Organizations in the not-for-profit sector have been under significant financial stress as a result of COVID-19. For many organizations, sources of revenue have been declining while demands on these organizations’ resources have continued or increased, particularly in the areas of health care, housing and other support for the most vulnerable members of our communities.
The impact of the approaches described below to generate or preserve cash flow and reduce compliance risk may differ based on the category of non-profit entity and its particular circumstances. This may be due to differences in an organization’s eligibility to claim relief or recover sales tax on its costs, to charge and collect tax on sales and its approach to accounting for tax in your organization’s returns.
Timing of invoices issued to customers
Indirect taxes generally are required to be reported in the period in which they are invoiced. This is the case for organizations in both the for-profit and not-for-profit sectors. Also, suppliers are required to remit these taxes even if the invoice amount and taxes have not been collected from the customer. This is subject to the various indirect tax filing and payment extension deadlines announced by the applicable government authority in view of COVID-19.
Suppliers can take steps to reduce their risk of having to remit indirect tax with their own funds for customers that may otherwise be late in paying. These include invoicing customers as early in their indirect tax reporting periods as possible, and offering customers early payment discounts. These actions can help suppliers receive payment before the indirect tax needs to be reported or remitted.
Bad debt write-offs and indirect tax recoveries
As the economic fallout from the pandemic continues, there will be an increase in bad debts. The special rules for recovery of GST/HST, QST and PST when a bad debt is recognized generally apply to organizations in both the for-profit and not-for-profit sectors. However, there are exclusions for this relief for organizations using a simplified method of tax accounting.
Organizations that invoiced and reported indirect taxes charged to customers who default on payment of those invoices and the related taxes, may be eligible to recover GST/HST, QST and PST when the bad debt is recognized. When making these claims, it is important to ensure that sufficient evidence is maintained to support your organization’s claims that the debt is, in fact, uncollectable in accordance with the different indirect tax laws.
Indirect taxes on payment deferrals and relief
As a purchaser or tenant on the one hand or a supplier or landlord on the other hand, your organization may have been either receiving or making deferred payments for goods, rent or services to preserve short-term liquidity. As contracts and agreements are changed to account for deferrals of payment, it is important to consider the effect these adjustments have on GST/HST, QST and PST.
In instances when deferrals are structured to postpone the payment of consideration for a taxable sale or rental and the vendor’s or landlord’s obligation to collect and remit indirect taxes, the deferral generally will also postpone the purchaser’s or tenant’s entitlement to input tax credits (ITCs) and input tax refunds (ITRs) under the GST/HST and QST respectively, or public service body (PSB) rebates.
On the other hand, an arm’s length agreement by a supplier or landlord and the purchaser or tenant to relieve all or a portion of the consideration for a taxable sale or rental will relieve the applicable GST/HST and QST or PST. It is important that such arrangements are documented for indirect tax purposes.
For example, the federal government and participating provinces introduced the Canada Emergency Commercial Rent Assistance (CECRA) program to relieve a portion of rent on certain commercial leases. It is necessary to consider the application of GST/HST and QST to commercial lease assistance in which the landlord has applied for relief under the CECRA program.
Compensatory payments for cancelled contracts
Organizations facing difficult decisions may choose to cancel or alter contracts that were entered into before the COVID-19 outbreak. Certain compensatory payments may be deemed to include GST/HST and QST and should be accounted for accordingly. Recipients of such payments may be required to remit GST/HST or QST in respect of the payment. Conversely, persons making these payments may be entitled to claim ITCs and ITRs or PSB rebates to recover GST/HST and QST deemed to be included in the compensatory payment if certain criteria are met.
When entering into any new agreements in which a compensatory payment is expected to be made or received, the indirect tax implications should be considered by the organization prior to concluding the agreement. This will help prevent surprises.
Organizations should also consider whether a deposit or down payment is an indirect-tax inclusive amount or simply not subject to an indirect tax when the payment is made to a supplier. Depending on the type of transaction, these payments may include GST/HST and QST and may entitle the person making the payment to ITCs, ITRs or PSB rebates.
Refundable GST/HST and QST
For GST/HST and QST payable to vendors on operational inputs during this time when revenues and cash flow are stretched, it is particularly important that eligible organizations ensure that the associated ITCs and ITRs or PSB rebates are being claimed on a timely basis. Organizations in a net refund position should file their returns and rebate claims as soon as possible or even increase the filing frequency to monthly.
There are a number of rebate programs that could apply to organizations in the not-for-profit sector. The main program of interest to registered charities, public institutions and not-profit organizations is the PSB rebate program.
If your organization is registered for the GST/HST or QST and qualifies for a rebate, such as the PSB rebate, the rebate amount should be deducted from the net tax on your GST/HST or QST return. This can either reduce the amount of net tax you are required to remit or increase your overall refund.
In addition, the following should be considered for purposes of determining an organization’s eligibility for PSB rebates as well as maximizing the organization’s recoveries under this program:
- Has eligible government funding increased as a percentage of your organization’s total revenue in a fiscal year so that the organization is a qualifying non-profit organization?
