30 January 2002 GST/HST Ruling 34224 - Application Ruling on Transactions by a Charity

Dear XXXXX

Thank you for your letter of January 15, 2001, requesting a ruling on the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain transactions of the XXXXX, as described below. We apologize for the delay in responding.

All statutory references in the following are to the Excise Tax Act (the "ETA").

Statement of Facts

Our understanding of the relative facts, based on your submissions, is as follows:

General

1. The organization known as XXXXX consists of a number of independent charities organized under ten provincial and territorial councils (the Councils) and the XXXXX. The XXXXX is the national headquarters. As well, the XXXXX is itself a "person" as defined in the ETA. That is, the XXXXX is separate and distinct from the Councils, each of which is also a legal "person". The XXXXX is a charity for GST purposes and is a GST/HST registrant (B.N. #XXXXX).

Memorandum of Understanding

2. The XXXXX has entered a Memorandum of Understanding (MOU) with the Councils, which sets out the rights, responsibilities and obligations they have with respect to each other. A copy of this agreement and its appendices has been submitted for our review. Its term is XXXXX.

3. Pursuant to XXXXX of the MOU, the XXXXX will provide certain "support services" to the Councils, such as:

-    research, development and production of XXXXX and community service products;

-    development of marketing and communication strategies;

-    technical support with respect to information technology;

-    development of training programs, product catalogue, pricing guidelines, etc.;

-    liaising with federal government and other national organizations;

-    maintenance of a national database;

-    national buyer of goods for re-sale to Councils at cost plus shipping.

4. Pursuant to XXXXX of the MOU, the Councils make certain undertakings, such as:

-    to promote, deliver and/or sell XXXXX products and services;

-    to comply with the XXXXX's requirements regarding use and display of XXXXX trademarks (see below);

-    to provide a copy of Charity Information Returns to the XXXXX;

-    to purchase "products, supplies and materials through the XXXXX or third party suppliers approved by the XXXXX ..."

5. Further, pursuant to XXXXX, the Councils agree to "pay to the XXXXX a service fee as described in Addendum A" (see below).

6. As well, it recognized under the MOU that "the Councils will have the sole right ... to operate within their respective province or territory ..."

7. Pursuant to XXXXX, the XXXXX and Councils agree to a number of joint responsibilities such as developing a national strategic plan, measuring and monitoring elements (customer loyalty etc.) that create stakeholder value, and participating in developing national standards.

XXXXX Trademarks

8. The Councils recognize the XXXXX as the owner of the trademarks, and also acknowledge that the Councils are using them under a license from the XXXXX.

9. The Councils further agree to the terms set out concerning the use of the trademarks (e.g., "... may only be used in association with delivering XXXXX products and services ..."), that their use of the trademarks is subject to the approval of the XXXXX, and that such use will be "in accordance with the terms of any license entered into between the Council and the XXXXX)."

XXXXX and XXXXX of the MOU

Service Fee

10. XXXXX sets out the funding formula whereby the XXXXX's "net cash flow requirements ... shall be financed by a service fee to be paid by all Councils"; i.e., The service fee shall be XXXXX of a Council's Revenue (as defined. It excludes, for example, investment income, grants, and donations) in the fiscal year ending XXXXX. Thereafter, the service fee shall graduate so that in the fiscal year ending XXXXX, it shall be calculated upon a formula based equally upon population and gross revenues as exemplified in XXXXX ...

11. XXXXX sets out the following:

For purposes of clarification all parties within XXXXX recognize the following:

... the entire service fee is for the provision of services under XXXXX XXXXX of the (MOU); these services are provided on a cost recovery basis; the entire service fee ... relates to the XXXXX cost of providing these services; and, the use of the XXXXX. XXXXX trademarks to the ... Councils under XXXXX of the (MOU) are provided for no consideration.

Ruling Requested

Are the supplies made by the XXXXX to the Councils pursuant to the MOU exempt from the GST/HST under section 1 of Part V.1 of Schedule V?

Rulings Given

1. The supplies of support services made by the XXXXX to the Councils pursuant to the MOU, as described above, are exempt supplies pursuant to section 1 of Part V.1 of Schedule V.

2. The supply by the XXXXX to the Councils of the right to use the XXXXX's trademarks is an exempt supply pursuant to section 1 of Part V.1 of Schedule V, whether or not this supply is viewed as being made pursuant to the terms of the MOU.

These rulings are 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 these rulings 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 transaction(s) for which you requested a ruling.

Explanation

Section 1 of Part V.1 of Schedule V provides a general exemption for supplies made by a charity of any property or service, except for supplies listed under paragraphs (a) to (m). Further, even if a particular supply is described under paragraphs 1(a) to 1(m), and thus is not exempt under section 1, it may still fall under another exempting provision. For example, section 5 of Part V.1 exempts a supply where "all or substantially all of the supplies...are made for no consideration."

The supplies of support services described under Item 3 of the Facts do not fall under the paragraphs 1(a) to 1(m) of Part V.1 of Schedule V. Accordingly, they are exempt under section 1 of Part V.1 of Schedule V.

With respect to the trademarks, the XXXXX XX is viewed as making a supply of the right to use its trademarks under the MOU notwithstanding your comment that the MOU "govern(s) the use of the XXXXX trademarks. They do not relate to the actual supply of the trademarks." (XXXXX appears to recognize that the use of trademarks is supplied under the terms of the MOU, but that such use is "provided for no consideration.") In any case, whether or not this supply is provided under the terms of the MOU, it is apparent that the XXXXX is making a supply to the Councils of the right to use its trademarks. This supply would also be exempt pursuant to section 1 of Part V.1 of Schedule V.

Since there are no taxable supplies being made pursuant to the terms of the MOU, it is clear that the "service fee" payable by the Councils to the XXXXX is consideration for exempt supplies only, and therefore is not subject to tax.

The ruling above does not preclude the possibility that the XXXXX makes taxable supplies to the Councils under other arrangements. For example, the XXXXX has agreed to be the national buyer of goods for re-sale to the councils at cost plus shipping and the Councils have agreed to purchase "products, supplies and materials" from the XXXXX. It is quite possible that such transactions represent taxable supplies made by the XXXXX to the Councils unless an exemption such as the direct cost exemption under section 5.1 of Part V.1 of Schedule V applies.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7936.

Yours truly,

Danielle Laflèche, c.a.
Manager
Charities, NPOs and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate