With the increase interest and involvement in social enterprise and other revenue-generating activities, charities are often unsure whether such revenue-generating activities requires them to collect and remit HST, similar to the for-profit sector. The following article discusses how HST affects charities, and specifically how HST affects charities that raise funds from social enterprise and other revenue-generating activities. It is important to note from the outset of this article that the HST treatment for non-profits that are not registered charities, for registered charities that are schools, hospitals or universities, and for social enterprises structured as for-profit corporations may be entirely different and this article will not apply to such organizations.
The general rule for charities is always that most supplies of goods or services are exempt from HST. The following are examples of exempt supplies for charities:
- most services;
- supplies of used or donated goods;
- short-term residential rental accommodation (unless an election is filed);
- supplies of food or beverages to seniors, underprivileged individuals, or individuals with a disability, under a program established and operated to provide prepared food to such individuals in their places of residence;
- parking space and facility rentals (unless an election is filed);
- catering services for private functions (for example, wedding receptions);
- property and services sold in the course of a fund-raising activity unless the goods or services are sold regularly or continuously throughout the year or the clients are entitled to receive these property or services regularly or continuously throughout the year; and
- tangible personal property (goods) and services that are sold for an amount that is not more than direct cost may also be exempt (direct cost exemption).
It is the last two exemptions and how they relate to revenue-generating or social enterprise activities that can often cause the most confusion. According to CRA, greeting cards sold only in the Christmas season and chocolate bars sold in an eight-week fund-raising drive are exempt; but goods sold year-round in a tuck shop and subscriptions to a regular magazine or newsletter are not exempt. The sales of the greeting cards and the chocolate bars would be exempt even if they are sold for more that their direct cost.
Added to the confusion are rules related to situations where the charity regularly provides employment or employment assistance to individuals with disabilities and supplies services that are performed by such individuals to clients. These supplies would usually be exempt (even if being provided for more that direct cost) but the charity can apply to CRA in writing to be designated for the purpose of having the supply of these services made taxable.
Oftentimes it is to the advantage of the charity for supplies of certain goods and services to be taxable because the HST on the inputs (goods and services purchased in order to provide the supplies) is considerable and if the supplies are not taxable the charity will only be partially compensated for the HST on the inputs through the public service bodies’ rebate. However, a charity cannot make a supply that is otherwise exempt taxable by simply charging HST – a situation we haves seen in a number of instances. If the supply is not taxable by virtue of the rules in the Excise Tax Act (remember the general rule that all supplies of charities are exempt) or by virtue of an election or a designation referred to above) and the charity charges HST, the HST will have been charged in error and can cause problems both in respect of the HST charged in error and in respect of the input tax credits also likely claimed in error.
Note also that when a charity is involved in revenue-generating activities, its status as an HST registrant or non-registrant may be relevant when the charity is seeking input tax credits. A charity need only register for the HST and become an HST registrant,if the charity provides taxable property and services in Canada and the charity is not a small supplier – charities are small suppliers if either their revenues from worldwide taxable supplies were $50,000 or less, or their gross revenue was $250,000 or less. Otherwise, a charity may choose to voluntarily register for the HST if the charity is a small supplier but wants to claim input tax credits. If a charity is an HST registrant, it must collect HST on all taxable supplies made in Canada and then report that tax by filing HST returns. If a charity is not an HST registrant, then it does not collect HST.
Before engaging in revenue-generating or social enterprise activities, charities should carefully consider how HST will apply to the supplies of goods and services through these activities and to the inputs they purchase in order to provide these goods and services. With CRA’s increasing audit activity in relation to charities, we are seeing many instances of HST charged in error or input tax credits claimed in error that could have serious financial consequences for the charities. The HST consequences of such activities are also an important factor in determining how to structure social enterprise activities – whether it make more sense to engage in such activities through a separate for-profit corporation. HST is adding another layer of complexity to the exercise of social entrepreneurship.