Effective Date: April 1, 2016

Applicable FAM Policies: 810 - Grants and Grants-in-kind

Applicability: GNWT Departments and Public Agencies

This interpretation provides guidance on establishing an agreement pursuant to a grant-in-kind. It is to be applied in conjunction with the Interpretation Bulletin 805.01 - Funding Agreement Application and Requirements.

A grant-in-kind recipient is not accountable to the funder for its use of the transferred asset, but it must remain eligible for the grant-in-kind during the duration of the agreement. The funder sets the eligibility criteria.         

INTERPRETATION                                        

Accounting and Reporting

Every grant-in-kind that does not relate to the gifting of land, must be recorded as an expenditure and offset by the recording of a revenue that is equal to the grant. A grant-in-kind for land that has no value on the balance sheet must be tracked and included in a submission to Financial Management Board (FMB) for the disposal of the asset. All grants-in-kind must be reported at year end for disclosure within the applicable financial statements.

Determining the Value

The value of a grant-in-kind to a for-profit person or organization must be the fair market value determined as follows:

• real estate assets or the right to use real estate assets may be estimated using market appraisal values.
• used materials and equipment must be the current market price for materials and equipment in the same condition, i.e., a realistically amortized value.
• new materials and equipment must be the current market price or the full replacement cost.

Where an active market for an asset has not been established, the fair market value is the estimated cost to replace the asset with another one of the same kind in the same condition, taking amortization into account, i.e. net book value. In the case of land transfers to municipalities, the property tax assessment rolls may serve as a reasonable valuation tool.

Goods and Services Tax (GST)

All grants-in-kind are subject to GST, although some may be specifically exempt under the federal Excise Tax Act. The amount of GST payable may not necessarily be based on the reported value of the grant-in-kind or the amount of any consideration received by the Government or Public Agency.

A grant-in-kind made in exchange for no consideration is GST exempt, but only if at least 90% of that type of property or service that the Government or Public Agency supplies is exchanged for no consideration. A customary nominal (usually $1.00) payment used to validate certain contracts constitutes actual consideration. If it is paid or recorded, GST may be payable on a larger amount i.e., fair market value, tax roll assessment value.

GST is payable on the fair market value of the transferred asset if:

1. a grant-in-kind is made for no consideration or consideration less than the fair market value of the transferred asset when the Government or Public Agency supplies less than 90% of that same type of property or service for no consideration; and,
2. the Government or Public Agency is not dealing at arm's length with the recipient.

GST is payable on only the actual amount of the consideration if:

1. a grant-in-kind involves consideration that is less than the fair market value of the transferred asset;
2. the Government or Public Agency supplies less than 90% of that same type of property or service for no consideration; and,
3. the Government or Public Agency is dealing at arm's length with the recipient.

The sponsoring or administering department is required to:

1. collect all GST payable from the grant-in-kind recipient or charge the GST payable to the appropriation of the sponsoring department; and,
2. remit and record all GST payable.

The Government or Public Agency is required to remit to Canada Revenue Agency (CRA) all GST payable, even if it fails to collect it from a grant-in-kind recipient.

GST is not payable for a grant-in-kind from the Government or Public Agency to any entity on the CRA list of "Government Entities that Comprise the Northwest Territories Government to the Reciprocal Tax Agreement.”

Examples of Expenditure, Revenues and Taxes for Grants-in-kind

Example 1: Bargain price sale of a capital asset to a not-for-profit organization

A sponsoring department initiates the sale of a Government residential property to a not-for-profit non-Government organization at a price that is less than the estimated book value (historical cost less estimated accumulated amortization) of the property. The recorded grant-in-kind value is the difference between the sale price and the book value. It is recorded as an expenditure reducing the sponsoring department's free balance and as revenue to the Department. The fair market value does not apply to the recorded grant-in-kind value because the recipient is a not-for-profit organization.

This example meets the GST conditions when consideration received is less than fair market value, the Government supplies less than 90% of its surplus residential property for no consideration, and the Government is dealing at arm's length with the recipient, i.e., it is not directing the recipient's affairs. GST is payable on the actual amount of consideration received, not the fair market value or book value of the asset, and not the recorded grant-in-kind value. Although the recipient's not-for-profit status is important to the Government's internal grant-in-kind valuation, it is not material to the amount of GST payable.

Example 2: Bargain lease to a not-for-profit organization

The Department of Infrastructure leases a building from a private owner, operates and maintains it for the Government, and administers any tenant subleases. Some space no longer needed by the Government becomes vacant in the building. A sponsoring department initiates a sublease of that space to a not-for-profit non-Government organization, for a rate that is less than the Government's cost to lease, operate and maintain the space. In this case, the sublease is not a physical asset in itself, so the recorded grant-in-kind value is the difference between the sublease revenue rate and the Government's cost to lease, operate and maintain the space. This calculation is based on the same principles as in Example 1 above, even though the asset type is different. The grant-in-kind is recorded as an expenditure reducing the sponsoring department's free balance and as revenue to the Department of Infrastructure.

