Re: clarification of the Legislative Alerts and Briefing Note issued February 27, 2006 regarding whether CANARIE-funded projects are GST exempt and the apparent anomaly in CRA’s handling of these cases.
The rulings reflect the position of CRA's Appeals Branch as well as one court decision relevant to the issue. They indicate that these projects should be looked upon as GST exempt. They are indicative of how decisions should be made by CRA. The rulings are not necessarily reflective of the positions that may be encountered as individual auditors the review the claims, e.g. as exemplified by the subject of this alert discusses.
Additional information on this matter that might be helpful should a similar issue arise, is presented below.
Further to the our previous advisory concerning the possible Canada Revenue Agency (CRA) assessment of GST/HST on CANARIE research grants, we have identified several additional cases where the Appeals Branch of the CRA has actually vacated assessments in similar instances. Inconsistent treatment by CRA in their GST audits has created some confusion to CANARIE and to recipients of CANARIE funding as indicated by the recent alert.
Under a typical CANARIE funding agreement, CANARIE provides a financial contribution to a specific project. Under these agreements, Industry Canada pays allowable costs incurred by the project participants in the performance of the work without any profit or fee. The participants agree to repay this funding based on a royalty on all sales of products resulting from the agreement up to the value of the funding. From a GST/HST perspective the issue is whether or not this funding is subject to tax.
In a 1997 GST Application Ruling, CRA stated that payments made under a specific CANARIE funding agreement are considered a grant as set out in Technical Information Bulletin TIB-067: Goods and Services Tax Treatment of Grants and Subsidies, and are not consideration for a supply and are therefore not subject to GST. In June of 2000, a Notice of Decision was released by the Appeals Branch of the CRA rendering that there was no supply made between a project participant and CANARIE under a specific funding agreement since there is no direct link between the contribution and any supply that may be provided under the contribution agreement to the grantor.
Most recently in a Tax Court of Canada decision (County of Lethbridge et al v The Queen) the court rejected CRA’s administrative policies in this area as outlined in TIB-067. The court stated, “If the Bulletin presumes to explain the doctrine of "consideration" under the common law of contract it is in failing competition with a host of educated authors of books on that subject matter.... The test to be applied is not whether there is a “direct link”. This rhapsodic venture into a mire of possibilities is foreign to the common law concept of contractual consideration.”
Given the recent jurisprudence, the 1997 CRA GST ruling on this issue and the Appeals Branch decision not to uphold these assessments, one would hope that CRA would be more careful not to incorrectly assess recipients of CANARIE funding and to communicate the positions taken by CRA’s Appeals Branch more effectively to their GST audit colleagues.
Russ Roberts, Senior Director
Deloitte & Touche LLP