Direct Cost Exemption

GST/HST memorandum 5-1
August 2026

This memorandum explains the meaning of direct cost found in subsection 123(1) of the Excise Tax Act (ETA). It also explains the application of the direct cost exemptions found in section 5.1 of Part V.1 of Schedule V and section 6 of Part VI of Schedule V to the ETA.

The direct cost exemption may apply to a supply of tangible personal property or a service made by a charity or a public service body (other than a municipality) if the property or service is sold at a price intended only to recover its purchase cost.

General
Meaning of significant terms
Introduction
Meaning of direct cost
- Amounts not included in direct cost
Direct cost exemption
GST/HST charged in error
Examples

General

1. Supplies of property and services made in Canada are generally taxable for GST/HST purposes, unless an exempting provision applies. Exempt supplies are listed in Schedule V and are not subject to the GST/HST.

2. Exempting provisions for supplies made by a charity are generally found in Part V.1 of Schedule V. Exempting provisions for supplies made by a public service body (not including a charity) are generally found in Part VI of Schedule V.

Meaning of significant terms

3. Capital property, in respect of a person, generally means:

any depreciable property that is or would be eligible for a capital cost allowance deduction for income tax purposes
any property, other than depreciable property, the sale of which would result in a capital gain or loss for income tax purposes

4. For GST/HST purposes, capital property does not include property in Classes 12, 14, 14.1, or 44 of Schedule II to the Income Tax Regulations.

5. Charity means a registered charity or registered Canadian amateur athletic association for income tax purposes, but does not include a public institution. A charity can issue official donation receipts for income tax purposes.

6. Designated municipal property means property of a person that is, at any time, designated to be a municipality for the purpose of claiming the municipal rebate. Generally, it is property, or an improvement to it, that the designated municipality intended to consume, use, or supply more than 10% in the course of activities specified in its designation, and an amount for the property or improvement to it has been included in the calculation of non-creditable tax charged. Once property qualifies as designated municipal property, it is treated as such for as long as it is held by the designated municipality.

7. Designated municipality means a person designated by the Minister of National Revenue to be a municipality, but only in respect of activities specified in the designation that involve the making of supplies (other than taxable supplies) by the person of municipal services.

8. Municipality means:

an incorporated city, town, village, metropolitan authority, township, district, county or rural municipality, or other incorporated municipal body however designated
such other local authority that the Minister of National Revenue may determine to be a municipality for GST/HST purposes

9. Public institution means a registered charity for income tax purposes that is also a school authority, a public college, a university, a hospital authority, or a local authority determined by the Minister of National Revenue to be a municipality.

10. Public service body means:

a charity
a non-profit organization (NPO)
a municipality
a university, public college, or school authority
a hospital authority

11. For purposes of the direct cost exemption for public service bodies found in section 6 of Part VI of Schedule V, it is important to note that section 1 of that Part stipulates that a public service body does not include a charity. As a result, the direct cost exemption for charities is found in section 5.1 of Part V.1 of Schedule V instead.

12. Sale, in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property.

13. Supply means the provision of property or a service in any way, including sale, transfer, barter, exchange, licence, rental, lease, gift, or disposition.

14. Tangible personal property is generally understood to mean personal property that may be seen and touched, and that is movable at the time the supply is made, but does not include money or real property.

Introduction

15. A charity or public service body may sell tangible personal property or a service for an amount that is not more than its direct cost (that is, the property or service is sold at a price intended only to recover its purchase cost).

16. The sale of tangible personal property or a service made in this manner may be exempt from the GST/HST under one of two direct cost exempting provisions, depending on the type of person making the supply. Where the person is a charity (as defined in paragraph 5 of this memorandum), section 5.1 of Part V.1 of Schedule V may apply. Where the person is a public service body (as defined in paragraphs 10 and 11 of this memorandum), section 6 of Part VI of Schedule V may apply. This exempting provision does not apply if the supplier is a municipality.

17. For the purposes of this memorandum, we refer to the exempting provisions in section 5.1 of Part V.1 of Schedule V and section 6 of Part VI of Schedule V as the direct cost exemption.

For the direct cost exemption to apply to a particular supply of tangible personal property or a service, specific conditions must be met. Where all conditions are not met, the direct cost exemption does not apply. However, this does not necessarily mean that the supply is taxable for GST/HST purposes. The supply may be exempt or relieved of the GST/HST under another provision in the ETA.

Meaning of direct cost

18. To determine if the direct cost exemption applies to a particular supply of tangible personal property or a service made by a charity or public service body, it is important to first understand what is included in the direct cost of the supply.

