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Charities and GST/HST - A High Level Summary

November 13, 2007 (Updated December 19, 2007)

The GST/HST rules are very complex and multilayered with exceptions to the exceptions to the exceptions not uncommon! Understandably in a high level summary it is not possible to set out all the nuances or exceptions to every rule. The intent of this summary is to provide a very simple framework and a context for the tax changes announced on October 30, 2007. Please see the resources listed at the end of this summary for a more in-depth review of GST/HST.

The Broad General Rule
The general GST/HST rule set out in the Excise Tax Act (the "ETA") is that the supply of all goods and services in the course of a commercial activity is subject to a tax of 7% (GST), or 15% (HST) if the property or service is provided in Newfoundland and Labrador, New Brunswick or Nova Scotia (referred to as "participating provinces"). These rates were lowered to 6% GST and 14% HST effective July 1, 2006. They will be reduced again to 5% GST and 13% HST effective January 1, 2008.

The Special Rule for Charities
However, there is a significant exception to this general rule when it comes to registered Canadian charities. The general rule for charities is that goods or services provided by a charity are exempt from the GST/HST and are referred to as 'exempt supplies' (see ETA Schedule V Exempt Supplies, Part V.1 Supplies by Charities). Not surprisingly there is a list of exceptions to this charity exemption rule (see ETA Schedule V, Part V.1 (1) (a) - (n)). This means that if a charity provides an item which is included in the list of exceptions to the exemption, that item would be subject to GST/HST after all. The provision of property or a service is generally referred to as a "supply." If the supply is subject to the GST/HST, it is referred to as a "taxable supply." If the supply is exempt from the GST/HST tax it is referred to as an "exempt supply."

Supplies by a Charity that are Exempt
The general rule for charities is that most supplies by a charity are exempt. Canada Revenue Agency (CRA) in GST/HST Information for Charities on Pages 6 & 7 provides a number of supplies that are exempt when provided by a charity including:

  • supplies of used and donated goods;
  • meals-on-wheels programs;
  • parking space rentals;
  • facility rentals;
  • private function catering services;
  • fundraising activities that are neither continual nor regular throughout the year;
  • provision of goods and services for an amount that does not exceed direct cost;
  • various gambling events;
  • recreation programs for children 14 years of age or under;
  • where supplies (at least 90%) are made free of charge;
  • memberships supplied without significant benefit (that relate to places of amusement or recreational/athletic facilities);
  • admissions to places of amusement that do not exceed $1, or where a charitable receipt may be issued (e.g. a fundraising event) or a performance or athletic event where 90% of the performers or athletes are not paid other than direct costs and are not eligible for cash prizes; and,
  • supplies made for the relief of poverty, suffering or distress of individuals.

Specific Supplies by a Charity that are not Exempt
The ETA in Schedule V, Part V.1(1) sets out those categories of supplies by a charity that are explicitly not exempt. CRA in GST/HST Information for Charities Page 8 provides the following examples of supplies that are not exempt when provided by a charity:

  • sale of personal property used in taxable activities for which the charity was able to claim ITC's;
  • new goods bought, manufactured or produced to resell for more than direct cost;
  • certain sales or leases of real property (i.e. real estate);
  • admissions to places of amusement where the fee is over $1;
  • memberships entitling members to significant discounts at places of amusement or in the use of recreational or athletic facilities;
  • supervision or instruction in a recreational or athletic activity for persons over 14 or for children under 14 where there is overnight supervision;
  • services of performing artists if provided to an organization selling taxable admissions to the performance; and,
  • sale of certain lottery tickets.

If a Charity Makes Taxable Supplies does it have to Register for GST/HST Purposes?
Providing supplies that are not exempt does not automatically mean that a charity has to register for GST/HST purposes. A charity that provides a taxable supply may be permitted to provide that supply without charging the GST/HST if it qualifies as a small supplier.

A charity only has to qualify under one of the two small supplier rules/tests. A charity is a small supplier under the first rule if its taxable supplies do not exceed $50,000. Note that for non-charities the small supplier rule threshold is $30,000. The second rule is the $250,000 "gross revenues test." If a charity has under $250,000 in gross revenues (including donations) the charity does not have to charge GST/HST even if the charity had over $50,000 in taxable supplies. The result of qualifying under either of these rules means that the charity does not have to register for GST/HST purposes nor make remittances to the Government, since the charity would not be collecting GST/HST. In fact a charity may not collect GST/HST unless it is registered for GST/HST purposes. Note: the ETA permits a charity which is not required to register for GST/HST purposes to voluntarily register. The charity would then have to collect and remit GST/HST.

Taking Advantage of Status as a Division, Branch or Chapter
Note also that a charity that does not meet either the $50,000 taxable supplies threshold or the $250,000 gross revenue threshold, which has branches, division or chapters, may apply to have them treated as separate persons for the purpose of applying the small supplier threshold. If each of the branches etc., on their respective taxable supplies and gross revenues, would qualify as small suppliers, the charity would qualify as a small supplier.

Where a charity provides taxable supplies and fails to qualify under either the small supplier rule or the gross revenue test, and cannot take advantage of being treated as a number of separate branches that qualify as small suppliers, it must register for GST/HST purposes, collect GST/HST, and remit the GST/HST to the government.

