Determining Whether a Transfer Payment is Consideration For a Supply

GST/HST Memorandum 18-4
June 2022

This memorandum cancels and replaces GST/HST Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies, and GST/HST Policy Statement P-061, Extension of Transfer Payment Policy.

This memorandum explains how and when the GST/HST provisions of the Excise Tax Act apply to transfer payments. It sets out the Canada Revenue Agency’s (CRA) administrative guidelines for determining when a transfer payment provided by a grantor is consideration for a supply made by the grantee.

Except as otherwise noted, all statutory references in this publication are to the provisions of the Excise Tax Act (ETA). The information in this publication does not replace the law found in the ETA and its regulations.

If this information does not completely address your particular situation, you may wish to refer to the ETA or relevant regulation, or call GST/HST Rulings at 1-800-959-8287 for additional information. If you require certainty with respect to any particular GST/HST matter, you may request a ruling. GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, explains how to obtain a ruling or an interpretation and lists the GST/HST rulings centres.

If you are located in Quebec and wish to request a ruling related to the GST/HST, please call Revenu Québec at 1‑800-567-4692. You may also visit the Revenu Québec website at revenuquebec.ca to obtain general information.

For listed financial institutions that are selected listed financial institutions (SLFIs) for GST/HST or Quebec sales tax (QST) purposes or both, whether or not they are located in Quebec, the CRA administers the GST/HST and the QST. If you wish to make a technical GST/HST or QST enquiry related to SLFIs, please call 1-855-666-5166.

GST/HST rates

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province.

Meaning of significant terms
Overview
Direct link between the transfer payment and the supply
- Terms of an agreement that may indicate a direct link
Nature and mandate of the grantor
Purpose of a transfer payment
- To financially support an activity
  - Indicators that a transfer payment is to financially support an activity
- To acquire property or services
  - Contracting out
  - Indicators of an input to the grantor’s activities/contracting out
Accountability measures and measures that are ancillary to the main purpose of the transfer payment
- Measures undertaken for accountability purposes
- Measures that are ancillary to the main purpose of the transfer payment
Summary of indicators to determine the existence of a direct link
Transfer payments passing through intermediaries

Meaning of significant terms

1. Transfer payment includes grants, contributions, gifts, subsidies, financial assistance and other similar payments made by a grantor. These payments are provided for many reasons ranging from money given to an individual by a charity to buy food or clothing, to government funding for major projects.

2. Grantor means a person who is providing a transfer payment, including a government, public service body, private-sector commercial organization or individual.

3. Grantee means the person to whom a transfer payment is provided. For purposes of this memorandum, it is assumed that grantees that are making taxable supplies are registrants.

4. Specified third party means a person, other than the grantor or the grantee, specifically identified by the grantor.

Overview

5. In general, a transfer payment is not consideration for a supply. As a result, such transfer payments will not be subject to the GST/HST and a grantee will not be required to collect the GST/HST on the receipt of such transfer payments. However, there may be circumstances in which a transfer payment is consideration for a supply, and consequently the GST/HST may apply to the payment. A number of issues must be considered and addressed to determine whether a transfer payment is consideration for a supply, and these issues are explained in this memorandum.

6. The GST/HST consequences related to the payment or receipt of a transfer payment will depend on whether a grantee is making a supply in respect of the transfer payment and whether the supply is a taxable supply. If a grantee is not making a taxable supply in return for the transfer payment, the grantee does not collect the GST/HST on the transfer payment.

Although a payment is transferred from a grantor to a grantee, the transfer of the payment is not, in itself, a supply of property or a service.

7. If a grantee is making a taxable supply, then one must establish if there is a direct link between the supply and a transfer payment in order to determine if the transfer payment is consideration for the supply. Where a direct link exists, the transfer payment is consideration for that supply. Where there is no direct link, the transfer payment is not consideration for a supply and, therefore, the supply is not subject to the GST/HST. For more information on what constitutes a direct link between a transfer payment and a supply, refer to paragraphs 13 to 35 of this memorandum.