19. Direct cost of a supply of tangible personal property or a service is defined in subsection 123(1) as the total of all amounts (whether paid in a single amount or in several instalments), each of which is the consideration paid or payable by the supplier for either of the following:

the property or service if it was purchased by the supplier for the purpose of resale
an article or material (other than capital property) purchased by the supplier, to the extent that the article or material is to be incorporated into or is to form a constituent or component part of the property, or is to be consumed or expended directly in the manufacturing, producing, processing, or packaging of the property

20. For purposes of the definition of direct cost, the consideration paid or payable by a supplier for tangible personal property or a service is deemed to include the following:

any GST/HST payable by the supplier to acquire or import the property or service
if the property was brought into a participating province from another province, any GST/HST payable by the supplier to bring the property into the participating province
any unrecoverable tax, duty, or fee that is prescribed for the purposes of section 154 and that is payable by the supplier to acquire or import the property or service
any Quebec sales tax (QST) payable by the supplier to acquire or import the property or service, if the supplier was a QST registrant at the time
any unrecoverable QST payable by the supplier to acquire or import the property or service, if the supplier was not a QST registrant at the time

For purposes of section 154, certain provincial taxes, duties, and fees are prescribed by the Taxes, Duties and Fees (GST/HST) Regulations. This includes, for example, general provincial retail sales taxes. For more information, refer to GST/HST Memorandum 3-5, Application of GST/HST to Other Taxes, Duties, and Fees.

Since provincial retail sales taxes are generally not recoverable, under most circumstances, they are included in the direct cost of property or a service.

Example 1 – Direct cost

A charity in Saskatchewan purchases key chains to resell to consumers. The charity pays $5 for each key chain plus $0.25 GST and $0.30 non-recoverable provincial sales tax.

The charity's direct cost of each key chain is $5.55 [$5 (purchase price) + $0.25 (GST) + $0.30 (non-recoverable provincial sales tax)].

Amounts not included in direct cost

21. Direct cost does not include administrative or overhead expenses or employees' salaries that a charity or public service body incurs to provide tangible personal property or services.

Example 2 – Direct cost does not include administrative or overhead expenses

An NPO purchases legal services from a lawyer in private practice. The NPO resells the legal services to its clients for an amount that includes the cost of the legal services plus an amount to cover the NPO's administrative and overhead expenses.

The definition of direct cost in subsection 123(1) does not include administrative or overhead expenses incurred to provide a service. Therefore, the administrative and overhead expenses incurred by the NPO to acquire the legal services do not form part of the direct cost of the services.

Example 3 – Direct cost does not include administrative or overhead expenses

A school authority in Ontario purchases calculators to resell to its students. The school authority pays $100 for each calculator plus $13 HST. It also incurs administrative expenses of $2.50 per calculator.

The definition of direct cost in subsection 123(1) does not include administrative expenses incurred to provide tangible personal property. Therefore, the administrative expense of $2.50 incurred by the school authority does not form part of the direct cost of the calculators.

The direct cost of each calculator is $113 [$100 (purchase price) + $13 (HST)].

22. To be included in the direct cost, a service must be resold as is. Where a service is acquired for use as an input into a supply (for example, a contractor's service to produce tangible personal property or to provide another service), the cost of the service is not included in the direct cost calculation.

Example 4 – Direct cost does not include the cost of services acquired as an input into a supply

An NPO in New Brunswick manufactures tables to sell to customers. It incurs the following expenses for each table that it manufactures:

$100 plus $15 HST for the services of a carpenter
$150 plus $22.50 HST for materials, including wood, nails, glue, and varnish
$20 plus $3 HST for packaging material (that is, the box in which the table is sold)

The definition of direct cost in subsection 123(1) does not include the cost of services acquired for use as an input into a supply. Therefore, the cost of the carpenter's services incurred by the NPO does not form part of the direct cost of the tables.

The definition of direct cost does, however, include the total of all amounts paid for any article or material purchased by the NPO, to the extent that the article or material is to be incorporated into the tables, or is to be consumed or expended directly in the manufacturing, producing, processing, or packaging of the tables.

As a result, the direct cost of each table is $195.50, which includes the cost of the materials [$150 (purchase price) + $22.50 (HST)] and the packaging materials [$20 (purchase price) + $3 (HST)].

23. Entitlement to a GST/HST rebate (for example, a public service bodies' rebate) does not impact the calculation of the direct cost of a supply of tangible personal property or a service. Therefore, the direct cost of a supply of tangible personal property or a service is not reduced by any rebate of the GST/HST.

Direct cost exemption

24. Once the direct cost of property or a service is determined, the requirements of the direct cost exemption must be considered to determine if the supply of the property or service is exempt.

