Charities, like many other organizations continue to struggle as the pandemic impacts their day-to-day activities. As expenses and costs continue to rise, many charities face an inability to operate fundraising events and meet with donors. Some charities may find it difficult to meet their cash-flow demands. A closer look at unclaimed Goods & Services Tax/Harmonized Sales Tax (GST/HST) rebates and even input tax credits (ITCs) may be an ideal way to generate some much-needed income into your charity.
We outline four cash flow improvement strategies that may help your charity find the cash it needs during these difficult times.
One of the best places to begin your search for tax savings and refunds is to do a deep dive into your own general ledger. Most services and property sold or leased by charities are exempt from GST/HST, meaning that charities do not need to collect tax on those revenues. Many charities have the false impression that they are not able to claim refunds of the GST/HST paid on purchases that support these sales and leases. However, these exemptions do not limit charities from recovering a portion of the GST/HST incurred on inputs to generate those revenues as charities are generally eligible to recover Public Service Body (PSB) rebates of a portion of the GST/HST incurred on purchases.
In one example, a charity that makes a $5,000 purchase and incurs $250 of GST should be eligible for a 50% PSB rebate of $125. Quebec Sales Tax (QST) rebates are also available, and PSB rebates in harmonized provinces such as Ontario provide additional recoveries. As a second example, a charity that incurred $5,000 in Ontario and paid $650 of 13% HST may receive a rebate of $453—which is a combined 50% federal GST rebate and 82% rebate of the Ontario provincial portion of HST.
Rebates on many purchases can be missed during the accounting entry process. These amounts can add up over time and may eventually become statute barred. Additional rebate amounts may be available in certain circumstances, such as property purchased and then exported out of Canada. A charity's eligibility for a rebate can be subject to many nuances—it is important to ensure the rules are understood and all rebates are recovered.
The Net Tax Calculation for Charities (NTCC) method is another area where charities often miss the opportunity to retain or recover cash. Charities that are GST/HST registrants and make taxable (non-exempt) sales and leases of property and/or services are subject to different rules than charities that are non-GST/HST registrants. Unless these charities elect to do otherwise, they are required to use the NTCC method to determine the amount of GST/HST to report. This includes charities that voluntarily register for GST/HST. However, several charities continue to use the traditional method.
Compared to the traditional method, the NTCC method can result in a net benefit to the charity when they have significant taxable revenues relative to its inputs. Charities using the NTCC method are required to remit only 60% of the tax collected on most supplies and are eligible for PSB rebates of the tax incurred on inputs. Note: Some supplies are still subject to full remittance.
The NTCC method results in an additional 40% of collected tax that the charity is eligible to retain as income, net of any ITC amounts not recovered by the rebate mechanism. Any capital and real property purchases used in 50% or more of the charity's commercial activities are eligible for full ITCs.
Charities demonstrating that 90% or more of their supplies are taxable can elect not to use the NTCC method. This will allow the charity to collect and remit tax and claim ITCs in accordance with the general GST/HST rules.
Electing out of the NTCC method can be advantageous or problematic for the charity. It may result in increased recoveries for some charities that can benefit from the increased recovery generated from claiming full ITCs. For other charities, losing the ability to retain 40% of the tax collected may negatively impact the charity's cash position.
Regardless of whether a charity uses the NTCC method or elects out, the charity should review the types of supplies it makes to confirm whether the supplies are taxable or can be deemed to be taxable. For the charities who have taxable supplies which constitute 90% or more of all supplies made, an analysis should be undertaken to confirm whether using the NTCC method is optimal or not.
Another often-overlooked opportunity for charities is their ability to elect to treat otherwise exempt sales or leases of real property (i.e., land and buildings) as taxable. Examples of exempt property are real property such as residential accommodation rented on a long-term basis. When electing to treat the real property as taxable, GST/HST must be collected on sales or rentals of this type of property. ITCs may also be available based on the percentage of use in commercial activities where the property is used at least 10% in commercial activities.
These two potential scenarios may apply to you.
- A charity is registered for GST/HST, acquires a building and leases it entirely to non-residential tenants. By treating the leases as taxable rather than exempt from GST/HST, the charity is then allowed to claim ITCs in respect of the acquisition of the property where all conditions are met. When considering a charity's eligible refunds, depending on whether the charity elects to not use the NTCC method, it will determine whether rebates or ITCs are available on on-going maintenance and utility costs. The result is often significant refunds to the charity.
- For charities contemplating selling real property, they can generally choose to treat an otherwise exempt sale of real property as taxable. By doing so, a charity may be able to free up all or a portion of the previously unrecoverable GST/HST that was embedded in its purchase price.
Missing Recoveries?
Navigating the GST/HST reporting requirements for charities is complex and missed recoveries are common despite best efforts of the charity. However, charities that have missed opportunities in the past may be able to recover certain amounts for up to four years prior when the tax became payable. To help minimize lost refunds by your charity, review your revenues to confirm whether they are taxable or exempt, ensure all rebates and ITCs are being claimed, and revisit net tax calculation options.
Provincial rules
In Quebec, the QST rules generally mirror the GST/HST rules, but not without nuance. The provincial sales taxes of British Columbia, Saskatchewan and Manitoba also have various exemptions where charities can find tax relief.
If you need help, BDO Canada's Indirect Tax team can assist by undertaking a comprehensive review of your sales and purchases to maximize sales tax recoveries. Reach out today.
Brian Morcombe, Partner, Indirect Tax Practice Leader
Jay Tulsani, Senior Manager, Indirect Tax
The information in this publication is current as of March 4, 2022.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.