28 February 2002 GST/HST Interpretation 35385 - Section 225.1 election

Dear XXXXX:

Thank you for your letter of March 30, 2001, concerning the retroactive filing of an election under section 225.1 of the Excise Tax Act (ETA). We apologize for the delay in our response.

We understand that a client of yours, a registered charity (the Charity), has been filing GST/HST returns without using the net tax calculation method. Although the Charity has not elected under section 225.1 of the ETA to not use the net tax calculation method, its head office and most of its branches have continued to file GST/HST returns as though an election had been made.

The Charity's head office and its branches make up one legal entity. The head office is registered for GST/HST purposes, as are approximately 80 branch offices. There are also several hundred other branch offices that make only exempt supplies and are not registered separately for GST/HST.

The Charity's head office purchases most of the inventory sold at the branches' retail stores (all GST/HST registrants). No GST/HST is collected on the transfer of the inventory to the branches, since the branches and head office make up the one legal entity. The head office also sells and ships books overseas; it treats these sales as zero-rated supplies.

Interpretations Requested

Will the CCRA permit a charity to file an election under subsection 225.1(6) retroactive to January 1, 1997, provided the charity qualified to make the election and acted as though it had?

Is it only the head office of an organization that can make an election under subsection 225.1(6) and once made, is the election binding on all the branches of the organization?

Interpretations Given

As you are aware, for reporting periods beginning after 1996, charities that are registrants are required to calculate their net tax using the special method set out XXXXX in section 225.1 of the ETA. Certain charities, however, can elect to not use this method. Subsection 225.1(6) allows charities that make supplies outside Canada, or zero-rated supplies, in the ordinary course of business as well as charities whose supplies are all or substantially all (greater than or equal to 90%) taxable to elect not to use the net tax calculation method.

Late-filed elections are usually subject to audit and acceptance decided on a case-by-case basis. A late-filed election will, however, generally be accepted if the following conditions are met:

1. the entity meets the criteria set out in subsection 225.1(6) (as discussed above);

2. the normal method of accounting for net tax has been used consistently; and

3. returns have been filed up to date.

It is the head office that should make this election. Once made it is binding on the legal entity. All branches that are part of one legal entity are required to use the same method of accounting for tax.

You mention branches that are registered and others that are not. It is the legal entity that is registered (or not). We assume that "registered" branches refers to branches filing their own returns and that the Charity has filed a GST 10, Application or Revocation of the Authorization to File Separate GST/HST Returns and Rebate Applications for Branches or Divisions. We also assume that for the branches that are "not registered" the Charity's head office reports all applicable tax and claims any eligible rebates (unless an election under section 129 has been filed using GST 31, Application for Public Service Bodies to Have Branches/Divisions Deemed to Be Separate Persons for Small Supplier Status).

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) 952-9592.

Yours truly,

Helena Ingr
Charities, NPOs and Educational Services Unit
PSBs and Governments Division
Excise and GST/HST Rulings Directorate