- Is your organization claiming the maximum rebate rate based on the status of the organization and the nature of its activities? For example, a non-profit organization that operates a health care facility such as a long-term care home may increase its GST recovery rate for health care facility operator costs from 50% to 83%.
- Is the GST/HST and QST paid being properly identified and captured by your organization’s systems and procedures for purposes of claiming the PSB rebate?
- If eligible, should your organization adopt the simplified method of claiming the PSB rebate so that the organization will not have to track the tax paid on each invoice?
Other rebate programs with particular application to organizations in the non-profit sector that should not be overlooked include rebates for:
- printed books
- administration of legal aid plan
- vehicles adapted for persons with disabilities
- exports by a charity or public institution
- property or services removed from a participating province, such as where goods are acquired in an HST province (i.e., Nova Scotia with an HST rate of 15%, and removed for use in an HST province with a lower provincial rate like Ontario, or a GST province such as Alberta)
These rebate programs present opportunities to reduce your indirect tax costs. In particular, as PSB rebate claims may be filed up to four years from the claim period in which you incurred the expense it may be worthwhile to review past purchases to help ensure that recoveries were not missed.
Changes in your mix of commercial and exempt activities
Subject to the nature of your activities, the status of your organization and the special simplified GST/HST and QST accounting rules discussed below, your organization may be entitled to claim ITCs or ITRs to recover the GST/HST and QST, respectively, on costs to the extent they are incurred in the course of an organization’s commercial activities. The PSB rebates discussed above may be available for the GST/HST and QST on costs incurred in your exempt activities.
If the organization has undergone changes in the mix of its commercial and exempt activities as it adapts to the economic dislocations caused by COVID-19, it may be appropriate to review the approach to allocating GST/HST and QST taxable costs between taxable and exempt activities. This review should include the allocation of general operating and overhead costs as well as capital costs to taxable and exempt activities. In particular, special rules apply to costs used in a combination of taxable and exempt activities. This could be the case with common overhead costs or capital property.
If you believe there has been significant changes in the mix of your organization’s commercial and exempt activities, a review of any possible increased recoveries or liabilities should be considered.
Simplified accounting methods for GST/HST and QST
Organizations in the not-for-profit sector that are also GST/HST or QST registrants should consider the application of simplified methods of accounting for the tax. In the case of the simplified net tax calculation method for charities, this approach is generally mandatory.
However, it may be possible for the charity to elect out of this method if it makes supplies outside Canada, has zero-rated supplies or significant taxable supplies, thereby increasing recoveries of GST/HST and QST. In the case of the special quick method for other not-for-profit organizations, electing into this method will reduce compliance costs and complexity; and possibly increase overall recoveries of tax, depending on the organization’s specific circumstances.
Given the increased pressure on staff and budgets, these are considerations that may be worth reviewing now.
Election to treat real property taxable
Certain PSBs may determine that it is worthwhile to file an election to treat their sales and leases of real property as taxable, thereby increasing their recoveries of GST/HST and QST on related costs, including both operating and capital costs. This would be most feasible when the purchaser or tenant is a GST/HST or QST registrant and is therefore eligible to recover the GST/HST or QST on the sale or rental by the PSB.
Taking advantage of GST/HST, QST and PST relief on purchases
The GST/HST and QST are broadly based sales taxes, applying to most goods and services supplied in Canada. However, there may be certain provisions that relieve the GST/HST and QST (either by way of zero-rating[1] or exemption) when acquired by a PSB in its particular circumstances. Such relief could include certain drugs and medical devices, services provided by health care professionals, food and beverage services for health care facilities and subsidized household and personal care services.[2] This is significant in the case of PSBs because they may not be entitled to recover all of the tax they pay in their exempt activities.
If the GST/HST or QST is charged and collected in error on these purchases, the PSB may be entitled to request a credit from their suppliers or claim a rebate for the overpayment of tax within two years of the payment of the tax.
The PST provinces also have certain exemptions available at the point of sale where the tax does not apply to the customer provided various criteria are met.
Organizations that are paying PST on purchases should consider if exemptions are available at the time of purchase. Depending on the province, there can be numerous exemptions or situations where a supplier has charged PST on an input that was non-taxable. For example, for British Columbia PST, there are various exemptions for health and medical products and equipment for persons with disabilities.
Documentation to support the relieving provisions may need to be provided to the supplier. Organizations may want to consider conducting a review to determine instances when refunds of GST/HST, QST or PST were not claimed on overpaid indirect taxes. The review should include processes to help ensure that your organization is able to take advantage of indirect tax relief up-front with suppliers going forward.
Summary
In view of the stresses on revenue and resources, this may be an appropriate time to consider how cash flow and liquidity relating to indirect taxes may be maximized and compliance risks reduced.
At RSM, we understand. We’ve been helping organizations like yours manage their indirect tax concerns for decades. We have the experience and resources to help you plan, implement and maintain proactive indirect tax strategies that take full advantage of planning opportunities and mitigate compliance risks. If you’ve got questions we are here, ready to talk, and help you and your organization. Contact us today.
[1] GST/HST and QST apply at the rate of 0%.
[2] These examples are illustrative, they are not conclusive and may be subject to particular conditions and circumstances.
