Charities are often unsure whether soliciting and accepting corporate sponsorships requires them to collect and remit HST, similar to what happens in the for-profit sector. The following article discusses how HST affects charities, and specifically how HST affects charities that solicit sponsorship money.
It is important to note from the outset of this article that the HST treatment for nonprofits that are not registered charities or for registered charities that are schools, hospitals or universities may be entirely different and this article will not apply to such organizations.
When to register for HST
A reminder—HST is the tax that was created by combining the provincial sales tax in New Brunswick, Nova Scotia, Newfoundland and Labrador, Ontario and Prince Edward Island with the federal Goods and Services Tax (GST). Currently, the rate of HST in Ontario is 13 per cent. The general rule for charities is that most supplies of goods or services are exempt from HST.
A charity must register for the HST and become an HST registrant only if it 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 acquire certain tax advantages, such as tax credits. If a charity is an HST registrant, it must collect HST on 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. There are exceptions for real estate property but that is beyond the scope of this article. When a charity is involved in sponsorships, its status as an HST registrant or non-registrant is only relevant when the charity is seeking rebates or input tax credits.
How corporations benefit
Corporate contributions not only assist charities that receive the funding, but corporations that support charities also receive benefits such as an improved reputation, increased brand awareness, and tax deductions. The word ‘sponsorship’ is not defined in the Income Tax Act or Excise Tax Act; however, the Canada Revenue Agency (CRA) has indicated that a sponsorship is a donation made by a business to a charity which in turn receives advertising or promotion of its brand, products or services. A sponsorship may not be a taxable supply and, thereby, subject to HST depending on the ‘nature and extent of the promotional benefit’ that the charity gives to the sponsor. The CRA explains this phrase using examples. The following (A and B) are examples of sponsorships that are not subject to HST:
A) A business financially supports a charity’s activity and in return, the charity promotes the business. For example, a charity organizes a baseball team and agrees to put a sponsor’s trade name on the team uniform. Another example is, a charity organizes a sporting event and publishes an acknowledgment of the sponsor in the sporting event’s program.
B) A charity receives funding and in return gives the sponsor the right to use the charity’s logo. For example, a corporation uses a national charity’s logo in the corporation’s advertising campaign.
The payments in the above examples are not considered to be payments for a property or service, and therefore are not taxable supplies subject to HST.
If the sponsor’s payments to a charity are primarily (over 50 per cent) given so the sponsor can be advertised on television, radio, magazines, newspapers, or other publications published periodically, then the CRA considers these to be payments for advertising services as opposed to payments for sponsorship. Nonetheless, when a charity provides advertising services, the services are generally exempt from HST because of the general rule exempting most supplies by charities.
How charities benefit
Charities that receive sponsorships from businesses will still be entitled to HST rebates or input tax credits. For non-HST registrants, the charity may claim the public service body rebate to recover a percentage of the HST that was paid on their purchases and expenses. If the charity is an HST registrant, then it can claim a public service bodies’ rebate for a portion of the HST (the federal portion) that was paid on eligible purchases and expenses. It may also claim input tax credits, depending on whether the purchases and expenses were incurred to provide taxable supplies.
Corporate sponsorships are a helpful source of funding for the charitable sector and most charities may solicit and accept these payments without HST consequences. As long as charities and their sponsors know the rules, they may reap the benefits of deducting a charitable donation or a sponsorship expense.
Karen J. Cooper is a partner with Carters Professional Corporation and practices charity and not-for-profit law in the firm’s Ottawa office. Formerly a Senior Rulings Officer with the Income Tax Rulings Directorate of Canada Revenue Agency, as well as former counsel for the Department of Justice in tax litigation. Ms. Cooper is a contributing author to The Management of Charitable and Not-for-Profit Organizations in Canada (LexisNexis Butterworths, 2009) and has been recognized as a leading expert in charity and not-for-profit law by Lexpert and The Best Lawyers in Canada. Ms. Cooper can be reached at kcooper@carters.ca.