For Charities that are Registered
Organizations and businesses that are registered for GST/HST purposes must collect and remit GST/HST to the government. Contrary to how a typical for-profit organization would calculate the net amount of GST to remit (i.e. taking GST/HST collected less "input tax credits" ("ITC's") for the GST/HST paid on the various goods or services needed to create its own taxable supply), a charity, with few exceptions, may not claim ITC's to reduce its net GST/HST remittance. Rather, a charity must use a "Simplified Method" (sometimes referred to as a "net tax calculation for charities") to calculate how much GST/HST to remit to the government (see ETA s 225.1). This method generally requires that a charity remit 60% of the GST/HST it collects and keep the remaining 40% collected. Note that a charity may elect out of using this Simplified Method for Remittances only if it makes an application and meets the narrow qualifications. A registered charity would still claim the Public Service Body ("PSB") rebate (e.g. at the 50% rate) in respect of GST/HST paid on eligible purchases and supplies, just as it would if it were not registered for GST/HST.

Rebates Whether or not a Charity is Registered
A charity may apply for the PSB rebate for "eligible" purchases and expenses at the applicable rate (most charities are at the 50% rate) whether or not they are registered for GST/HST purposes. Note that having a business number and being in the government system for rebate purposes does not mean the charity is "registered for GST/HST purposes." The applicable rebate rate and the method for calculating the rebate are set out in the ETA Part IX, Division VI- Rebates, in section 259, and also in the Public Service Body Rebate (GST/HST) Regulations.

There is no definitive list of what qualifies as "eligible" purchases and services. Some examples provided by CRA in the Guide GST/HST Public Service Bodies' Rebate include:

  • general operating and overhead expenses, such as rent, utilities and administration expenses;
  • most allowances and reimbursements paid to employees and volunteers;
  • merchandise bought to sell at fundraising events, supplies bought to make goods to sell at fundraising events; and,
  • certain capital property (buildings, equipment, vehicles, machinery, office furniture, computers and photocopiers used by the charity for carrying out its activities).

Examples from the Public Service Body Rebate (GST/HST) Regulations and the CRA's GST/HST Public Service Bodies' Rebate guide, of expenses not eligible for rebate consideration include:

  • memberships in recreational and sporting clubs;
  • expenses related to providing long-term residential accommodation unless more than 10% is restricted to seniors, students, youths, individuals with a disability who qualify under a means or income test;
  • goods and services bought to sell or give to an employee, officer etc., if it is a taxable benefit to that person; and,
  • supplies that are subject to GST/HST at a 0% tax rate (e.g. basic groceries) and known as zero-rated supplies.

Calculating the Rebate
Most charities can either track the GST/HST paid on each and every item separately or, if eligible, they may use a simpler method to calculate their rebate. For example, in the first instance the charity would total the exact GST/HST paid or owing for all eligible purchases. Where GST/HST is included in the purchase price the charity would multiply the purchase price by 7/107 or 7/115 to arrive at the GST/HST charged. As of July 1, 2006, these factors changed to 6/106 and/or 6/114. As of January 1, 2008, they will change again to 5/105 and/or 5/113.

Charities that have taxable supplies of less than $500,000 or taxable purchases of no more than $2 million may use the simpler or prescribed method (see both ETA section 259(12) and the Public Service Body Rebate (GST/HST) Regulations) to calculate their rebate. This method of calculating rebates does not require the charity to track the exact GST/HST paid on each eligible purchase. A charity using this method would total the eligible purchases that were used for the charity's activities and multiply that total by a prescribed factor to arrive at the amount to which the charity would apply the 50% PSB rebate rate. In totalling the eligible purchases, a charity would include the purchase price, GST or HST, non-refundable provincial tax only if taxed at the 5% GST, reasonable tips, import duties and interest and penalty paid for supplies taxed at 5% or 13%. In totalling the eligible expenses, a charity could not include: part of purchases for which it claimed or will claim input tax credits; expenses on which GST/HST is not paid such as salaries or insurance payments; other exempt or zero-rated purchases; purchases from non-registrants or purchases made outside of Canada that are not subject to GST/HST; the part of ITC's on meals and entertainment that is subject to recapture; refundable or rebateable PST; and purchases of real property. As a practical point, items subject to the 13% HST need to be totalled separately from those subject to the 5% GST.

As mentioned above, the total of eligible expenses is generally multiplied by the factor of 6/106 and/or 6/114 (and 5/105 and/or 5/113 as of January 1, 2008) as applicable. Once this amount is established, a charity would add 100% of the GST/HST paid on items like real estate and capital improvements not used primarily in making taxable supplies, and then multiply this total by the rebate rate (e.g. 50%). This final amount is the amount of the charity's federal rebate.

Employee/Volunteer Allowances and Reimbursements
A special note on allowances and reimbursements of employees or volunteers. If a charity reimburses its employee or volunteer for expenses incurred on its behalf, the charity can include in its rebate claim 50% (assuming that is the applicable PSB rate) of the GST/HST portion of those expenses (e.g. reimbursement for supplies). The charity is deemed to have paid the GST/HST on the date it pays the allowance or reimbursement to the employee or volunteer.