Similar to Example 1, this example meets the conditions when consideration received is less than fair market value, the Government supplies less than 90% of its sublet space for no consideration, and the Government is dealing at arm's length with the recipient. GST is payable on only the consideration received. For GST purposes, it is not necessary to consider the fair market value or book value of the asset, the recorded grant-in-kind value, or the recipient's not-for-profit status.

Example 3: Bargain lease to a for-profit organization

A sponsoring department initiates the lease of a Government-owned building to a for-profit non-Government organization at less than fair market value. Given the recipient's for-profit status, the recorded grant-in-kind value is equal to the difference between the actual lease price and the fair market value. The grant-in-kind is recorded as an expenditure reducing the sponsoring department's free balance and as revenue to the Department of Infrastructure.

This example meets the conditions when GST is payable on only the consideration received. For GST purposes, it is not necessary to consider the fair market value or book value of the asset, the recorded value of the grant-in-kind, or the recipient's for-profit status.

Example 4: Transfer for no consideration (gift) of a capital asset to a not-for-profit organization

A sponsoring department initiates the gift of a school, complete with developed land, buildings, fixtures, furnishings, and equipment, to a municipally tax-based school board (e.g., Yellowknife School District No. 1) for no consideration. Given the recipient's not-for-profit status, the recorded grant-in-kind value is the actual or estimated book value of the school unless book value cannot be reasonably estimated, in which case the fair market value may be used, as illustrated below. Otherwise, the fair market value does not apply.

Incomplete cost records for a long history of land improvement, construction and additions, renovations and upgrades, and contents make the book value difficult or impossible to estimate. Fair market value as determined by a qualified property appraiser or certified business valuator is a reasonable substitute for book value. As a gift recipient, the school board will be required to disclose contributed capital in its audited financial statements and will likely engage the appropriate professional to calculate the fair market value. The Government could use that value as the recorded grant-in-kind value in its Public Accounts. The grant-in-kind is recorded as an expenditure reducing the sponsoring department's free balance and as revenue to the Department of Infrastructure.

Provided that 90% or more of schools transferred to parties outside the Government entity are gifts for no consideration. (If the transfer in this example is unique, 100% of school transfers are gifts for GST purposes.) No GST is payable.

Note: By contrast to this example, if the property had been transferred through a grant-in- kind to a for-profit organization, the recorded value of the grant-in-kind would have been the fair market value of the property, regardless of the book value.

Example 5: Transfer to a board or agency on the list of entities that comprise the Government under the Reciprocal Tax Agreement

A department transfers a Government asset to a Government agency on the CRA list of "Government Entities that Comprise the Northwest Territories Government pursuant to the Reciprocal Tax Agreement". Due to the not-for-profit status of the recipient, the recorded grant-in-kind value is the actual or reasonably estimated book value of the transferred asset. The transfer is considered by CRA to be within the same entity for tax purposes, and no GST is payable.

Example 6: Transfer to a board or agency that is not on the CRA list of entities that comprise the Government under the Reciprocal Tax Agreement (RTA)

A department transfers a Government asset to a Government agency that is not on the CRA list of "Government or Agency Entities that Comprise the Northwest Territories Government or Agency Pursuant to the Reciprocal Tax Agreement". Such agencies include Crown Corporations that do not operate at arm's length from the Government, e.g., the Northwest Territories Power Corporation (NWTPC) and the Northwest Territories Housing Corporation (NWTHC). The grant-in-kind is the actual or reasonably estimated book value of the asset or the tax assessment roll amount in the case of a land transfer.  (In the case of land transfers to municipalities or an agency that is not identified as an excluded entity under the RTA i.e. GST Registered, the property tax assessment rolls may serve as a reasonable valuation tool. Typically, the GST registered recipient is required by CRA to self-assess or account for the GST payable.)

Assuming that the Government does not transfer away 90% or more of its surplus of this type of asset as gifts, this grant-in-kind matches the conditions when consideration at less than fair market value is received, and the Government is not dealing at arm's length with the recipient. GST is payable on the fair market value (or the tax assessment roll amount) of the transferred asset, not the book value, not the value of the consideration received, and not the recorded value of the grant-in-kind. However, if the Government did transfer away 90% or more of its surplus of this type of asset as gifts, no GST would be payable.

Example 7: Recipient eligibility for a grant-in-kind

The expenditure officer responsible for approving the transfer of an asset through a grant-in-kind should ensure that the recipient remains eligible during the time period to which the grant-in-kind applies. For example, a not-for-profit organization may receive a grant-in-kind in the form of a lease of space at a rate below the Government's total cost to lease or own, operate and maintain the space. If the organization uses the space for purposes other than those stipulated in the transfer agreement, it may lose eligibility, in which case it must either vacate the space or pay the Government for the full costs.

If outright ownership of an asset is transferred to an eligible party, the Government loses any claim to the asset, and the other party will retain ownership even if it becomes ineligible later. The sponsoring department in an asset ownership transfer through a grant-in-kind should ensure that the recipient intends to apply the asset to a purpose complimenting the purpose of the budget against which the expenditure is recorded.