8. A transfer payment will not be determined to be consideration for a supply solely because the transfer payment agreement requires a grantee to provide a grantor with reports or documents accounting for the way in which the transfer payment is spent, or because a term or condition of the agreement results in a supply that is ancillary to the main purpose for making the transfer payment. For more information on accountability measures and measures that are ancillary to the main purpose of the transfer payment, refer to paragraphs 36 to 38 of this memorandum.

9. Under the terms of a transfer payment agreement, a grantee may use a transfer payment to provide property or services to a third party. In this case, if the property or services are provided to a specified third party (for example, if the transfer payment agreement requires the grantee to provide training to individuals named by the grantor), a direct link may exist between the transfer payment and the provision of property or services and the transfer payment may be consideration for the supply made by the grantee.

10. A transfer payment that is not consideration for a supply should maintain this status regardless of the number of intermediaries through which it passes. However, a direct link analysis will have to be undertaken each time a payment is transferred from one intermediary to the next and to the final grantee to ensure that no direct link exists between the transfer payment and a supply made by the grantee or an intermediary to the original grantor, an intermediary or a specified third party. For more information on transfer payments passing through intermediaries, refer to paragraphs 40 to 42 of this memorandum.

11. The GST/HST applies only when a transfer payment provided by a grantor is consideration for a taxable supply made by a grantee.

12. There may be cases where a transaction between a grantor and a grantee consists of several elements. Refer to GST/HST Policy Statement P-077R2, Single and Multiple Supplies, for guidance on determining whether a transaction consisting of several elements is a single supply or two or more supplies.

Direct link between the transfer payment and the supply

13. The most critical step in the analysis to determine if a transfer payment is consideration for a supply involves establishing whether a direct link exists between the transfer payment provided by a grantor and a supply made by a grantee.

14. Generally, there is a direct link between a transfer payment provided by a grantor and a supply made by a grantee if the payment directly results in the provision of property or a service (other than for accountability or ancillary purposes) by the grantee to the grantor or to a specified third party.

15. If there is no direct link between the transfer payment and a supply made by a grantee, the transfer payment is not consideration for the supply. If a direct link exists between the transfer payment and a supply, the transfer payment is consideration for that supply.

16. A direct link between a transfer payment and a supply may not always be apparent. Therefore, it is necessary to consider the complete set of facts for each case (for example, the terms of the agreement(s) between the parties, the conduct of and relationships between the parties, and the program objectives or policy statements of a grantor).

17. In addition, any legislation or by-laws under which a transfer payment is authorized should be reviewed along with any other documents that govern the provision of the transfer payment. Payment documents, reports and any other applicable documentation should also be reviewed. However, the form or content of the payment document or the basis upon which the payment is calculated (for example, an invoice based on a unit price, a reimbursement claim or a request for an advance under a contribution agreement) does not in itself determine the existence of a direct link.

18. The form of the written agreement for the provision of a transfer payment (for example, contract for service versus contribution agreement) should not be the sole determinant of whether a direct link exists between the payment and the supply of property or a service.

Terms of an agreement that may indicate a direct link

19. The following are examples of terms and conditions in a transfer payment agreement that may result in a determination that supplies are directly linked to the transfer payment:

a grantee provides a grantor with the exclusive right to use the material produced as a result of the receipt of the transfer payment
a grantee agrees that a grantor controls the release of the material produced as a result of receiving the transfer payment (for example, the right to decide to whom a research report is released)
a grantee agrees to pay a grantor a certain portion or percentage of the income generated from the use of the transfer payment and this payment is not limited to the amount of the original transfer payment
a grantee agrees to provide a grantor with the exclusive rights to publish, distribute and/or publicize the results produced from the receipt of the transfer payment
a grantee agrees to provide a grantor with rights to intellectual property (for example, copyrights in respect of project results generated from the receipt of the transfer payment)

These terms and conditions must be viewed in the context of the whole transfer payment agreement.

