GST/HST 101 for Charities and Not-for-Profit Organizations
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:
- Taxable at normal rates
- 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
- 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.
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
- 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
- Registration for conferences, educational seminars and trade shows
- Rental income
- Books and magazine subscriptions
- 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
- As a small supplier, must provide taxable supplies (not exempt supplies)
- Most do not want to register
- 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
- Once $50,000 threshold exceeded in any 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 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:
- 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:
- 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.