GST/HST 101 for Charities and Not-for-Profit Organizations

April 1, 2019 Published by

GST/HST is:

A type of value-added tax

  • In theory, should apply to all consumption irrespective of whether the supplier is in the for-profit or non-profit sector
  • Special GST/HST provisions for non-profit sector to exempt certain “public good” or non-commercial-like activities
    • Attempt to minimize the compliance burden for the sector
  • Supplies by charities = exempt unless specifically excluded from exemption.
  • Supplies by other non-profit organizations = taxable unless the supply is prescribed to be exempt.
  • Supplies can be:
    • Exempt
    • Taxable at normal ratesGST/ HST is Complex for Non-Profit Organizations
    • Zero-rated
  • For supplies, each organization must determine:
    • Which, if any, of its supplies are exempt;
    • Which supplies are taxable;
    • Under what conditions; and
    • At what rate.
  • For inputs, each organization must determine:
    • Which qualify for input tax credits; and
    • Which do not
  • NPOs are subject to many of the rules applicable to the for-profit sector:
    • Input tax credit restrictions
    • Change-of –use rules
    • Registration
    • Filing and remittance requirements
  • NPOs also have specific provisions directed at the non-profit sector

Definitions – Public services bodies

  • Refers to all the entities that make up the non-profit sector.
  • A public service body is either
    • A government (federal or provincial); or
    • A public service body.

Definitions – Public services bodies

 

 

 

For charities, the majority of property and services supplied are exempt from GST/HST.

Charities – specific exemptions

  • Supplies of used or donated goods
  • Provision of new goods in exchange for donation, no GST/HST on portion which qualifies for donation receipt
  • Short-term rentals of residential accommodation
  • Exempt admissions
  • Direct cost exemption
  • Most goods and services sold in course of fundraising activities
  • Gambling events
  • Memberships
  • Recreation programs
  • Grants and subsidies

Charities – taxable supplies

  • Sale of new goods for a profit
  • Rentals and leases
  • Admissions to a place of amusement (> $1)
  • Memberships that entitle members to benefits

NPOs – taxable supplies

  • Majority of goods and services
  • Membership fees
  • Sponsorships
  • Registration for conferences, educational seminars and trade shows
  • Rental income
  • Books and magazine subscriptions

GST/HST registration?

  • Everyone must register for GST/HST if:
    • Provide taxable supplies in Canada; and
    • You are not a small supplier.
  • Not necessary to register if:
    • You are a small supplier;
    • Only commercial activity is the sale of real property; or
    • You are a non-resident who does not carry on commercial activity in Canada.

NPOs and charities – small supplier?

  • Considered a small supplier if:
    • Gross taxable supplies < $50,000 for previous 4 consecutive calendar quarters
    • Charities also have $250,000 gross revenue test
  • As a small supplier:
    • Do not charge GST/HST on taxable supplies
    • Do not claim ITCs on related expenses
    • Claim public service bodies’ (PSB) rebate, if applicable
  • The definition of “taxable supplies” includes:
    • Worldwide revenue that would be subject to GST/HST if you made the supply in Canada
    • Revenue from zero-rated supplies
  • Must register within one month from the effective date you cease to be a small supplier

Revenue – Importance of tracking

  • Potential implications if you do not track revenue:
    • Failure to charge GST/HST
    • CRA assesses you for failure to charge GST/HST
    • Difficulty in collecting GST/HST after the fact
    • Missing potential GST/HST ITCs
  • Important to track revenue, worldwide taxable supplies

Voluntary registration

  • As a small supplier, must provide taxable supplies (not exempt supplies)
  • Most do not want to register
    • Compliance
    • Lose competitive advantage
  • If decide to register
    • Must charge GST/HST on all taxable supplies
    • Have ability to claim ITCs on related expenses
    • Must continue to be registered for at least 1 year

Qualification as a small supplier

  • Last four calendar quarters test
    • Once $50,000 threshold exceeded in any calendar quarter:
      • Must register and begin to collect tax on the 1st day of 2nd month in subsequent calendar quarter
  • Calendar quarter test – exception to above general rule
    • Total revenues from taxable supplies in particular calendar quarter exceed $50,000
    • Must register and collect tax, beginning with supply in which threshold exceeded

Directors’ liability

  • Directors of incorporated public sector body are jointly and severally, or solidarily, liable, together with the corporation, for any GST/HST the corporation fails to collect or remit.
  • Liability extends to directors for two years subsequent to their leaving office.
  • Excused from liability if exercised a degree of care, diligence, and skill to prevent GST/HST collection and remittance failures.
  • Liability extends to:
    •  Officers
    • Management committee members
    • Members of an unincorporated entity
  • Members have an absolute liability, which cannot be waived or eliminated by exercising due diligence.

Charities – net tax calculation

  • As GST/HST registrant, special net tax calculation is mandatory
  • Remit 60% (line 105) of GST/HST charged on taxable supplies
  • Unable to claim an input tax credit on expenses relating to taxable activities except for capital property
  • May claim the PSB rebate for expenses you are unable to claim an input tax credit
  • Capital property consists of buildings, furniture and equipment
  • Claim full input tax credit on capital property if used more than 50% in your commercial activities
  • No input tax credit if capital property used less than 50% in your commercial activities

Charities – election not to use net tax method

  • Ability to elect not to use net tax calculation if:
    • 90% or more of your supplies are taxable,
    • You make supplies outside of Canada, or
    • You make zero-rated supplies
  • Complete Form GST488
  • Eligible to claim ITCs for GST/HST paid on expenses related to commercial activities
  • Does expense relate to a specific activity?
    • If taxable supply, claim the ITC
    • If exempt supply, do not claim the ITC
  • Overhead and operating expenses are allocated between taxable and exempt activities in a “fair and reasonable” way
  • Allocation must be consistent throughout the year

Usually, if taxable sales are greater than related expenses, it is better to use the net tax method.

Input tax credits (ITCs) – GST/HST registrants

  • As a registrant, you must remit GST/HST charged
  • Have ability to claim ITCs for GST/HST that was paid on expenses related to providing a taxable supply
  • Eligible to claim a PSB rebate for GST/HST paid that was not recoverable through claiming ITCs
  • ITCs not available on expenses relating to exempt supplies
  • Many groups are involved with both taxable and exempt activities
  • Expenses can be classified as direct or indirect
  • Direct expenses associated with a taxable supply qualify for an ITC
  • Indirect expenses need to be allocated between taxable and exempt supplies as an input tax credit may be taken on those expenses associated with a taxable supply
  • If all or substantially all (more than 90%)of expenses relate to:
    • Taxable supplies – able to claim full input tax credit
    • Exempt supplies – no input tax credit available
  • Will need to allocate expenses between taxable and exempt supplies and claim input tax credits accordingly
  • CRA does not prescribe any one method of allocation
  • Examples of allocation methods include square footage, cost, number of employees, revenue earned and number of transactions
  • Allocation method must be fair, reasonable, consistent and documented
  • Entitlement to rebates will impact claim of ITCs

Public service bodies’ (PSB) rebates

  • NPOs that are eligible to claim the PSB rebate include:
    • Charities
    • Public institutions
    • Qualifying NPOs – where government funding is at least 40% of total revenue
    • Municipalities, universities and school and hospital authorities.
  • Rebate is 50% of the Federal portion (5%) of the HST on eligible expenditures
  • In Ontario, rebate of 82% of the Provincial portion (8%) of the HST
  • Therefore, in Ontario the net HST is reduced to 3.94%
  • Do not have to be a GST/HST registrant to qualify for the rebate.

Rebate on out-of-province expenses

  • Rebate depends on location of permanent establishment (“PE”)
  • If PE is in an HST Province (Ontario), then one can claim rebate on Provincial portion of HST in other Provinces (Nova Scotia)
  • In non-harmonized provinces, rebate only on Federal GST (5%)

Public service bodies’ (PSB) rebates

  • Charities must complete Federal form GST66 and Provincial form RC7066 and file them together
  • If not registered for GST/HST, file forms semi-annually; otherwise with GST/HST return
  • NPOs must also complete form GST523-1 concerning government funding
  • Forms can be filed online

Other noteworthy items

  • File returns online
  • Review GST/HST obligations annually at a minimum
  • Ensure that you are claiming the maximum PSB rebate
  • Consider making a voluntary disclosure with CRA
  • You have 4 years to file for a PSB rebate or claim an input tax credit
  • Seek professional advice
  • Be aware that CRA has increased GST/HST audit activity
  • Complex rules surrounding the disposition of real property. If your organization is selling or buying real property, you must consider the GST/HST impact.
  • Consider a Section 211 election if you receive rental income from real property.

Re posted from Presentation of Chris Munn, CPA, CA, BBA, Partner, Tax Services, Hogg, Shain & Scheck CPAs on October 30, 2018 at the HSS Navigating for Social Impact at Artscape Sandbox

Disclaimer: This presentation does not constitute formal professional advice. The contents are for general information purposes only and under no circumstances can be relied upon for legal decision-making.  Attendees and readers are advised to consult with a qualified accountant and obtain a written opinion concerns the specifics of their particular situation.