Nature and mandate of the grantor

Public sector body or funding organization

20. The nature and mandate of a grantor are factors to be considered in determining whether or not a direct link exists between the transfer payment and a supply. If a grantor is a public sector body and/or a funding organization (for example, a Crown agency that subsidizes housing), this may be an indicator that no direct link exists between the transfer payment provided by a grantor and a supply made by a grantee. However, these bodies also acquire property and services for their own use and, therefore, this is only one factor to consider.

Private-sector commercial business

21. If a grantor is a private-sector commercial business, this may be an indicator that a direct link exists between the transfer payment provided by the grantor and a supply made by a grantee. However, even if a grantor’s main purpose is to make a profit, it may have a benevolent funding program/activity through which it provides funding to the general public or a segment thereof. In such circumstances, there may not be a direct link between the transfer payment and a supply where the funds are not provided to acquire property or services but are provided to financially support other persons or activities.

Example 1 – No direct link

Each year, a private-sector business provides a transfer payment to a children’s camp to subsidize camp fees for underprivileged children. The private-sector business receives nothing in return for the funding except a letter acknowledging its gift.

As neither the business nor a specified third party receives property or services in return for the transfer payment, there is no direct link between the transfer payment and a supply. Therefore, the transfer payment is not consideration for a supply.

Mandate to oversee or fund public programs

22. Where a grantor’s mandate includes funding activities that are in the public interest and it makes funds available to support the general public or a segment thereof, these are indicators that a direct link may not exist between the transfer payments and a supply. Where a grantor has set up a funding program and established criteria to be met by applicants to qualify for funding under the program, and a grantee qualifies and receives funding, this may indicate that the funding is provided to applicants at the grantor’s discretion to financially support the grantee’s activities. Therefore, there may not be a direct link between the transfer payment provided by the grantor under the program and a supply by the grantee.

Example 2 – No direct link

A municipality has a funding program to subsidize organizations that provide community programs to assist local residents. On an annual basis, the municipality invites and evaluates applications for funding. Under this program, the municipality provides funds to a community organization whose mandate is to limit the number of stray animals by decreasing the cost of neutering pets belonging to the municipality’s residents. The municipality is not legislatively obligated to neuter stray animals within its boundaries.

When a resident provides the organization with a veterinarian’s receipt confirming the neutering of their pet, the organization pays the resident an amount equal to 20% of the total receipt amount up to a set amount.

Each year since the municipal program was implemented, the community organization has requested approval from the municipality for a specific funding amount. Each year, based on funds available for all community organizations, the municipality has approved a transfer payment for a certain amount to the community organization (not necessarily the amount requested).

The following factors indicate that no direct link exists between the transfer payment made by the municipality and a supply of a service rendered by the community organization:

the discretionary nature of the transfer payment
the public service nature of the program’s mandate
the transfer payment is made from a municipal funding program
the municipality is funding the organization’s activities as opposed to purchasing services for itself (that is, the municipality is not contracting out its legislative responsibility)

Grantor’s mandate to provide property or service

23. When a grantor provides a transfer payment to a grantee so that the grantee will provide property or services that the grantor is otherwise obligated to provide, it is likely that the grantor is providing the payment to the grantee to acquire the property or services and that there is a direct link between the transfer payment and a supply made by the grantee.

Example 3 – Direct link

Under its by-laws, a municipality is required to collect and neuter stray animals within its boundaries. Based on the program costs over the previous two years, the municipality decides to provide a transfer payment to a community organization to deliver those services.

Although the municipality is overseeing and funding services that are in the nature of a public service, the non-discretionary nature of the activity for the municipality (that is, the activity falls within the municipality’s own responsibilities) indicates that a direct link exists between the transfer payment made by the municipality and the services provided by the community organization. The municipality is contracting out (acquiring) a service it is mandated to provide.

Purpose of a transfer payment

24. Another indicator of whether or not a direct link exists between a transfer payment and a supply is the purpose for which the transfer payment is being made. It is necessary to determine whether the transfer payment is provided to acquire property or services or to financially support an activity. It is sometimes difficult to make this determination as it may appear that a grantor has more than one purpose depending on the particular situation. Therefore, it is necessary to establish the grantor’s main purpose for making the transfer payment.

