When a supplier pays GSTH/HST on a property or service acquired for consumption, use or supply in the course of commercial activities, the supplier is entitled to claim an input tax credit (“ITC”) equal to the tax paid on expenses incurred:  see section 169 of the Excise Tax Act (“ETA”). 

“Commercial activity” excludes exempt supplies listed in Schedule V of the ETA.  (Suppliers that make exempt supplies do not charge and collect GST on their outputs, and are thus also ineligible to claim ITCs on inputs.)

This area has been ripe for recent assessments, with the CRA often struggling to determine whether exempt or commercial (taxable) supplies are being made.   In many instances, the CRA assesses suppliers making “exempt” supplies on the basis that their supplies are actually taxable, assessing large amounts for “GST not collect”:  see, for example, Applewood Holdings Inc. v. The Queen and Zomaron Inc. v. The Queen, the suppliers challenged the CRA’s conclusion of “taxable” supplies in the Tax Court of Canada (“TCC”), arguing that their services were in fact exempt financial services.  The suppliers won on “exempt” supplies argument at the court, thus, relieving them from any obligation to charge and collect GST/HST on their services.  (Note the possible downside of the “winning” such an assessment, as that usually leads to a denial of ITCs that may have been inadvertently claimed by the exempt supplier, which was highlighted in our prior blog on Applewood.) 

In other cases, the CRA makes a 180 degree-turn and takes the position that the suppliers providing “taxable supplies” (and collecting GST, and claiming ITCs) are in fact either not making supplies for consideration, or are making exempt supplies – in an attempt to deny the ITCs that have been historically claimed.   Such is the case in Canadian Legal Information Institute v. The Queen2020 TCC 56 (CanLII).

In the case, the Canadian Legal Information Institute (“CanLII”) was a not-for-profit corporation, established and funded by the Federation of Law Societies of Canada (the “Federation”), whose sole function was to operate a virtual law library which was freely available for both legal professionals and the general public. During the relevant period, CanLII charged, collected, and remitted GST/HST on the amounts received from the Federation, and attempted to claim ITCs on expenses paid to third-party service providers in relation to the operation of the virtual library. 

The CRA assessed CanLII, taking the position that CanLII provided the services for no consideration and, therefore made exempt supplies pursuant to section 10 of Part VI, Schedule V of the ETA.  As mentioned above, exempt supplies do not give rise to ITCs.   CanLII took the position that there had been consideration as the Federation was obliged to pay CanLII to operate the virtual library.  CanLII appealed to the TCC when its ITCs were denied by the CRA.

In determining whether CanLII’s supply was “taxable” or “exempt”, the TCC began by considering the definition of “consideration” in the ETA and confirmed that it was “not a restrictive or exclusive definition”.  After reviewing the caselaw (including Commission scolaire Des Chênes v. The Queen and Invesco Canada Ltd. v. The Queen), the TCC said that in order to be consideration, the amount must be payable “for a supply”, whether there is a contract or not.  The TCC concluded that although the payment amount was at the discretion of the Federation, there was an obligation on the Federation to pay CanLII for the supply and that there was a direct link between the Federation’s payment and CanLII’s supply of the virtual library.  The TCC further determined that even though the public also benefited from CanLII’s supply, this did not change the fact that CanLII had received consideration from the Federation to operate the service.  Accordingly, the TCC held that CanLII’s supply was taxable.

By way of commentary, the CanLII case is a good example of the tension between registrants and the CRA on characterization of a supply (i.e., “taxable” versus “exempt”).  For its part, the CRA has struggled with its views on publicly funded organizations, especially where those organizations provide free public goods.   For NPOs involved in exempt or commercial activities, “now” is always a good time to review GST/HST compliance!

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