25. For the direct cost exemption to apply, the provisions found in section 5.1 of Part V.1 of Schedule V and section 6 of Part VI of Schedule V contain a number of conditions that must be met. These conditions are discussed in detail in paragraphs 26 to 40 of this memorandum.

Supplier and nature of the supply

26. The direct cost exemption applies to the following supplies made by way of sale by a charity or a public service body (other than a municipality):

tangible personal property (other than capital property or designated municipal property)
a service purchased by the charity or the public service body for the purpose of resale

27. This means that, for the direct cost exemption to apply, a charity or public service body must sell tangible personal property that it purchased or produced, or a service that it purchased for the purpose of resale.

28. The direct cost exemption does not apply to supplies made by municipalities.

29. Since the supply must be made by way of sale, the direct cost exemption also does not apply to any supply made by way of lease, licence, or similar arrangement.

30. In addition, the direct cost exemption does not apply to supplies of the following:

capital property (for example, computers, photocopiers, office furniture, cash registers, equipment, machinery)
designated municipal property, if the supplier is a designated municipality for purposes of the public service bodies' rebate
real property
intangible personal property (for example, trademarks, goodwill, admissions, intellectual property)

31. Tangible personal property may be resold as is or may be used by the charity or public service body to create new tangible personal property. As discussed in paragraph 19 of this memorandum, the direct cost of tangible personal property also includes the cost of certain other property used as an input into the sale of tangible personal property (for example, an article or material that is incorporated into, or consumed or expended directly in the manufacturing, producing, processing, or packaging of the property).

32. With regard to the supply of a service, the direct cost exemption applies only if the service is sold in the same form as the form in which it was acquired. This means that a service purchased by a charity or public service body must be identical to the service that it subsequently sells.

Example 5 – Public service body sells services that it purchased for resale

An NPO purchases mediation services from a private company to resell to its clients. The NPO resells the mediation services in the same form as they were purchased and at a price intended only to recover the purchase cost.

The NPO (that is, a public service body) is reselling services that it purchased for the purpose of resale. Therefore, the direct cost exemption may apply to the NPO's sales of the mediation services provided all other conditions of the exemption are met.

Total charge must be the usual charge

33. For the direct cost exemption to apply, the total charge for a supply of tangible personal property or a service made by a charity or a public service body to a recipient must be equal to the usual charge by the charity or public service body for such supplies to such recipients.

34. The usual charge may vary depending on, for example, the volume or quantity purchased. It may also vary according to the type of recipient and/or the recipient's ability to pay. For example, the amount charged to recipients whose income is under a certain threshold might recover only the direct cost of the property or service, while the amount charged to other recipients might be higher.

Example 6 – Total charge is the usual charge

The NPO from Example 5 purchases and resells mediation services to its clients. However, instead of only recovering the purchase cost on all sales made to all recipients, the NPO establishes a two-tier pricing structure. Where a client is a college or university student, the NPO charges the client $210 for the mediation service. This price is intended only to recover the purchase cost of the service. For all other clients, the NPO marks up the cost of the service and charges $300.

The NPO purchases a mediation service and resells it to Individual A, a university student. The NPO charges Individual A $210 for the service.

The NPO is a public service body that is selling a service that it purchased for the purpose of resale. The total charge of $210 is the usual charge by the NPO to a university student. Therefore, the direct cost exemption may apply to the NPO's sale of the mediation service to Individual A provided all other conditions of the exemption are met.

35. The usual charge cannot be zero. It is the CRA's position that the direct cost exemption does not apply in cases where all supplies of the property or services made to such recipients are made for no consideration because, where there is no consideration, there is no usual charge.

Example 7 – Usual charge cannot be zero

A charity acquires blood from a non-profit blood bank. The charity then supplies the blood to local hospitals and health care facilities. All supplies of blood made by the charity are provided at no charge.

Since the charity does not charge any consideration for the blood that it supplies to hospitals and health care facilities, there is no usual charge for the supplies. As a result, all conditions for the direct cost exemption are not met, and the exemption does not apply.

36. The direct cost exemption also does not apply if the charity or public service body normally sells the particular property or service for a price exceeding direct cost and decides to sell off excess stock at, or below, cost. The excess stock is not considered to be sold at the usual charge.

Example 8 – Total charge is not the usual charge

A school authority purchases 500 sweatshirts bearing the school's logo. The school authority marks up the price of the sweatshirts and sells them to staff and students at a price that exceeds direct cost. As a result, the direct cost exemption does not apply.

At the end of the school year, 20 sweatshirts remain. In an effort to sell off the excess stock, the school authority reduces the price of the remaining sweatshirts to only recover the purchase cost.

The school authority (that is, a public service body) is reselling sweatshirts (that is, tangible personal property) that it purchased. Although the remaining sweatshirts are being sold at cost, the total charge is not the usual charge. Since all conditions are not met, the direct cost exemption does not apply to the school authority's sale of the 20 remaining sweatshirts.

Does the charity or public service body charge the GST/HST

37. Finally, the application of the direct cost exemption depends on whether the charity or public service body charges the GST/HST on the supply. For the direct cost exemption to apply, one of the following conditions must be met:

If the charity or public service body does not charge the recipient the GST/HST in respect of the supply, the total charge for the supply does not, and could not reasonably be expected to, exceed the direct cost of the supply
If the charity or public service body charges the recipient the GST/HST in respect of the supply, the consideration for the supply does not, and could not reasonably be expected to, equal or exceed the direct cost of the supply determined without reference to the GST/HST and, for QST registrants, the QST

38. This means that charities and public service bodies have some flexibility when applying the direct cost exemption. If a charity or public service body wants to recover only its direct cost, it can choose to make certain sales taxable or exempt depending on its tax treatment of the sale.

39. If a charity or public service body sells tangible personal property or services, the total charge is equal to or less than the direct cost, and the GST/HST is not charged, the sale is exempt. However, if a charity or public service body sells tangible personal property or services, the consideration is equal to or more than the direct cost (not including the GST/HST and, if the supplier is a QST registrant, the QST), and the GST/HST is charged on the selling price, the sale is not exempt under the direct cost exemption. The Zone chart below illustrates the flexibility that charities and public service bodies have when applying the direct cost exemption, depending on whether or not the GST/HST is charged.

The Zone chart

It is important to note that if a charity or public service body chooses to make a particular sale taxable by charging the GST/HST, it cannot later make the sale exempt by retroactively deciding that it should not have charged the GST/HST.

Example 9 – Public service body does not charge the GST/HST

The NPO from Example 6 purchases a mediation service from a private company and pays $200 for the service plus $10 GST. The NPO's direct cost of the service is $210 [$200 (purchase price) + $10 (GST)].

The NPO resells the mediation service to Individual B, a university student. The NPO charges Individual B $210 (that is, the usual charge by the NPO for a sale of a mediation service to a college or university student) and does not charge the GST/HST.

The NPO is a public service body and it sold a service that it purchased for the purpose of resale. The total charge of $210 is the usual charge by the NPO to a university student. The NPO did not charge Individual B the GST/HST on the sale of the mediation service and the total charge is equal to the top end of the zone in the Zone chart above (direct cost, which is $210 in this case). Therefore, all conditions of the direct cost exemption are met and the NPO's sale of the mediation service to Individual B is exempt from the GST/HST under section 6 of Part VI of Schedule V.

Example 10 – Public service body charges the GST/HST

The NPO from Example 6 purchases a mediation service from a private company and pays $210 for the service plus $10.50 GST. The NPO's direct cost of the service is $220.50 [$210 (purchase price) + $10.50 (GST)].

The NPO resells the mediation service to Individual C, a university student. The NPO charges Individual C $210 (that is, the usual charge by the NPO for a sale of a mediation service to a college or university student). However, the NPO also charges Individual C $10.50 GST on the sale.

The NPO is a public service body and it sold a service that it purchased for the purpose of resale. The $210 charge is the usual charge by the NPO to a university student. However, the NPO charged the GST on the sale of the mediation service and, in such cases, the direct cost exemption only applies if the consideration for the sale of the service is less than the bottom end of the zone in the Zone chart above (direct cost not including the GST, which is $210 in this case).

Since the consideration for the sale of the service (that is, $210) is equal to the bottom end of the zone, all conditions of the direct cost exemption are not met. Therefore, the NPO's sale of the mediation service to Individual C is not exempt from the GST under section 6 of Part VI of Schedule V.

40. If the consideration for the supply is less than the direct cost of the supply determined without reference to the GST/HST and, for QST registrants, the QST, the supply is exempt regardless of whether the charity or public service body charges the GST/HST, provided the other conditions of the direct cost exemption are met.

Example 11 – Consideration is less than direct cost

The NPO resells the mediation service to Individual D, a university student. The NPO charges Individual D $199 (which, for purposes of this example, is the usual charge by the NPO for a sale of a mediation service to a college or university student) plus $9.95 GST.

The NPO is a public service body and it sold a service, purchased for the purpose of resale, at the usual charge.

Although the NPO charged the GST, the direct cost exemption applies. The consideration for the sale of the service (that is, $199) is less than the bottom end of the zone in the Zone chart above (direct cost not including the GST, which is $200 in this case). Therefore, the NPO's sale of the mediation service to Individual D is exempt from the GST under section 6 of Part VI of Schedule V. The NPO charged the GST in error and it may refund, adjust, or credit the GST as explained in the next section.

GST/HST charged in error

41. Where a supplier (for example, a charity or public service body) has charged the GST/HST in error on an exempt supply, it has the option to adjust, refund, or credit the excess amount to the other person. The supplier has up to two years after the day on which the excess amount was charged but not collected to adjust the amount of tax charged, or if the excess amount was collected, two years after the day on which it was collected to refund or credit the excess tax.

42. When a supplier refunds, adjusts, or credits an excess amount to another person, the supplier must issue a credit note including prescribed information within a reasonable time to the other person (unless the other person first issues a debit note to the supplier).

43. If a supplier chooses not to refund, adjust, or credit the GST/HST collected in error, the other person may file Form GST189, General Application for GST/HST Rebates. The application must be filed within two years after the day the excess amount was paid.

44. For more information, refer to GST/HST Memorandum 12-2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act.

Examples

Tangible personal property or services purchased for resale – direct cost exemption applies

Example 12 – Tangible personal property purchased and resold, no GST/HST charged

A charity in Saskatchewan purchases skates for $50 plus $2.50 GST and $3 non-recoverable provincial sales tax.

The charity's direct cost of each pair of skates is $55.50 [$50 (purchase price) + $2.50 (GST) + $3 (non-recoverable provincial sales tax)].

The charity resells each pair of skates to a recipient for the usual charge of $55.50 and does not charge the GST.

The charity is selling tangible personal property that it purchased. The total charge of $55.50 is the usual charge by the charity for such sales to such recipients. Since the charity does not charge the recipients the GST on the sales of the skates and the total charge (that is, $55.50) does not exceed the direct cost (that is, $55.50), all conditions of the direct cost exemption are met. Therefore, the charity's sales of the skates are exempt from the GST under section 5.1 of Part V.1 of Schedule V.

Example 13 – Tangible personal property purchased and resold, no GST/HST charged

A public service body that is a school authority in Ontario purchases calculators to resell to its students. The school authority pays $100 for each calculator plus $13 HST. It also incurs administrative expenses of $2.50 per calculator.

The school authority's direct cost of each calculator is $113 [$100 (purchase price) + $13 (HST)]. The definition of direct cost in subsection 123(1) does not include administrative expenses incurred to provide tangible personal property. Therefore, the administrative expense of $2.50 incurred by the school authority does not form part of the direct cost of the calculators.

The school authority resells each calculator for the usual charge of $110 and does not charge the HST.

The school authority is a public service body that is selling tangible personal property that it purchased. The total charge of $110 is the usual charge by the school authority for such sales to such recipients. Since the school authority does not charge its students the HST on the sales of the calculators and the total charge (that is, $110) does not exceed the direct cost (that is, $113), all conditions of the direct cost exemption are met. Therefore, the school authority's sales of the calculators are exempt from the HST under section 6 of Part VI of Schedule V.

Example 14 – Services purchased and resold in the same form, no GST/HST charged

A public service body that is an NPO in British Columbia purchases legal services from a lawyer in private practice for the purpose of reselling the services to a client. The NPO pays $500 for the services plus $25 GST.

The NPO's direct cost of the services is $525 [$500 (purchase price) + $25 (GST)].

The NPO resells the legal services, in the same form, to its client for $525 and does not charge the GST. This is the usual charge by the NPO for sales of legal services to its clients.

The NPO is a public service body that is selling legal services that it purchased for the purpose of resale. The total charge of $525 is the usual charge by the NPO for such a sale to such a recipient. Since the NPO does not charge its client the GST on the sale of the legal services and the total charge (that is, $525) does not exceed the direct cost (that is, $525), all conditions of the direct cost exemption are met. Therefore, the NPO's sale of the legal services is exempt from the GST under section 6 of Part VI of Schedule V.

Example 15 – Tangible personal property purchased and resold, GST/HST charged in error

A charity in Prince Edward Island purchases T-shirts with its logo for $20 plus $3 HST.

The charity's direct cost of each T-shirt is $23 [$20 (purchase price) + $3 (HST)].

The charity resells each T-shirt for the usual charge of $18 and charges the recipients $2.70 HST.

Although the charity charges the recipients the HST, the direct cost exemption applies. The charity is selling tangible personal property that it purchased. The $18 charge is the usual charge by the charity for such sales to such recipients. The consideration for the sales of the T-shirts (that is, $18) does not equal or exceed the direct cost not including the HST (that is, $20). Therefore, all conditions of the direct cost exemption are met and the charity's sales of the T-shirts are exempt from the HST under section 5.1 of Part V.1 of Schedule V. The charity charged the HST in error and it may refund, adjust, or credit the HST in accordance with subsection 232(1).

Tangible personal property or services purchased for resale – direct cost exemption does not apply

Example 16 – Tangible personal property purchased and resold, no GST/HST charged

A public service body that is an NPO in Alberta purchases T-shirts for $10 plus $0.50 GST.

The NPO's direct cost of each T-shirt is $10.50 [$10 (purchase price) + $0.50 (GST)].

The NPO resells each T-shirt to a recipient for the usual charge of $11 and does not charge the GST.

The NPO is a public service body that is selling tangible personal property that it purchased. The total charge of $11 is the usual charge by the NPO for such sales to such recipients. The NPO does not charge the recipients the GST on the sales of the T-shirts, however, the total charge (that is, $11) exceeds the direct cost (that is, $10.50). For the direct cost exemption to apply, the total charge for the sale of the T-shirts cannot, and could not reasonably be expected to, exceed the direct cost. Since all conditions of the direct cost exemption are not met, the NPO's sales of the T-shirts are not exempt from the GST under section 6 of Part VI of Schedule V.

Example 17 – Services purchased and resold in a different form, no GST/HST charged

A public service body that is an NPO purchases resumé writing services and credit counselling services from two separate companies. The NPO bundles the services and sells them to its clients in the form of a life skills coaching service. The NPO charges its clients an amount that does not exceed the combined direct cost of each of the services and does not charge the GST/HST.

Although the NPO is a public service body that does not charge its clients the GST/HST on the sales of the services and although the total charge does not exceed the direct cost, the services that the NPO purchases are not resold in the same form as they were acquired. The resumé writing and credit counselling services that it purchases are not identical to the life skills coaching services that it sells. Since all conditions of the direct cost exemption are not met, the NPO's sales of the life skills coaching services are not exempt from the GST/HST under section 6 of Part VI of Schedule V.

Example 18 – Tangible personal property purchased and resold, GST/HST charged

A public service body that is an NPO in Newfoundland and Labrador purchases bicycles for $100 plus $15 HST.

The NPO's direct cost of each bicycle is $115 [$100 (purchase price) + $15 (HST)].

The NPO resells each bicycle for the usual charge of $100 and charges its customers $15 HST.

The NPO is a public service body that is selling tangible personal property that it purchased. The $100 charge is the usual charge by the NPO for such sales to such recipients. However, since the NPO charges its customers the HST, the direct cost exemption only applies if the consideration for the sales of the bicycles does not, and could not reasonably be expected to, equal or exceed the direct cost not including the HST. As the consideration for the sales of the bicycles (that is, $100) equals the direct cost not including the HST (that is, $100), all conditions of the direct cost exemption are not met. Therefore, the NPO's sales of the bicycles are not exempt from the HST under section 6 of Part VI of Schedule V.

Example 19 – Tangible personal property purchased and resold, GST/HST charged

A charity in Alberta purchases calendars for $12 plus $0.60 GST.

The charity's direct cost of each calendar is $12.60 [$12 (purchase price) + $0.60 (GST)].

The charity resells each calendar for the usual charge of $12.50 and charges the recipients $0.63 GST.

The charity is selling tangible personal property that it purchased and the $12.50 charge is the usual charge by the charity for such sales to such recipients. However, since the charity charges the recipients the GST, the direct cost exemption only applies if the consideration for the sales of the calendars does not, and could not reasonably be expected to, equal or exceed the direct cost not including the GST. As the consideration for the sales of the calendars (that is, $12.50) exceeds the direct cost not including the GST (that is, $12), all conditions of the direct cost exemption are not met. Therefore, the charity's sales of the calendars are not exempt from the GST under section 5.1 of Part V.1 of Schedule V.

Tangible personal property produced for sale – direct cost exemption applies

Example 20 – Tangible personal property produced and sold, no GST/HST charged

The print shop of a university that is a public service body in Manitoba produces 1,000 day planners to sell to students. The university pays $2,000 for paper, binding material, and ink plus $100 GST and $140 non-recoverable provincial sales tax. It also incurs $200 in administrative and overhead expenses.

The university's direct cost of producing the day planners is $2,240 [$2,000 (materials) + $100 (GST) + $140 (non-recoverable provincial sales tax)] and the direct cost of each day planner is $2.24 ($2,240 ÷ 1,000 day planners). The definition of direct cost in subsection 123(1) does not include administrative or overhead expenses incurred to produce tangible personal property. Therefore, the administrative and overhead expenses of $200 incurred by the university do not form part of the direct cost of the day planners.

The university sells the day planners to its students for the usual charge of $2 each and does not charge the GST.

The university is a public service body that is selling tangible personal property that it produced. The total charge of $2 is the usual charge by the university for such sales to such recipients. Since the university does not charge its students the GST on the sales of the day planners and the total charge (that is, $2) does not exceed the direct cost (that is, $2.24), all conditions of the direct cost exemption are met. Therefore, the university's sales of the day planners are exempt from the GST under section 6 of Part VI of Schedule V.

Example 21 – Tangible personal property produced and sold, GST/HST charged in error

The print shop of a university that is a public service body in Nova Scotia produces 1,000 day planners to sell to instructors. The university pays $3,000 for paper, binding material, and ink plus $420 HST. It also incurs $300 in administrative and overhead expenses.

The university's direct cost of producing the day planners is $3,420 [$3,000 (materials) + $420 (HST)] and the direct cost of each day planner is $3.42 ($3,420 ÷ 1,000 day planners). The definition of direct cost in subsection 123(1) does not include administrative or overhead expenses incurred to produce tangible personal property. Therefore, the administrative and overhead expenses of $300 incurred by the university do not form part of the direct cost of the day planners.

The university sells the day planners to its instructors for the usual charge of $2.50 and charges $0.35 HST.

Although the university charges its instructors the HST, the direct cost exemption applies. The university is a public service body that is selling tangible personal property that it produced. The $2.50 charge is the usual charge by the university for such sales to such recipients. The consideration for the sale of each day planner (that is, $2.50) does not equal or exceed the direct cost not including the HST [that is, $3 ($3,000 ÷ 1,000 day planners)]. Therefore, all conditions of the direct cost exemption are met and the university's sales of the day planners are exempt from the HST under section 6 of Part VI of Schedule V. The university charged the HST in error and it may refund, adjust, or credit the HST in accordance with subsection 232(1).

Tangible personal property produced for sale – direct cost exemption does not apply

Example 22 – Tangible personal property produced and sold, no GST/HST charged

A public service body that is an NPO in New Brunswick manufactures tables to sell to customers. It incurs the following expenses:

$100 plus $15 HST for the services of a carpenter
$150 plus $22.50 HST for materials, including wood, nails, glue, and varnish
$20 plus $3 HST for packaging material (that is, the box in which the table is sold)

The definition of direct cost does, however, include the total of all amounts paid for any article or material purchased by the NPO, to the extent that the article or material is to be incorporated into the property, or is to be consumed or expended directly in the manufacturing, producing, processing, or packaging of the property.

Therefore, the NPO's direct cost of each table is $195.50, which includes the cost of the materials [$150 (purchase price) + $22.50 (HST)] and the packaging materials [$20 (purchase price) + $3 (HST)].

The NPO sells each table for the usual charge of $270 and does not charge the HST.

The NPO is a public service body that is selling tangible personal property that it manufactured. The total charge of $270 is the usual charge by the NPO for such sales to such recipients. The NPO does not charge its customers the HST on the sales of the tables, however, the total charge (that is, $270) exceeds the direct cost (that is, $195.50). For the direct cost exemption to apply, the total charge for the sales of the tables cannot, and could not reasonably be expected to, exceed the direct cost. Since all conditions of the direct cost exemption are not met, the NPO's sales of the tables are not exempt from the HST under section 6 of Part VI of Schedule V.

Example 23 – Tangible personal property produced and sold, GST/HST charged

A charity in Ontario manufactures chairs to sell to customers. It incurs the following expenses for each chair that it manufactures:

$50 plus $6.50 HST for the services of a carpenter
$90 plus $11.70 HST for materials, including wood, nails, glue, and varnish
$10 plus $1.30 HST for packaging material (that is, the box in which the chair is sold)

The definition of direct cost in subsection 123(1) does not include the cost of services acquired for use as an input into a supply. Therefore, the cost of the carpenter's services incurred by the charity does not form part of the direct cost of the chairs.

The definition of direct cost does, however, include the total of all amounts paid for any article or material purchased by the charity, to the extent that the article or material is to be incorporated into the property, or is to be consumed or expended directly in the manufacturing, producing, processing, or packaging of the property.

Therefore, the charity's direct cost of each chair is $113, which includes the cost of the materials [$90 (purchase price) + $11.70 (HST)] and the packaging materials [$10 (purchase price) + $1.30 (HST)].