To financially support an activity

25. Where the main purpose for making a transfer payment is to financially support a grantee in undertaking activities that benefit the general public or a particular segment of the general public, and the main purpose is not to acquire an input into a grantor’s activities or to contract out its responsibilities, this is an indicator that the transfer payment is not consideration for a supply. As such, there is likely no direct link between the transfer payment provided by the grantor and a supply made by the grantee. Many transfer payments provided by governments and public service bodies fall into this category.

26. If property or a service is provided by a grantee to someone other than a grantor or a specified third party (for example, the general public or a segment thereof), this is an indicator that there is likely no direct link between the transfer payment provided by the grantor and a supply made by the grantee.

Example 4 – No direct link

A non-profit organization (NPO) applies and qualifies for funding under a grantor’s funding program. The funding is provided to support the NPO in providing counselling services to its low-income clients. The NPO deals with the clients directly and chooses which clients will receive the counselling services.

These facts indicate that the main purpose of the transfer payment is to financially assist the NPO in undertaking its activities of providing counselling services to its clients. As such, there is likely no direct link between the transfer payment provided by the grantor and any counselling services provided by the grantee to the grantor or a specified third party.

Indicators that a transfer payment is to financially support an activity

27. The following are indicators that a transfer payment is made to financially support activities of a grantee:

the transfer payment is provided from a grantor’s funding program
the transfer payment may be available to any person who qualifies (that is, who meets the eligibility criteria) under a particular funding program
a grantor attaches limited conditions to the provision of the funding (for example, the conditions are accountability measures only or are ancillary to the main purpose of the funding)
the transfer payment is provided as funding to support a person’s activities that are in the public interest
a grantee applies for the funding from a grantor
where the funding is used by a grantee to provide a service (for example, training) to a third party, it is the grantee that has control over the provision of the service (for example, the grantee decides who is eligible to receive the service, enters into any agreement with an eligible person for the provision of the service, issues any receipts for the service to participants and is the participants’ contact for any administrative issues) and the third party is not a specified third party

Example 5 – No direct link

A municipality develops a short-term funding program under which it provides a transfer payment to a non-profit organization (NPO) to support it in assisting residents to clean up and make repairs after an ice storm. The NPO applied for and received transfer payments under the program as it met the eligibility criteria set by the municipality. The funding is used by the NPO to support its own activities that benefit a segment of the general public (that is, the residents of the municipality affected by the ice storm). The NPO is required to account to the municipality for its use of the funds by providing it with final financial statements.

These factors indicate that no direct link exists between the transfer payment provided by the municipality and any property or services provided by the NPO to either the municipality or a specified third party. The financial statements are provided solely for accountability purposes.

Example 6 – No direct link

A government agency uses a funding program to make subsidy payments to transportation companies to reduce the cost of transporting agricultural products within Canada. The transportation companies must apply for the funding and may qualify if they meet the eligibility criteria set out by the government agency under the funding program.

The payments are provided from a funding program to fund activities that benefit a segment of the general public (that is, the producers and transporters of agricultural products) and not to acquire transportation services. These factors indicate that no direct link exists between the transfer payments provided by the government and a supply made by the transportation companies.

Example 7 – No direct link

A province sets up a legislative program to fund municipalities in developing public transit systems for their residents. To be eligible under the program, a municipality must own the transit infrastructure and related capital, be responsible for operating the transit system and operate the transit facilities. Under the legislative program, the province approves the construction of new transit facilities by an eligible municipality and provides funding to subsidize the municipality’s costs under a cost-sharing agreement.

Under the agreement between the province and the municipality, the province provides funding, details the types of expenses for which the funding may be used, sets the construction standards that must be maintained and stipulates the municipality’s specific reporting requirements relating to the use of funding. These facts indicate that no direct link exists between the payment by the province and a supply by the municipality.

The payment is provided by the province to subsidize the municipality in undertaking the municipality’s own activities of constructing and operating its own transit facilities for its residents and is not consideration for a supply. Any reports provided by the municipality to the province to fulfill reporting requirements within the agreement would be for accountability purposes only.

