acquired for the purpose of making exempt supplies.

XXXXX the Society may be entitled to claim a partial rebate for the non-creditable tax charged on its purchases, if it meets the definition of a "qualifying non-profit organization". Under subsection 259(2) of the ETA, a qualifying non-profit organization is a non-profit organization whose percentage of government funding for the year is at least 40%.

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 transactions for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9590.

Yours truly,

Elaine Bonnah
Government Sectors Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate