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Goods & Services Tax, Charities and the implications of the May 2, 2006 federal budget

June 20, 2006

Changes to the Goods & Services Tax (GST) announced on May 2, 2006 included a new GST tax rate. Effective July 1st, 2006, the GST tax to be charged will be 6% instead of 7%. For the provinces that have "harmonized" their sales taxes with the GST, (Nova Scotia, New Brunswick, and Newfoundland and Labrador), the tax rate will be 14% instead of 15% which includes the GST and the applicable provincial tax. The harmonized tax system is referred to as the HST.

What should charities do? CCCC suggests that:

1) All charities should take note of the new tax rates and the transitional rules setting out when the old rate and when the new rate will apply.

2) Because all charities are eligible for a Public Service Body rebate, whether or not a charity is registered for GST/HST purposes, all charities should take note of the changes in the applicable rebate rules; and

3) Whether or not a charity is registered for GST/HST purposes, all charities should consider processing appropriate employee reimbursements and allowances before July 1st, 2006.

1) Change in the GST/HST Rates and the Transitional Rules

Change in Tax Rates

Like any other person or organization, the decrease in the tax rates on July 1st, 2006 will result in a decrease in the amount of GST/HST a charity pays on purchases of goods or services and, if the charity is a registrant, collect on taxable sales. Effective July 1st, 2006, the tax rate to be charged is 6% instead of 7% and for participating provinces that have harmonized their sales tax with the GST, 14% instead of15%.

Transitional Rules

In making the transition to these new tax rates the following rules apply.

  • If GST/HST becomes payable on or after July 1, 2006 without having been paid before that day, the 6% GST rate, or the 14% HST rate will apply.
  • If GST/HST is paid on or after July 1st, 2006 without having become payable before that day, the 6% GST rate, or the 14% HST rate will apply.
  • If GST/HST becomes payable or is paid before July 1, 2006, the 7% GST rate, or the 15% HST rate will apply.

The key thing to know is when the GST/HST becomes payable. It usually becomes payable when payment for the item or service is made, or the day the invoice is issued, whichever is earlier. If the invoice is "unduly" delayed, the date the invoice should have been issued will be used. (Note that it appears the timing of when an item becomes payable for GST/HST purposes may be different than for accounting purposes.)

Examples
Sales
Facts: Charity A sells widgits which are subject to GST/HST (a "taxable supply") and is registered for GST/HST purposes. Therefore they collect and remit GST/HST to the government.

  • If Charity A sells a widgit and is paid for it on June 30th, 2006, they must use the 7% or 15% rate as applicable. But if they sell a widgit on July 1, 2006, they must charge the 6% or 14% rate as applicable. (Rationale: GST/HST payable when payment is made.)

  • Charity A will take mail orders, but will not process them until payment is made. If Charity A takes an order for and receives payment for a widgit before July 1st, 2006, and ships it out after July 1st, 2006, they will have to charge at the 7% or 15% rate as applicable. (Rationale: in this case the payment was made before July 1st.)

  • Charity A permits customers with a proven payment record to pay within 30 days of receiving the widgits. In such cases they prepare invoices each month on the 15th. If Charity A receives the order June 16, 2006 and ships the product out the same day, but does not prepare the invoice until July 15, 2006, the 6% or 14% rate will apply as applicable. (Rationale: in this case the invoice date was after July 1 and is the appropriate date to consider as it precedes the payment date.)

    Deposits

  • Charity A orders a new photocopier May 1st, 2006. They were required to provide a deposit with the order. The photocopier will not arrive until August 1st, 2006. The photocopier is payable in full upon delivery. The supplier will apply the deposit against the amount payable on August 1st, 2006. The deposit in this example will be subject to the 6% or 14% rate. (Rationale: GST/HST is payable on the earlier of the day of payment or invoice and a deposit is not treated as payment until the supplier applies it against the amount payable.)

    Prepaid Rent

  • Charity A rents its facilities and pays GST/HST on the rent. The rental agreement requires that it pay rent the last day of the month for the following month. The charity pays rent June 30th, 2006 for the month of July. The charity will pay the 7% or 15% rate, even if the payment is a day late, i.e. on July 1st. (Rationale: Since the earlier of the agreement date and payment date is the date to consider. Payment is due before July 1st, 2006 and therefore the old rates apply.)

    Allowances and Reimbursements
    (See the Employee/Volunteer Allowances and Reimbursement section below).

    2) Calculating your Rebates

    Like any other person or organization, the decrease in the tax rates on July 1st, 2006 will result in a decrease in the amount of GST/HST a charity pays on purchases. Consequently, it will also affect the amount of a charity's GST/HST Public Service Body rebate and the ratios used in calculating GST/HST paid or owing.

    Most charities are eligible for a Public Service Body (PSB) rebate on GST/HST paid or owing on eligible expenses at the 50% rate. The changes in the GST/HST tax rates do not affect the PSB rates. However, there are two related items that are affected: the factors in the simplified method for determining rebates; and the factors for determining employee/volunteer allowances and reimbursements.

    Simplified Method for Calculating Rebates

    If a charity is using the simplified method for calculating its rebate (see explanation in Charities and GST/HST - A High-level Summary), the factors 6/106 and/or 6/114 will have to be used in place of the current 7/107 and 7/115 in calculating the amount of GST/HST included in its purchases.

    On a practical note a charity will want to total the items paid or owing before July 1st, 2006 (i.e. taxed at the current tax rates) separately from those paid after July 1st, 2006 (i.e. taxed at the new tax rates) to ensure that the correct factor is used.

    3) Employee/Volunteer Allowances and Reimbursements

    Currently when a charity provides, to an employee or volunteer, an allowance or reimbursement for expenses incurred on behalf of the charity, the charity is deemed to have paid the GST/HST on those expenses. The date the charity is deemed to have paid the GST/HST is not the actual day the employee/volunteer incurred the expense, but the day the charity gives the allowance or reimbursement to the employee. To that end it would be to the charity's advantage to issue reimbursements and allowances as appropriate before July 1st 2006, so as to qualify for a rebate of 50% of a higher amount of GST/HST paid.

    To calculate the amount of GST/HST that the charity is deemed to have paid on a reimbursement, the charity may use an exact calculation method or a simpler method (provided the basic requirements are met and the charity keeps the required documents). Where the simpler method is used, the total amount of reimbursement is multiplied by the current factor of 6/106 and/or 14/114 as applicable. Note that for reimbursements paid on or after July 1st, 2006, these factors will change to 5/105 and/or 13/113 as applicable.

    To calculate the amount of GST/HST that the charity is deemed to have paid on an allowance, it may again use a simpler method. In respect of allowances, a charity using the simpler method would multiply the amount of the allowance by the current factor of 7/107 and/or 15/115 as applicable. Note that for allowances paid on or after July 1st, 2006, these factors will change to 6/106 and/or 14/114 as applicable.

    If these factors are automatically generated for example by tables in a software program, the tables will have to be updated.

    The amount of GST/HST paid in respect of an allowance or reimbursement is necessary to determine the overall amount of GST/HST paid by the charity in order to calculate the charity's rebate whether or not they are registered for GST/HST purposes. This calculation is also relevant for tracking ITCs for those rare charities that are registered for GST purposes and who have also elected out of the Simplified Method for calculating GST/HST remittances (which is not to be confused with the simplified method for calculating a rebate just discussed above).

    Example:

  • Charity A pays a reasonable car allowance to its employees.
    It is deemed to have paid the GST/HST (whether actual or deemed) on the date it pays the allowance to the employee(s). So, Charity A will be deemed to have paid tax at the 7% or 15% rate if the charity pays the allowances before July 1st, 2006, and at the 6% or 14% rate if the allowance is paid on or after July 1st, 2006.

    If the gas allowance was $100, the deemed GST portion is 7/107 ($6.54) or 15/115 ($13.04) if paid before July 1st, 2006 but 6/106 ($5.66) or 14/114 ($12.28) if paid on or after July 1st, 2006.

    To illustrate the difference in the rebate amount consider the following. A charity claiming the 50% PSB rebate on the gas allowance above would be eligible for a rebate of $3.27 or $6.52 on allowances paid before July 1st, 2006 and $2.83 or $6.14 for allowances paid on or after July 1st, 2006.

    For more examples and information see CRA's GST/HST Info Sheet (May 2006) at: www.cra-arc.gc.ca/tax/technical/gsthst-e.html.

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