To acquire property or services

28. If a grantor’s main purpose for providing a transfer payment to a grantee is to acquire property or services for itself or a specified third party, this indicates that there is a direct link between the payment and a supply. This may occur even if the grantor is a public sector body and some indirect public benefit results from the provision of the transfer payment.

29. Looking at a number of indicators is generally a key step in determining whether a direct link exists between a transfer payment to a grantee and a supply made to a grantor (including where property or services are provided to a specified third party). Examples of indicators that may suggest the existence of a direct link include:

the grantor is engaged in activities of a commercial nature
the grantee provides property or a service to the grantor or a specified third party in exchange for the transfer payment
the grantor is contracting out an activity that it is required (obligated) to undertake itself under legislation, by-law or contract
the grantor selects the grantee through a tendering process initiated by the grantor

Example 8 – Direct link

A municipality provides a transfer payment to an NPO to build a sports facility on municipal land. A citizens’ committee established the NPO in order to ensure that the sports facility is built for the community’s benefit. The municipality owns the land and will own the facility to be constructed.

Although the municipality may undertake activities in the general public’s interest, its primary purpose for making the transfer payment is to arrange for the construction of a facility that it will own. These factors indicate that a direct link exists between the transfer payment provided by the municipality and the supply made by the NPO. The municipality is acquiring a supply of construction services from the NPO.

Example 9 – Direct link

A municipality provides transfer payments to companies that set up the location of their facilities in the municipality in order to cover the companies’ costs of constructing and connecting sewer and water lines to these facilities. Under provincial legislation, the municipality will own and must maintain the sewer and water lines constructed by these companies.

Although the municipality may have developed a funding program that is in the public interest (that is, the program encourages companies to set up their facilities in, or relocate them to, the municipality and therefore creates more job opportunities for its residents), because the provision of the transfer payments to grantees results in a supply of infrastructure being made to the municipality, a direct link exists between the transfer payments provided by the municipality and the supplies made by the grantees. The municipality is acquiring a supply of construction services (that is, for the resulting sewer and water lines that it will own) from the companies that set up their facilities in, or relocate them to, the municipality.

Contracting out

30. Where a grantor uses a transfer payment in order to contract out one or more of its activities, it is receiving a supply in return for the transfer payment. To determine if a grantor is contracting out an activity, it is necessary to examine why the transfer payment is being provided (that is, to determine whether the grantor is using the transfer payment to acquire property or services from the grantee as an input into its own activities). The key question, taking into account any legislative, contractual and other obligations, is whether or not the grantor itself is required to make the property available or render the service for which it is providing the transfer payment. In cases where contracting out exists, there will be a direct link between the transfer payment and a supply even where the activity contracted out may result in a benefit to the general public or a segment thereof.

31. Governments sometimes devolve certain responsibilities to other organizations. Where a government is no longer legislatively responsible for an activity, the government is not necessarily receiving a supply as a result of providing a transfer payment to the body now delivering the devolved program or service. In such cases, a key factor is to determine which body (that is, the grantor or the grantee) is responsible (for example, legislatively or contractually) for undertaking the activity.

32. Where a government enters an agreement under which it gives responsibility for the delivery of a service or the administration of a program to another body but retains the legislative responsibility for delivering the program, the government may be contracting out its legislative responsibility where it provides a transfer payment to the body to deliver the program or certain services on its behalf.

33. To determine if a grantor is contracting out its legislative responsibilities, it is necessary to examine the grantor’s obligations under the applicable legislation. If a grantor provides a transfer payment to a grantee so that the grantee will undertake an activity or provide a supply that the grantor is obligated to undertake or provide under legislation, this indicates that the grantor is probably contracting out its responsibility and that a direct link exists between the transfer payment provided by the grantor and the supply made by the grantee.

34. However, if the grantor appears to have discretion to undertake the activity (for example, it is not legislatively responsible for undertaking the activity) or to provide the supply, it is probably not contracting out the activity because it is not obligated to undertake that activity or to make the supply.

Example 10 – Direct link

A government department is required under its governing legislation (that is, it has a legislative obligation) to maintain public parks. It provides a transfer payment to a grantee so that the grantee will undertake the activities related to the upkeep of the public parks.

In this case, the government department is likely contracting out to acquire services from the grantee. As such, there is likely a direct link between the transfer payment and the supply and, therefore, the transfer payment is likely consideration for the supply.

Example 11 – No direct link

A government department provides a transfer payment to a grantee to subsidize the construction of low-income housing. Under its governing legislation, the government department is not required to provide low-income housing but rather has a mandate to fund or otherwise support activities that increase the availability of low-income housing. The grantee has applied to the government department for funding to support its own activities of providing low-income housing.

All of the facts indicate that the government department is not contracting out its responsibilities. As such, there may not be a direct link between the funding provided by the government department and a supply made by the grantee and therefore, the transfer payment is likely not consideration for a supply.

Indicators of an input to the grantor’s activities/contracting out

35. The following are some indicators that point to a transfer payment being made to a grantee to acquire an input to a grantor’s own activities (that is, factors supporting the determination that a grantor is contracting out its responsibility):

the grantor has an obligation (for example, in legislation) to make the property available or render the services for which it is providing the transfer payment
the grantor puts out a tender through a formal tendering process and provides the transfer payment to the successful bidder
the grantee is required to post a performance bond or pay a penalty for non-performance of the terms of an agreement in respect of the provision of property or a service
in the case where property is made available or a service is rendered to a third party by a grantee (for example, training), it is the grantor that controls the provision of that property or service (for example, the grantor decides/specifies who is eligible to receive the service, enters into any agreement with the eligible person, issues any receipts for the service and/or is the person’s contact point for any administrative issues regarding the service)

The more of these indicators that are present, the more likely it is that a grantor is contracting out/acquiring a supply of property or services.

Example 12 – Direct link

A municipality is legislatively required to undertake certain activities, including the collection and subsequent recycling of recyclable waste from its residents. As the municipality does not have sufficient equipment and employees to undertake the collection of recyclable waste, it puts out a tender and hires a firm with the lowest bid to undertake this activity.

These factors are indicators that a direct link exists between the transfer payment provided by the municipality and the collection services provided by the firm. Although the collection of recyclable waste has an indirect public benefit, the municipality is acquiring the supply of a collection service as an input to its own recycling activities.

Example 13 – Direct link

As part of its mandate, a youth services agency (YSA) provides counselling services to individuals (that is, third parties) free of charge or at a nominal charge based on an individual’s ability to pay. The YSA gives a transfer payment to an NPO to provide mentoring services to the YSA’s clients. Under an agreement between the YSA and the NPO, the services to be provided are determined jointly by the YSA and the NPO after the NPO has completed an initial assessment of the client’s needs. The NPO provides mentoring services to the client and agrees to provide the YSA with periodic reports on the client’s progress. If the client is required to pay for the services, the client pays the YSA.

These facts are indicators that a direct link exists between the transfer payment provided by the YSA and the supply made by the NPO to the YSA. The YSA is responsible for providing counselling services and it acquires related mentoring services from the NPO as an input into the provision of the YSA’s services.

Accountability measures and measures that are ancillary to the main purpose of the transfer payment

36. A grantor will often require a grantee to undertake accountability measures in respect of the use of a transfer payment or to fulfill certain terms or conditions that are ancillary to the main purpose of a transfer payment agreement. The transfer payment is not consideration for a supply when the only supplies that a grantee makes are for the purpose of fulfilling these accountability requirements or ancillary terms and conditions, as they are not supplies made in return for the transfer payment.

Measures undertaken for accountability purposes

37. The following are examples of accountability measures in a transfer payment agreement:

A grantee agrees to provide to a grantor reports on the efforts expended in respect of a transfer payment. This may be a statement or indication that the money was spent as agreed upon. This could take the form of financial reports or a detailed written report accounting for the use of the transfer payment.
A grantor requires a grantee to submit to an audit in respect of the use of a transfer payment when the grantor deems it necessary.
A grantee agrees to acknowledge the provision of a transfer payment by a grantor in all public communications (for example, press releases and media announcements).

