There are currently over 85 thousand registered charities in Canada. Every year, millions of people contribute both money and time to these charities, yet how Canada’s Goods and Service Tax / Harmonized Sales Tax (GST/HST) rules may impact these charities is often overlooked. The GST/HST rules that apply to charities can be significantly different from those for businesses. This article speaks to the fundamental GST/HST rules that are applicable specifically to charities.
What constitutes a “charity” for GST/HST purposes?
A charity for GST/HST purposes is a registered charity or a registered Canadian amateur athletic association, but does not include a public institution (that is, a registered charity that is a school authority, a public college, a university, a hospital authority, or a local authority determined to be a municipality).To become a registered charity, an organization must apply to the Canada Revenue Agency (CRA), and be approved for registration as a charity. To qualify for registration, an organization must meet the following criteria:
- The organization must be established and operated for charitable purposes (charitable purposes include the relief from poverty, the advancement of education, the advancement of religion, and certain other purposes that benefit the community);
- The organization must devote its resources (funds, personnel, and property) to charitable activities; and
- The organization must be resident in Canada.
Are properties and services provided by a charity subject to GST/HST?
While most supplies of property and services that are made by a charity are exempt from GST/HST, some are taxable. A charity that is registered for GST/HST is required to collect and account for the GST/HST on its taxable supplies. A charity that is not required to register for GST/HST is not required to collect the GST/HST on its taxable supplies.
Taxable supplies are supplies of property and/or services made in the course of a commercial activity in Canada. Taxable supplies made by charities may include the sale of new goods that the charity bought, manufactured, or produced to resell, or may even include admissions to a place of amusement such as a museum, recreational complex, or theatre. A detailed review of all supplies provided by a charity should be conducted in order to appropriately determine if any of the supplies provided constitute taxable supplies.
When is a charity required to register for GST/HST?
Generally, a charity is only required to register for GST/HST purposes if it provides taxable supplies, and it meets the following two tests: it has greater than $250,000 of gross revenue (includes business income, donations, grants, gifts, investment income, etc.) in a fiscal year, and greater than $50,000 of taxable supplies in the charity’s last four calendar quarters.
Normally, a charity that is registered for GST/HST must calculate its net GST/HST tax by using the “net tax calculation for charities”. A charity that uses the net tax calculation for charities method must remit 60% of the GST/HST it collects on most of its taxable supplies, and it must not claim ITCs for the GST/HST paid on most purchases. The net tax calculation for charities simplifies the way charities calculate their net GST/HST tax as it generally removes the need for charities to allocate their purchases and expenses in relation to their taxable supplies and exempt supplies.
If a charity is already registered for GST/HST purposes, and subsequently determines that it is not required to be registered, the charity can ask to have its registration revoked by submitting a request to the CRA.
How does a charity recover the GST/HST paid on its expenses?
Businesses must pay GST/HST on its business purchases and expenses. The GST/HST paid by businesses can generally be recovered by claiming an input tax credit (ITC). Similarly, charities must also pay GST/HST on its purchases and expenses, however, a charity that is registered for GST/HST, is limited in the ITCs that it can claim because of the net tax calculation for charities that it must use. Charities registered for GST/HST can claim ITCs only on certain items, such as the GST/HST paid or payable on purchases of, or improvements to, capital property that is used primarily in its commercial activities.
Where ITCs are not available, which may be the case when a charity is not required to be registered for GST/HST, or when a charity incurs expenses that relate to exempt supplies, charities can recover a portion of the GST/HST that has been paid on their eligible purchases and expenses by claiming a public service bodies’ (PSB) rebate.
The PSB rebate allows charities to recover 50% of the federal portion of the GST/HST paid on eligible purchases and expenses, and a percentage of the provincial portion if the charity is resident in a participating province (provincial rates vary by province). The Ontario PSB rebate rate is currently set at 82%.
Charities that are GST/HST registrants are required to file their PSB rebate applications with the same frequency as they file their GST/HST returns (monthly, quarterly or annually). In contrast, charities that are not GST/HST registrants can file two PSB rebate applications per fiscal year. A non-registrant has up to four years from the last day of the claim period to file a PSB rebate application.
As this article provides only a brief summary of some of the key GST/HST rules applicable to charities, it is important for charities to be aware of any GST/HST obligations and benefits available to them. We encourage you to contact your Crowe Soberman advisor to assist you in thoroughly assessing the potential implications of any of the GST/HST rules discussed herein.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.