16 November 1995 GST/HST Interpretation 11925-3[1] - Whether a Proprietorship Operation that Receives More Than 40% of Its Revenue From Government Funding Could Constitute a Qualifying Non-profit Organization for the Purpose of the 50% Rebate Provided in Section 259 of the Excise Tax Act

Dear XXXXX

This letter is in response to the memorandum dated August 28, 1994 from XXXXX asking whether a proprietorship operation that receives more than 40% of its revenue from government funding could constitute a qualifying non-profit organization for the purpose of the 50% rebate provided in section 259 of the Excise Tax Act (ETA). XXXXX specifically requested our opinion concerning the eligibility of XXXXX to claim this rebate. We regret the delay in our response.

Background

From the information provided, we understand the following:

1) XXXXX is the sole proprietor of the XXXXX a business that operates three homes in XXXXX for the purpose of providing care and a place of residence for mentally handicapped persons.

2) XXXXX has legal right and title to the residences, vehicles and property used in this operation.

3) No independent board oversees the operations of the XXXXX[.]

4) The XXXXX is not a registered charity and thus, is not a charity for the purposes of the GST.

5) Neither XXXXX nor the XXXXX is a GST registrant.

6) The XXXXX is funded by XXXXX and XXXXX.

7) Cheques are made payable to XXXXX and deposited in a separate bank account in the XXXXX name.

Questions to be resolved:

•   Will a proprietorship meet the definition of a "non-profit organization" as set out in subsection 123(1) of the ETA?

•   Is XXXXX entitled to claim the 50% rebate available to "qualifying non-profit organizations"?

Conclusion

•   A sole proprietorship will not meet the definition of a "non-profit organization" provided in subsection 123(1) of the ETA. Other proprietorships may, depending on the circumstances, qualify as non-profit organizations if they constitute persons "other than an individual".

•   As it appears that the XXXXX is a sole proprietorship, it cannot meet the definition of a "non-profit organization" set out in subsection 123(1) or the definition of a "qualifying non-profit organization" provided in subsection 259(2). Therefore, it is not entitled to apply for the 50% rebate available to qualifying non-profit organizations.

Analysis

As noted in the information accompanying XXXXX letter, a "proprietor" is generally defined to mean the owner of a proprietorship, one who has legal right or exclusive title to property, business, etc. and is often considered to be synonymous with "owner".

A "proprietorship" is generally considered to mean a business that is owned by a person who has either the legal right and exclusive title or dominion or who has ownership of the business. A business (usually unincorporated) that is owned and controlled exclusively by one person is commonly designated as a sole proprietorship.

The term "non-profit organization" is defined in subsection 123(1) as:

"... a person (other than an individual, an estate, a trust, a charity, a municipality 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 unless the proprietor, member or shareholder is a club, a society or an association the primary purpose and function of which is the promotion of amateur athletics in Canada;".

If a business is a sole proprietorship, (i.e., a business that is owned and controlled by one individual) then it will not meet the definition of a non-profit organization as the "person" will be considered to be an individual. Individuals are specifically excluded from the definition of non-profit organization.

While a sole proprietorship will not meet the definition of a non-profit organization, we cannot categorically state that no proprietorship will qualify under this definition. The definition itself seems to anticipate that some proprietorships will qualify as non-profit organizations as it specifically restricts the distribution of income to proprietors.

We consider therefore, that a proprietorship established and operated by a number of individuals would not necessarily be excluded from the definition of a non-profit organization on the basis that the "person" in this situation is considered to be an individual.

That is, a proprietorship established and operated by more than one individual could conceivably constitute a non-profit organization if it met the other criteria set out in the definition (i.e., is it organized and operated for a purpose other than profit?).

In determining whether a proprietorship constitutes a person "other than an individual", it will be necessary to consider how the person is established, structured and operated, (e.g., how its assets are controlled, how decisions are made concerning the operation and expenditure of its funds, whether there is a board of directors or a membership overseeing its operations and whether the person has enacted a constitution, by-laws or other governing document).

Based on the information provided, it appears that the XXXXX is a sole proprietorship and thus does not meet the definition of a non-profit organization set out in subsection 123(1).

Subsection 259(3) provides authority for the Minister to pay a rebate in respect of non-creditable tax incurred by a "qualifying non-profit organization".

The definition of "qualifying non-profit organization" in subsection 259(2) requires that the person be both a non-profit organization and that the person's percentage of government funding for the year be at least 40%.

As the XXXXX is not a non-profit organization, it is not entitled to apply for the rebates available to qualifying non-profit organizations.

I hope that this information will be of assistance. Please do not hesitate to contact Elaine Bonnah at (613) 952-6761 if you would like to discuss this matter further.

Yours truly,

J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations