30 September 1998 GST/HST Interpretation HQR0001208 - Application of the GST/HST to the Supply of Memberships and New Merchandise Distributed by a Charity

Dear XXXXX

This letter is in response to XXXXX electronic message to Susan Eastman on June 4, 1998 concerning the application of the Goods and Services Tax(GST)/Harmonized Sales Tax (HST) to the transactions described below.

All legislative references are to the Excise Tax Act and regulations thereunder, unless otherwise specified. This letter does not reflect any legislation regarding the provincial component of the HST.

Background

Our understanding of the facts from XXXXX electronic message and facsimile of June 4, 1998, is that XXXXX is a charity for GST/HST purposes with revenues from a number of sources such as the supply of memberships, list rentals, new merchandise, advertising, commissions, and royalties. It also publishes a magazine, XXXXX, which it distributes freely to members. To date, XXXXX has treated all of these supplies as taxable supplies for GST purposes and with this understanding has filed an election under subsection 225.1(6), in order to not use the net tax calculation for charities. XXXXX is registered for GST purposes under account XXXXX[.]

Based on a previous discussion between XXXXX and Ms. Eastman, it was determined that the supply of memberships and new merchandise are taxable supplies for GST purposes. The supply of advertising in XXXXX magazine and commissions are exempt supplies. The remaining issues concern list rental revenue and royalty income.

The list rental revenue is derived from the sale of a list of members' names and addresses, put onto a disc or tape for computer use and sold to a customer who may then use the list of names for their own advertising purposes.

Royalty income is paid to XXXXX by agencies with whom they have agreements to allow for the use of XXXXX magazine through various means such as photocopies, CD sales and other electronic reproduction. These amounts are paid as a percentage of sales, net of taxes, that the agency receives from the electronic products or photocopies that they sell.

Opinions Requested

1. Is the GST applicable to the list rental revenue on the basis that since it is derived from the sale of a listing of the memberships, and those memberships are taxable, the supply of the listing is therefore excluded from exemption under paragraph 1(c) of Part V.1 of Schedule V?

2. Is the GST applicable to the royalty payments by falling under the exclusion to exemption under paragraph 1(c) of Part V.1 of Schedule V?

Opinions Given

1. Is the GST applicable to the list rental revenue on the basis that since it is derived from the sale of a listing of the memberships, and those memberships are taxable, the supply of the listing is therefore excluded from exemption under paragraph 1(c) of Part V.1 of Schedule V?

The supply of a list of addresses may be the supply of a service or intangible personal property (i.e., the right to use the names and addresses), depending on the specific circumstances. As it appears that XXXXX has not been contracted to prepare a specific list of addresses (which could be considered a supply of a service), it is reasonable to suggest XXXXX is making a supply of intangible personal property.

Generally supplies made by a charity are exempt from the GST unless they are specifically excluded from exemption within the legislation. Paragraph 1(c) of Part V.1 of Schedule V excludes from exemption any property that was used in a commercial activity immediately prior to the supply. This paragraph does not apply to property that was acquired or produced for resale by the charity, nor to property that was used in making the supply by the charity. The list of addresses is not used in a commercial activity as referred to under paragraph 1(c) of Part V.1 of Schedule V and is also not otherwise excluded from the section 1 exemption. Regarding paragraph 1(c), it is our view that even though the memberships are taxable, the listing of member's names etc. is not property that was used in making supplies of the memberships. For this reason, paragraph 1(c) does not apply and the supply of the list is therefore, exempt from the GST.

2. Is the GST applicable to the royalty payments by falling under the exclusion to exemption under paragraph 1(c) of Part V.1 of Schedule V to the Act?

Royalty payments are generally viewed as payments for certain rights and are therefore consideration for intangible personal property. As stated above, paragraph 1(c) of Part V.1 of Schedule V to the Act excludes from exemption any property that was used in a commercial activity immediately prior to the supply. Again, it is our view that even though the memberships are taxable, the royalty payments are not in respect of property that was used in making supplies of the memberships. Since paragraph 1(c) does not apply and there is no other "exclusion" applicable, we view the royalty payments as consideration for exempt supplies and therefore, also exempt from the GST.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9214, or Mike Place, Manager Charities, Non-Profit Organization Unit, Public Service Bodies and Governments Division at (613) 954-3976.