The charity sells each chair for the usual charge of $100 and charges its customers $13 HST.

The charity is selling tangible personal property that it manufactured. The $100 charge is the usual charge by the charity for such sales to such recipients. However, since the charity charges its customers the HST, the direct cost exemption only applies if the consideration for the sales of the chairs does not, and could not reasonably be expected to, equal or exceed the direct cost not including the HST. As the consideration for the sale of each chair (that is, $100) equals the direct cost not including the HST [that is, $100 ($90 + $10)], all conditions of the direct cost exemption are not met. Therefore, the charity's sales of the chairs are not exempt from the HST under section 5.1 of Part V.1 of Schedule V.

Supplies for which the direct cost exemption does not apply

45. The direct cost exemption only applies to certain sales of tangible personal property and services made by a charity or public service body. As discussed in paragraphs 29 and 30 of this memorandum, the direct cost exemption does not apply to supplies made by way of lease, licence, or similar arrangement, or to supplies of capital property, designated municipal property, real property, or intangible personal property.

Example 24 – Supply by way of lease, licence, or similar arrangement

An NPO owns a party tent. It rents the tent to persons that are hosting outdoor events. The fee that the NPO charges to rent the tent is intended only to recover its costs.

The direct cost exemption only applies to certain sales of tangible personal property and services. It does not apply to supplies made by way of lease, licence, or similar arrangement (that is, rentals). As a result, the NPO's rentals of the tent are not exempt from the GST/HST under section 6 of Part VI of Schedule V.

Example 25 – Capital property

A community-based charity teaches woodworking skills to adults. The charity owns capital property such as band saws. The charity sells one of its band saws at a price that is intended only to recover its purchase cost.

The direct cost exemption applies to certain sales of tangible personal property. However, the sale of capital property of the supplier is specifically excluded. As the band saw is capital property of the charity, the direct cost exemption does not apply. The charity's sale of the band saw is not exempt from the GST/HST under section 5.1 of Part V.1 of Schedule V.

Example 26 – Capital property

An NPO provides services to newcomers to Canada, including English language instruction and computer skills training. The organization owns computers that it uses in the course of providing these services to its clients. The computers are capital property of the organization.

The NPO sells one of the computers at a price that is less than its direct cost.

The direct cost exemption applies to certain sales of tangible personal property. However, the sale of capital property of the supplier is specifically excluded. As the computer is capital property of the NPO, the direct cost exemption does not apply. The NPO's sale of the computer is not exempt from the GST/HST under section 6 of Part VI of Schedule V.

Example 27 – Real property

A charity owns a parcel of vacant land. It sells the land to an individual at a price that is intended only to recover its purchase cost.

The direct cost exemption only applies to certain sales of tangible personal property and services. The sale of vacant land is a sale of real property, not tangible personal property or a service. As a result, the direct cost exemption does not apply and the charity's sale of the vacant land is not exempt from the GST/HST under section 5.1 of Part V.1 of Schedule V.

Example 28 – Intangible personal property

An NPO holds an annual conference for its members, providing them with the opportunity to attend various workshops and information sessions. The organization sells admissions to the conference and structures the admission fees to only recover its costs.

The direct cost exemption only applies to certain sales of tangible personal property and services. The sale of an admission to a conference is a sale of intangible personal property, not tangible personal property or a service. As a result, the direct cost exemption does not apply and the NPO's sales of the admissions to the conference are not exempt from the GST/HST under section 6 of Part VI of Schedule V.

Example 29 – Intangible personal property

An NPO is the provincial governing body of a sport. The NPO's members are its local clubs, and each local club has individual members.

The NPO purchases a software program that is designed to track and rank the individual members of each local club. The NPO charges each local club a fee for the right to use the program. The fee is intended to only recover the NPO's costs.

The direct cost exemption only applies to certain sales of tangible personal property and services. The supply of a right to use a software program is a supply of intangible personal property, not tangible personal property or a service. As a result, the direct cost exemption does not apply and the NPO's supplies of the right to use the software program are not exempt from the GST/HST under section 6 of Part VI of Schedule V.

Example 30 – Intangible personal property

An NPO organizes a golf tournament and charges its members an entry fee to participate. The entry fee is intended to only recover the NPO's costs.

The direct cost exemption only applies to certain sales of tangible personal property and services. The supply of a right to participate in a golf tournament is a supply of intangible personal property, not tangible personal property or a service. As a result, the direct cost exemption does not apply and the NPO's supplies of the right to participate in the golf tournament are not exempt from the GST/HST under section 6 of Part VI of Schedule V.

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2026-08-26