….for Canadian charity and NPOs

Unique GST/HST for NPOs and charities

As Canadians we are all expected to pay our share of taxes

and to take the necessary steps toward ensuring that we file

under the correct tax bracket, income category and so forth.

While privately owned businesses and commercial enterprises

encompass a set of tax rules and regulations that are more

complicated than personal tax, GST/HST as it relates to

not-for-profit organizations (NPOs) and charities can be even

more complex. Being uninformed about these complexities

can unfortunately result in lost opportunities, or worse, large

tax assessments against the organization or its directors.

Luckily, there are solutions to even the most complicated tax

situations. In the case of GST/HST filing for NPOs and

charities, there are a number of ways in which tax burdens

can be lifted and refunds increased; it often takes the right

combination of research, fastidiousness and awareness of

how our tax system affects your particular organization. The

results can lead to minimized exposure to tax liabilities and

maximum results in recovering overpaid taxes.

NPOs versus registered charities

A good place to start is to define some of the ways in which a

charity differs from an NPO in terms of Canada’s Excise Tax

Act. There is a general assumption that revenue earned by

both types of organization are exempt, and while this is true

in many cases, there are exceptions.

Revenue earned by a charity is generally exempt from GST/

HST unless certain, specific exclusions apply. For example, the

sale of new (versus donated) goods would not be exempt.

Contrarily, the revenue earned by NPOs is generally taxable

and subject to GST/HST unless specific exemptions apply.

The sale of goods at or below direct cost is one such

exemption and would not be subject to tax. Sometimes the

same supply, such as the rental of a facility, is treated

differently depending on whether it was provided by a charity

or an NPO. If a charity rents a hall for a wedding the supply

would be exempt, whereas if an NPO rents the same facility it

would be considered taxable.

Canadian tax rules change frequently, and experience has

shown that each NPO and charity should have its own review

to determine how its activities affect its resulting GST/HST

compliance.

Case Study

A not-for-profit in New Brunswick, with an annual budget

of $3 million, was being audited by the CRA. Slightly over

$15,000 in HST owed on taxable revenue was uncovered;

the NPO’s directors were unaware that tax was to be

collected and remitted on this activity.

An MRSB tax professional performed a risk-free tax

recovery review, primarily to review the auditor’s findings

but also to look at the NPO’s compliance system to see if

any efficiencies could be found.

Although the CRA’s findings were accurate and the NPO

did have to remit HST, the recovery review also identified

ways to allocate expenditures between taxable and

exempt activities, as well as available elections pertaining

to capital property.

As a result, the NPO was able to apply for an $87,000 tax

refund for previous years, in addition to having an

updated tax compliance system that was projected to

save them $40,000 per year in the future.

Keeping abreast of and adhering to Canada’s complex tax rules can be daunting,

we know. Here are a few tips to help you maximize tax recoveries while minimizing

exposure to liabilities.

1. Identify and capture recoverable Input Tax Credits (ITCs) or rebates

GST/HST registrants may recover taxes paid on purchases and expenses related to commercial activities. There are

special rules that apply to charities who want to claim ITCs; these should be reviewed on the Canada Revenue Agency

(CRA) website or discussed with a tax professional. Particular attention should be paid to expenditures that are not

processed through your normal accounts payable system, such as direct bank payments (e.g. lease payments) or

employee reimbursements and allowances.

2. Find out if you are subject to ITC recapture rules

In HST provinces, large businesses and certain financial institutions are required to repay the provincial portion of HST on

some property and services. Luckily, not-for-profits and charities were left out of the scrum. Make sure you’re not

inadvertently recapturing provincial ITCs if you aren’t obligated to.

3. NPOs and charities can be entitled to higher Public Service Body rebates

There are certain instances where a charity can receive a higher-than-expected PSB rebate. For instance, a charity that

operates a qualifying care facility could be eligible for the higher rebate rate of 83% normally reserved for hospital

authorities.

4. Review your GST/HST accounting and allocation methods

Evaluate the benefits of opting in or out of a simplified tax accounting system or determining a cost allocation method,

which may simplify accounting and administration but reduce the eligible refunds and rebates. Regularly review ITC

allocation methods that allow you to maximize tax recovery while remaining fair and reasonable.

5. Recover HST paid in a higher-rated province

For example, after making a purchase in Nova Scotia, which has a 15% HST rate, and consuming the goods in Prince

Edward Island, which has a 14% HST rate, you may claim a tax rebate on the 1% differential.

Here are some common tax ’traps’ that can negatively impact your organization’s income tax system

and impede successful tax recovery. Understanding these pitfalls can save your organization tax

headaches down the road.

1. Complexity of NPOs and charities GST/HST treatment of revenues

For example, sponsorship payments, while generally not taxable when received by a not-for-profit, can be partially

taxable if some promotional benefits are made available to the sponsor. Some grants or donations can be taxable if the

donor receives property or services other than nominal value items such as pins, key chains, etc.

2. Funding from federal and provincial governments may be taxable

As a charity or NPO you may receive grants, contributions, subsidies, forgivable loans and similar payments. Usually,

when these transfer payments are made in the public interest or for a charitable purpose, they are not regarded as

payment for a supply and thus not subject to GST/HST. However, if there is a direct link between a payment received and

a supply provided, either to the grantor of the transfer payment or to a third party, the payment may be subject to

GST/HST.

3. 100% of GST collected in error must be remitted

If a charity collects GST/HST in error and retains 40% of the tax collected under special tax accounting rules, the Canada

Revenue Agency will nonetheless require 100% of the collected tax to be remitted.

4. You may be required to self-assess HST on inputs and transfers between provinces

If property or services are purchased in Ontario (13% HST) for consumption or use in PEI (14% HST), you may be required

to self assess the tax differential. This is particularly relevant if you are a multi-jurisdictional organization.

5. It’s to up the NPO or charity to charge correct GST/HST rates

In 2010 Canada’s Department of Finance made significant changes to the Place of Supply rules, which may have affected

the tax rate charged on certain supplies. For example, memberships and publications may yield a higher tax rate now

than before the changes.

For more information on how current GST/HST rules may affect your NPO or registered charity, contact

Martin Goguen, CPA, CA at martin.goguen@mrsbgroup.com.