Measures that are ancillary to the main purpose of the transfer payment

38. The following are examples of terms and conditions in a transfer payment agreement that are ancillary to the main purpose of a transfer payment:

A grantee agrees to repay a transfer payment to a grantor under certain conditions (for example, when the grantee’s product, produced as a result of the receipt of the transfer payment, is sold). The repayment may never occur. It will only be triggered if the condition is met.
A grantee agrees to repay a transfer payment to a grantor if the grantee is unable to fulfill the terms of the transfer payment agreement. The repayment may never occur. It will only be triggered if the condition is met.

Summary of indicators to determine the existence of a direct link

39. The table below illustrates, in general terms, the indicators to consider in determining whether or not a direct link exists between a transfer payment and a supply. Each indicator, by itself, is not necessarily determinative of whether or not a direct link exists. All applicable indicators must be taken into consideration in order to make a final determination of whether or not the transfer payment is consideration for a supply. Note that the list of indicators is not exhaustive.

Indicators to determine the existence of a direct link
Indicators	No direct link	Direct link
Nature and mandate of the grantor	the grantor oversees or funds programs for the interest of the general public or a segment thereof	the grantor is engaged in commercial activities the grantor is contractually or legislatively required to provide a supply of property or services
Purpose of the transfer payment	the transfer payment is used to fund or subsidize the grantee’s activities that benefit the general public or a segment thereof the transfer payment is provided to the grantee as a result of a call request by the grantor for proposals/applications for funding the provision of funding is discretionary the transfer payment is available to persons who qualify (that is, who meet eligibility criteria set by the grantor) under a particular program the grantor may fund property made available or services rendered by the grantee to a person that is not a specified third party but is not obligated (under legislation or otherwise) to provide it the grantee agrees to pay the grantor a certain portion or percentage of the income generated from the use of the transfer payment but this payment will not exceed the amount of the original transfer payment where the grantee renders services to third parties, the grantee selects eligible third parties, enters into agreement with them, issues receipts to them or communicates with them on service issues the grantee provides the grantor with financial statements or reports on the use of transfer payment for accountability purposes only	the transfer payment is used to acquire property or services for the grantor’s or specified third party’s use, or as an input to the grantor’s own activities (that is, contracting out the grantor’s obligations) the transfer payment is provided as a result of tendering process the grantee posts performance bond or pays penalty for non-performance the government grantor retains ultimate legislative responsibility or obligation to provide property or services the grantee agrees to pay the grantor a certain portion or percentage of the income generated from the use of the transfer payment and this payment is not limited to the amount of the original transfer payment the grantor may receive exclusive right to material produced by the grantee or exclusive rights to copyrights or other intellectual property rights where the grantee renders services to third parties, the grantor selects eligible third parties, enters into an agreement with them, issues receipts to them or communicates with them on service issues the grantor controls the grantee’s release of information resulting from the use of the transfer payment

Transfer payments passing through intermediaries

40. A transfer payment that is not consideration for a supply should maintain this status regardless of the number of intermediaries through which it passes as long as there is no direct link between the transfer payment and the provision of property or services to a grantor, an intermediary or a specified third party. However, where the original grantor is paying an intermediary to administer the grantor’s transfer payment program (for example, under an agreement, the intermediary will provide services of administering a funding program for the grantor), there is likely a direct link between the portion of the transfer payment that is retained by the intermediary and the administration services it performs in return. Therefore, that portion of the transfer payment will likely be consideration for the supply of an administration service.

41. In addition, when an intermediary is providing a transfer payment under an agreement whereby the grantee agrees to provide property or services to the intermediary, the original grantor or a specified third party in return for the receipt of the payment, this is an indication that a direct link exists between the transfer payment and the provision of property or services. The intermediary is receiving a supply as a result of providing the transfer payment.

