GST and HST: A Common Pitfall for Nonprofits
Does your non-profit organization (“NPO’s”) earn revenue from memberships? If so, you should be aware of the potential pitfalls with respect to the GST/HST system. Informally, the Canada Revenue Agency’s (“CRA”) audit division has many subject matter experts (“SMEs”) that have been busy reviewing various NPO’s GST/HST treatment over the last several years. We know that at least 70% of those NPO’s reviewed or audited by the CRA have been found to be non-compliant in a variety of ways.
Many of the errors found related to various types of youth sporting or athletic associations and other NPO’s (charities have similar rules) that provide memberships in programs or provide instruction services in various recreational pursuits ranging from athletics to music, dance, arts, crafts or other hobbies. In the course of recently working with an NPO client on this issue, we also learned that the CRA is actively looking for such NPO’s that should be registered for GST/HST but are not yet registered.
Other errors could relate to other memberships that NPO’s supply to their members, such as professional or trade organizations (excluding most union dues) or pretty much any other NPO membership fee charged to members on a periodic basis. Such memberships are not the focus of this blog, but we hope to cover the related GST/HST issues in a future article, given the number of complexities with those rules for non-charity NPO’s.
What are the GST/HST issues with membership in NPOs?
There are a few key GST/HST issues that NPO’s may not get right with respect to the rules related to exemptions from GST/HST in connection with various recreational activities. Below we provide the background on the criteria that must be met, in order for certain NPO’s to treat their membership revenues as exempt from GST/HST.
Firstly, a supply of a membership in, or services supplied in connection to, a program involving athletics, etc. must be made by a public sector body, which includes a NPO (excluding charities) as defined in the GST/HST legislation under the definition of “public service body”.
Secondly, the NPO must establish and operate the program, which involves a series of supervised instructional classes or activities pertaining to athletics, recreational pursuits, etc. Therefore, if the NPO did not establish and also operate the programs or classes, the NPO would not meet this condition.
The third key condition that seems to cause the bulk of the uncertainty and issues, is that the classes or activities be classified according to either the nature of the classes or activities, or by the relevant skill or ability required to participate, such that children primarily (>50%) aged 14 and under could participate. The exemption rule contains the phrase “may reasonably be expected”. This terminology seems to contemplate that the “program” that was established and operated by the NPO meets these conditions throughout the duration of the classes and activities under the program.
How do you fix GST/HST issues for NPOs and Charities?
If any of the conditions above are not met, then GST or HST applies and if the NPO has total taxable supplies (including other revenue sources) of its own or any other associated persons (including individual divisions such as sports teams under its umbrella) exceeds $50,000 in any four rolling consecutive calendar quarters, the NPO must register and collect the tax on all taxable revenue sources going forward.
If the NPO has exceeded the $50,000 threshold at some time in the past (perhaps over a 3-or-4-year period), it risks being assessed by the CRA for GST or HST not collected along with penalties and most recently, very punitive arrears interest of 10%. Fortunately, there may be some relief for GST or HST paid on operating and capital costs, that can offset a portion of the assessment of tax on such taxable revenues.
Once registered and collecting the applicable tax on the memberships, etc., and all other taxable revenues, the NPO can also claim back as refunds, some or all GST/HST paid on taxable operating and possibly capital costs directly related to the taxable revenues. If the NPO only makes taxable supplies, it can generally claim the full amount of GST/HST paid to operate.
If the NPO has some amount of GST/HST-exempt revenues, it cannot claim any GST/HST directly related to such revenues. However, if an operating input or expenditure relates partly to taxable revenue and partly to exempt revenues, the NPO may be able to claim a portion of the GST/HST paid as refunds (also known as input tax credits) on its GST/HST return.
For inputs and expenditures that relate to both taxable and exempt revenue sources (e.g., certain professional fees, office rent, etc.), apportioning the GST/HST paid for input tax credit (“ITC”) purposes is somewhat of an art vs. science. As long as the approach derived is consistently applied during a fiscal year of the NPO and is considered “fair and reasonable” by CRA, the ITCs claimed should be allowed. The pro-rating approach should be easily implementable and not so complex that the accounting cannot be managed, while also maximizing the ITCs.
What if we are already charging the tax?
This is a great start, but if the revenue source(s) are actually exempt from GST/HST, then some or all of the ITCs claimed could be denied in an audit situation. Simply because an NPO charges and reports GST/HST on a revenue source that is actually exempt, does not automatically mean that ITCs can be claimed.
In such a situation, the NPO still has to remit the GST/HST it collected in error on one or more taxable revenues, but also could lose some or all of its ITCs, resulting in a type of “double jeopardy”. Such an assessment by CRA could result in significant hardship for an NPO, especially in HST provinces where the tax rates are more than double the GST. However, it may be possible to side-step this problem by using a special GST/HST election form, which can deem some or all, otherwise exempt memberships, to be taxable and subject to GST/HST.
What are other GST/HST considerations for NPOs?
Some other things for NPO’s to think about, include whether some (or possibly all) of the GST/HST they pay to operate, is eligible for the GST/HST public service bodies rebates. If no ITCs can be claimed and an NPO is eligible (e.g., receives sufficient “government funding”) it may be able to claim rebates for some or all of the GST/HST paid to operate. There are various types of NPO’s that may be eligible for these rebates, which can rebate (vs. refunds like ITCs) from 50% up to 100% of the GST/HST paid.
Certain NPO’s have other divisions (think of a minor sports association and its teams/leagues that form part of it) in addition to the main body of the organization. Such teams may have their own separate revenues such as various types of fund-raising, equipment or swag sales, grants/subsidies, etc. If any of these revenue sources are subject to GST/HST, the NPO must report and remit the applicable tax on its GST/HST return.
In most cases, these divisions are considered part and parcel of the NPO and share the $50,000 taxable supplies threshold. However, there is a potential relief mechanism for such NPOs and their “divisions” such as teams, etc., where the NPO can apply to the CRA, to have these “divisions” each treated as separate entities that have their own $50,000 taxable revenues threshold.
As such, if the NPO main body is required to register and is over the $50,000 taxable supply threshold in its own right, each division’s taxable supplies (if any) would not be subject to GST/HST, provided that each division does not exceed their own $50,000 threshold. The CRA may not necessarily grant the application for the “operating divisions” to be treated as separate entities that each have their own taxable revenues threshold. If so, then GST/HST must be collected and reported by the main NPO on taxable revenues of each division.
Takeaways for NPOs impacted by GST/HST
If you think that your NPO may be impacted by these rules or you’re maybe second-guessing what you may be doing now, consider reaching out to your financial advisor such as your CPA firm to get a second look at these issues. You can also do your own research on CRA’s website that contains a lot of good information and publications on these issues that are explained mostly, in plain language.
You can check out some of the links below, that are directed at NPOs, which can help you determine how these and other unique NPO rules, affect your organization.
GST/HST Information for Non-Profit Organizations – Canada.ca
Basic GST/HST Guidelines for Charities – Canada.ca
At Achen Henderson CPAs, we help you to take the complexity out of GST/HST and other sales or indirect taxes for NPO’s. Call us today for help getting your sales tax collection and reporting “on the mark”, so that you can rest easy by ensuring your organization is not offside with these indirect tax rules across Canada.
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