1) Knowing when to register for GST/HST
Understanding the nuances of GST/HST registration in the not-for-profit sector can have its challenges. GST/HST applies to most property and services that not-for-profit organizations (NPOs) supply. NPOs and charities have different requirements when registering for GST/HST, so it's important to know the differences. Our team has identified the top five issues NPOs and charities face in this area.
The following is an overview on how to gain a better understanding of accounting for not-for-profit organizations. Before we get into the top five issues, we'd like to outline some key definitions that will be mentioned throughout our discussion.
| Charity | Charitable organizations in Canada are registered under the Canadian Income Tax Act as either a charitable organization, public foundation, or private foundation. These organizations must use their resources for purposes that benefit the community; like poverty relief or advancement of education or religion. |
|---|---|
| NPO | Not-for-profit organization: An organization, association or club (that is not a charity) that exists for any reason except profit. (Ex. social welfare, civic improvement, recreation, etc.) |
| QNPO | Qualifying not-for-profit organization: An NPO whose percentage of government funding is at least 40% of its total revenue. |
| Small Supplier | NPO whose revenue from total worldwide taxable supplies is $50,000 or less in any single calendar quarter, and in the last four consecutive calendar quarters. |
| ITC | Input Tax Credit: A credit GST/HST registrants can claim to recover those taxes for property or services acquired or imported into Canada. |
| PSB | Public Service Bodies Rebate: A rebate of the GST or the provincial part of the HST paid or payable on eligible purchases and expenses if you are a charity, QNPO, or selected public service body. |
One of the primary issues our clients in this industry face is understanding when they are required to register for GST/HST. When an organization meets certain criteria, they are obligated to register. Sometimes organizations reach a point of making supplies in excess of the minimum threshold but don't realize it. That said, it's important to monitor your organization's status to avoid missing registration deadlines and complicating things further down the road.
NPOs and charities have different parameters to follow, both of which are highlighted below. Note that an NPO with branches or divisions must register as a single entity.
NPOs are required to register for GST/HST when:
- They provide taxable supplies in Canada
- They exceed the small supplier threshold of four consecutive quarters or in a calendar quarter
Charities must meet two tests before there is a requirement to register for GST/HST. The first is the $50,000 taxable supplies test for small suppliers, as stated in the glossary. The second is the $250,000 gross revenue test. This is when a charity's annual gross revenue is $250,000 or less. If a charity exceeds the $50,000 threshold of taxable supplies but is still under $250,000 annual gross revenue, they are considered a small supplier because only one test was sufficiently met. However, they need to meet both of these criteria to be able to register for GST/HST.
NPOs do not have to register for GST/HST if the following items put them over the thresholds:
- Sale of capital property
- Financial services
- Goodwill in sale of business
2) Distinguishing between NPOs, QNPOs, and charities
To know how to register your business, you must be clear on which structure it falls under. As defined in the glossary, a charity uses its resources for purposes that benefit the community (poverty relief, advancing education, support of religion). An NPO is not a charity and exists for reasons other than profit such as social welfare, civic improvement, recreation, etc.
A QNPO is a qualifying not-for-profit whose percentage of government funding is at least 40% of total revenue. Such government funding can be paid directly to the QNPO by a grantor or through another organization, referred to as an intermediary. When calculating total revenue on some amounts, you can deduct 25% to consider cost of things like fundraising, financial payments, private gifts and donations, and sponsorships.
3) Claiming Input Tax Credits vs. Public Service Bodies Rebates
Two common tax credits NPOs and charities can claim are ITCs and PSBs. Unlike registering for GST/HST, claiming these credits is done on a voluntary basis. Input Tax Credits (ITCs) are credits that GST/HST registrants can claim to recover taxes for their respective taxable activity. They can be claimed for purchases of real and capital property when more than 50% is used for commercial activities. As charities and QNPOs don't typically carry on commercial activities, they very rarely claim these credits. Moreover, NPOs without government funding can claim ITCs but not PSBs.
Receiving donations, grants, subsidies, and sponsorships does not affect an NPO's entitlement to ITCs. Moreover, employee reimbursements for taxable purchases are treated as including GST/HST. The employer can claim ITCs for the GST/HST component of these employee reimbursements where it relates to a commercial activity.
A PSB rebate gives back a portion of the GST (or HST, assuming certain conditions are met) paid or payable on eligible purchases and expenses if you are a charity, QNPO, or selected public service body.
When establishing the appropriate credit to apply for, it's important to determine what your respective business activity entitles your organization to. Once that's established, you can move forward in determining the rates you're entitled to.
4) Reporting using the special net tax method
Many organizations are unaware of the tax credits available to their type of business. Charities in particular are entitled to use the special net tax calculation method. This method is specific to a charity's structure. Charities that are GST/HST registrants are required to use this special net tax calculation. The step-by-step method can be accessed via Canada Revenue Agency.
Generally, you remit 60% of the GST/HST collected and only claim ITCs on certain items. You can claim the PSB rebate of the GST/HST paid or payable on your eligible purchases and expenses, for which ITCs cannot be claimed.
You can elect not to use the net tax calculation for charities if:
- You make supplies outside Canada
- You make zero-rated supplies in the ordinary course of your business
- 90% or more of your supplies are taxable
5) Which elements of fundraising are exempt?
Fundraising is any activity that includes a solicitation of present or future donations, or the sale of goods/services to raise funds for a charitable purpose. Only certain areas of fundraising qualify for HST registration.
Sales of goods (outside alcoholic beverages, tobacco, and cannabis) are exempt when:
- The organization is not in the business of selling those goods
- All salespeople are volunteers
- The sale price on each item is $5.00 or less
- Goods are not sold by people in the business of selling those goods
Other areas of fundraising exempt from HST:
- Revenues received from sales of lottery, break-open, and raffle tickets
- A sale of property or service by a public institution in the course of a fundraising activity, except when offered on a regular or continuous basis throughout the year
- Fundraising event tickets for admission to a dinner, show, or similar event for fundraising when part of the payment may reasonably be regarded as an amount that is donated to the institution
Please note that the above commentary should not be considered advice, as rules and regulations for NPOs and charities will differ based on industries and business models. This is intended as an opportunity to start a conversation with a BDO advisor to discuss details with your unique needs in mind.
Visit our not-for-profit resource centre for more insights and information to help your organization.