To calculate the amount of GST/HST that the charity is deemed to have paid on a reimbursement it may use an exact calculation method or a simpler method (provided the basic requirements are met and it keeps the required documents) where it multiplies the total amount of reimbursement by the current factor of 5/105 and/or 13/113, as applicable. Note that for reimbursements paid on or after January 1, 2008, these factors will change to 4/104 and/or 12/112, as applicable.

To calculate the amount of GST/HST that the charity is deemed to have paid on an allowance, it may multiply the amount of the allowance by the current factor of 6/106 and/or 14/114 as applicable. Note that for allowances paid on or after January 1, 2008, these factors will change to 5/105 and/or 13/113 as applicable.

Additional Resources


Changes to the Goods & Services Tax (GST) announced on October 30, 2007, include a new GST tax rate. Effective January 1, 2008, the GST tax will be 5% instead of 6%. For the provinces that have "harmonized" their sales taxes with the GST, Newfoundland and Labrador, New Brunswick and Nova Scotia, the tax rate will be 13% instead of 14%. This 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 and the new rates 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.
  3. Whether or not a charity is registered for GST/HST purposes, all charities should consider processing appropriate employee reimbursements and allowances before January 1, 2008.

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 January 1, 2008, 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, collects on taxable sales. Effective January 1, 2008, the tax rate will be 5% instead of 6%. For participating provinces that have harmonized their sales tax with the GST, the tax rate will be 13% instead of 14%.

Transitional Rules
In making the transition to these new tax rates the following rules apply:

  • If GST/HST becomes payable on or after January 1, 2008, without having been paid before that day, the 5% GST rate, or the 13% HST rate will apply.
  • If GST/HST is paid on or after January 1, 2008, without having become payable before that day, the 5% GST rate or the 13% HST rate will apply.
  • If GST/HST becomes payable or is paid before January 1, 2008, the 6% GST rate, or the 14% HST rate will apply.

The key element is 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"). Charity A 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 December 31, 2007, they must use the 6% or 14% rate as applicable. But if they sell a widgit on January 1, 2008, they must charge the 5% or 13% rate as applicable. (Rationale: GST/HST is 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 and receives payment for a widgit before January 1, 2008, and ships it out after January 1, 2008, they will have to charge at the 6% or 14% rate as applicable. (Rationale: The payment was made before January 1).

Charity A permits customers with a proven payment record to pay within 30 days of receiving the widgits. In such cases they prepare invoices on the 15th day of each month. If Charity A receives the order on December 16, 2007, ships the product out the same day but does not prepare the invoice until January 15, 2008, the 5% or 13% rate will apply as applicable. (Rationale: The invoice date is after January 1, 2008, and is the appropriate date to consider as it precedes the payment date).

Deposits
Charity A orders a new photocopier November 1, 2007. They were required to provide a deposit with the order. The photocopier will not arrive until February 1, 2008. The photocopier is payable in full upon delivery. The supplier will apply the deposit against the amount payable on February 1, 2008. The deposit will be subject to the 5% or 13% rate. (Rationale: GST/HST is payable on the earlier of the day of payment or invoice. 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 payment on the last day of each month for the following month. The charity pays rent December 31, 2007, for the month of January, 2008. The charity will pay the 6% or 14% rate, even if the payment is a day late, i.e. on January 1, 2008. (Rationale: The earlier of the agreement date or payment date is the date to consider. Payment is due before January 1, 2008. 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 January 1, 2008, 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 or 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 5/105 and/or 5/113 will have to be used in place of the current 6/106 and 6/114 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 January 1, 2008, (i.e. taxed at the current tax rates) separately from those paid after January 1, 2008, (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 or 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 January 1, 2008, in order 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 5/105 and/or 13/113, as applicable. Note that for reimbursements paid on or after January 1, 2008, these factors will change to 4/104 and/or 12/112, 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. For allowances a charity using the simpler method would multiply the amount of the allowance by the current factor of 6/106 and/or 14/114, as applicable. Note that for allowances paid on or after January 1, 2008, these factors will change to 5/105 and/or 13/113, 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 for 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 ITC's 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 employees. Charity A will be deemed to have paid tax at the 6% or 14% rate if the charity pays the allowances before January 1, 2008, and at the 5% or 13% rate if the allowance is paid on or after January 1, 2008.

If the gas allowance was $100, the deemed GST portion is 6/106 ($5.66) or 14/114 ($12.28) if paid before January 1, 2008, but 5/105 ($4.76) or 13/113 ($11.50) if paid on or after January 1, 2008.

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 $2.83 or $6.14 on allowances paid before January 1, 2008, and $2.38 or $5.75 for allowances paid on or after January 1, 2008.

For more information see CRA's GST/HST Notice at http://protos.cch.ca/tax/docs/gsthst/rcpub/otherccrapublications/071113Notice226-e.pdf

and CRA's December 17, 2007 News Release at http://www.cra-arc.gc.ca/newsroom/releases/2007/dec/nr071217-e.html

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