42. Sometimes it is difficult to determine whether the provision of a transfer payment by an intermediary is consideration for a supply. The following are indicators that a direct link may not exist between a transfer payment provided by an intermediary and a supply:

in providing the transfer payment, the intermediary has a funding purpose consistent with that of the original grantor
although a transfer payment was provided by the original grantor to a single grantee (that is, the intermediary), the grantor acknowledged under the terms of the agreement with the intermediary that the funding could be passed on by the intermediary to other grantees that are involved in supporting the intermediary in carrying out the funded activities
it is clear from the original agreement that the original grantor intended that the transfer payment be shared by several grantees, which may include the intermediary

Example 14 – No direct link

The federal government sets up a funding program to assist small business owners in purchasing computer equipment to make their businesses more efficient. The government establishes the eligibility criteria that must be met by the businesses and determines the appropriate assistance levels that may be provided. The government has entered into an agreement with an NPO under which the NPO will review business owners’ applications under the assistance program, determine whether their businesses are eligible for the financial assistance and, where applicable, provide the financial assistance payments on behalf of the government. The government agrees to provide cash advances and reimbursements to the NPO to cover the assistance payments made to business owners and to provide an additional amount to cover the NPO’s cost of administering the assistance program.

There is no direct link between the portion of the transfer payment intended to financially assist small business owners (that is, the amount provided by the federal government to the NPO and then by the NPO to the business owners) and any supplies. However, there is likely a direct link between the portion of the transfer payment that is retained by the NPO for its costs and the NPO’s services of administering the assistance program. The federal government is likely purchasing a supply of administration services as the NPO is administering the federal government’s funding program.

Example 15 – No direct link

A provincial health ministry has a program under which it provides a transfer payment to a medical organization to assist the organization to increase its capacity to provide medical services, teaching, and research activities. Under the terms of a transfer payment agreement with the ministry, the organization can use up to 10% of the funds to cover any of its related administrative costs. The transfer payment agreement acknowledges that the funds may be transferred to another person, in part, to financially support research opportunities; however, it is the organization that will determine which research projects are funded.

As an intermediary, the medical organization enters into a research funding agreement with an individual under which it agrees to provide a portion of the funding received from the ministry to support the individual in carrying out a research project. Under the terms of the research funding agreement, the individual is required to provide the organization with regular status reports and a final report on the research, as well as a report accounting for the use of the funds. The funding agreement states that the individual will own any rights to intellectual property that may be created from the project.

As the medical organization uses the transfer payment in carrying out its own activities and funding program (that is, it is not using the transfer payment to carry out the legislative responsibilities of the ministry or to administer the ministry’s program), there is no direct link between the portion of the funds used to cover its administrative costs and any supply made by the organization. Therefore, the transfer payment relating to that portion of funds is not consideration for a supply.

The research funding paid to the individual by the organization is intended to financially assist the individual and does not result in a supply, other than for accountability purposes, to the organization, the ministry or any other specified third party. Furthermore, the terms of the transfer payment agreement with the ministry acknowledge that the funds may be passed on by the organization to other grantees. Based on these factors, there is no direct link between the research funding and a supply made by the individual or by the organization. Therefore, the research funding is not consideration for a supply.

Further information

All GST/HST technical publications are available at GST/HST technical information.

To make a GST/HST enquiry by telephone:

for GST/HST general enquiries, call Business Enquiries at 1-800-959-5525
for GST/HST technical enquiries, call GST/HST Rulings at 1-800-959-8287

If you are located in Quebec, call Revenu Québec at 1-800-567-4692 or visit their website at revenuquebec.ca.

If you are a selected listed financial institution (whether or not you are located in Quebec) and require information on the GST/HST or the QST, go to GST/HST and QST - Financial institutions, including selected listed financial institutions or:

for general GST/HST or QST enquiries, call Business Enquiries at 1-800-959-5525
for technical GST/HST or QST enquiries, call GST/HST Rulings SLFI at 1-855-666-5166

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Date modified:: 2022-09-07