Top Issues for Non-Profits: A Friendly GST/HST Reminder

As a non-profit organization (NPO) or a business dealing with an NPO, complying with goods and services / harmonized sales tax (GST / HST) requirements can be daunting. Taking for granted that managing GST / HST efficiently is relevant only for organizations and businesses involved in commercial activities would be a serious misconception.

In general terms, the first step in a review of the GST / HST obligations of a given organization is to make sure the organization is an NPO, rather than a registered charity for income tax purposes. From a GST / HST perspective, an NPO is also considered a public service body (PSB).

The next step is determining if you have to register for GST / HST. NPOs must register when they provide taxable supplies in Canada and exceed the $50,000 small supplier threshold.

Depending on their status, activities, and public funding they receive, PSBs, including NPOs, may be eligible for input tax credits (ITCs) and, in certain cases, GST / HST rebates.

Other than the overarching exercise of qualifying the status of the supplies made by NPOs and the recovery of taxes paid on their expenses under the GST / HST legislation, here are five key GST / HST issues NPOs commonly face.

1. GST / HST audits: The number one GST / HST issue for NPOs is not being prepared for an audit. Addressing the following issues prior to an audit will help reduce headaches on both sides.

   An audit will require qualification of supplies made and received by the NPO. How expenses are incurred needs to be clearly shown; are they incurred as principal or as agent, and are certain supplies resupplied, for example? The organization will also need to meet documentary requirements and will likely need to demonstrate its status as a “qualifying NPO.” If the NPO owns real property, the rate of such property used in commercial activity must also be determined.

2. Special quick method of accounting: An election must be entered into by qualifying NPOs for this method to be used. The idea here is to collect GST / HST at the usual rates but to remit net tax based on a prescribed percentage. The end result is remitting less than you collect but with limited ITC entitlement. ITCs can still be claimed but only on:
   • acquisitions of a capital property with a cost of $10,000 or more for use primarily in commercial activities; and
   • acquisitions of a real property or improvements to a real property.

   While this method is very beneficial to reduce the taxes that need to be remitted in certain circumstances, this method is neither quick nor simple. The ITC entitlement rules can be difficult to apply; the organization must determine if their supplies are eligible for the use of this method. If not, the full GST / HST needs to be remitted.

   NPOs still need to determine if ITCs can be claimed on certain supplies. They need to consider what rates they need to use (several rates may apply depending on the NPO’s status and where supplies are made) under this method. The relevant Excise Tax Act (ETA) regulations are somewhat complicated, and the information required to comply may not be produced in the organization’s or body’s accounting systems.

3. Real property: Issues NPOs need to consider in connection with real property they may own, construct, or renovate include the following:
   • Residential complex

   Construction and substantial renovations of a residential complex: The somewhat complex rules applicable to other taxpayers also apply to NPOs:

   • ITCs are claimed on taxes paid in respect of expenses incurred in the course of the construction of the residential complex;
   • Self-supply rules occur upon completion, determination of the fair market value of the property at that point and timing of the deemed supply are frequent issues looked into by the tax authorities; and
   • A GST / HST new residential rental property rebate may be claimed only if the NPO is not eligible for a public service bodies' rebate for the GST or federal part of the HST. An NPO in Ontario may meet the conditions for claiming both an Ontario new residential rental property rebate and a public service bodies' rebate of the provincial part of the HST.^[1]

   NPO rebate: Qualifying NPOs^[2], NPOs designated as a municipality for GST / HST purposes, and NPOs involved in certain other types of activities including universities, schools, hospitals, and charities, can claim a rebate related to GST / HST paid on property and services purchased on the construction and on substantial renovations of a residential complex. But they can claim it only if more than 10 percent of the accommodation is restricted to seniors, youths, students, or individuals with a disability or with limited financial resources who qualify for occupancy or reduced rents under a means or income test. The rebate rates vary and the concerned NPO needs to ensure their activities give rise to the rebate they are claiming.

   • Real property other than residential complexes

     Most supplies by way of sale, lease, license or similar arrangement of real property by NPOs other than municipalities are exempt. An NPO may elect on a property-by-property basis to have supplies of real property not be exempt. If this election is in effect, such supplies in most cases are taxable and, as such, ITCs may be available in connection with expenses incurred by the NPO in relation with such supplies.

     This election must be considered and reviewed carefully in situations where real property is used to a certain extent in the course of commercial activities by the NPO. For example if the percentage of commercial activities is 50 percent or less but more than 10 percent.

4. NPOs designated as municipalities: Certain NPOs may be designated as municipalities (para-municipal organizations) if they are involved in certain activities, including:
   • Residential services
   • Unbottled water
   • Rent-geared-to-income housing
   • Municipal transit services
   • Water distribution, sewerage, or drainage systems

   Being designated as a municipality can benefit NPOs as there is a 100-percent GST / HST rebate factor for designated municipalities. However, transactions between municipalities and para-municipal organizations also are mostly exempt from GST /HST and no ITCs can be claimed in connection with expenses incurred to make such supplies.

   The higher rebate rates and exempt supplies made to other cities / municipalities can be attractive, however, an analysis is required to determine if the pros outweigh any cons. The rebate rate for an NPO designated as a municipality will be 100 percent of the GST and, for the provincial component of HST, will vary according to where the expense is incurred and where an NPO is regarded as being a resident. Other factors may also apply regarding provincial public sector rebate entitlement.

5. COVID-related issues: The COVID-19 pandemic resulted in exceptional circumstances. This includes how NPOs provided property or services to the general public. For example, vaccination centers could have been installed in, or temporary homeless shelters made, on NPO properties.

   This pivot might result in a change in use for those properties from commercial to exempt use. The change in use rules generally applicable in such situations would oblige NPOs to remit taxes it had claimed previously, potentially resulting in significant cash outflows. However, NPOs will be eligible to claim ITCs at the time the real property is used once again in the course of the PSB’s pre-pandemic commercial activities. The net result may be important cashflow concerns for NPOs. No alleviating measures were provided by the tax authorities.

Taking the foregoing issues and concerns into consideration, it is obviously important for NPOs to consider how they manage GST / HST, whether they optimize potential savings or refunds, and whether they meet all obligations which they are subject to. Doing so will help NPOs stay on top of their GST / HST requirements and prevent incurring unnecessary costs from being non-compliant.

Contact us

For more information contact Nicolas Désy, LL.M, at 514.228.7897 or [email protected], or Kayla Seipp, CPA, CA, at 613.691.4203, [email protected].

References

[1] In this case, the NPO is entitled to claim either the Ontario new residential rental property rebate or the public service bodies' rebate of the provincial part of the HST.

[2] In general terms, this expression refers to an NPO or prescribed government organization whose percentage of government funding is at least 40% of its total revenue.