Are You Calculating Your 40% Funding Ratio Properly?

For a qualifying not-for-profit organization (NPO) in Ontario, two Public Service Body (PSB) rebates are available:

  • a federal rebate of 50% of federal portion of HST (5%) and;
  • a provincial rebate of 82% of the provincial portion of HST (8%).

Unlike a charity, which is automatically entitled to claim the PSB rebate, an NPO is only entitled to claim the rebate if it receives at least 40% of its funding from government. The NPO must be able to meet this test either in the current year or average 40% or more over the two preceding years.

The 40% funding test is based on the NPO’s total revenue, including grants, donations, sponsorships, net gaming receipts, investment income, fees and other revenues, but not all components. Excluded from the base are sales of capital property and donations ‘in kind’ (other than financial instruments – shares & bonds). Loans from non-arms-length persons are also included in revenue for the funding test unless the loans are on commercial terms. For purposes of the determining the PGF (percentage government funding ratio), only 75% of the total revenue (excluding financial income) is used in the calculation.

The PGF components are summarized below and an illustrative example follows:

PGF = A / (Adjusted Revenue) x 100

Adjusted Revenue = A + B + C – D

A: government funding identified in annual F/S

B: donations, net gaming revenue and other revenue but excluding:

           – sales of capital property

           – donations ‘in kind’ other than shares/bonds

           – amounts included in C

C: financial income, including:

           – interest, dividends, non-capital trust receipts

           – non-commercial loans from non-arms-length persons

D: 25% of amount B

Example:

Government funding (A)      $ 35,000

Other donations & fees (B)     60,000

Financial income (C)                  5,000

Total                                         $100,000

(D) 25% reduction on B          (15,000)

Adjusted revenue                  $ 85,000

PGF = $35,000/$85,000 =      41.18%

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