GST/HST Memorandum 5-1 Direct Cost Exemption, August 2026

Direct cost exemption

• The direct cost does not include administrative or overhead expenses or employee salaries that are incurred to provide tangible personal property or services (para. 21, and Examples 2, 3, and 4).

On-supplies of services

• The direct cost exemption for a supply of services applies only if the service is sold in the same form as the form in which it was acquired (para. 22).

Example 14: Direct cost exemption available where legal service are sold by an NPO to its clients at the NPO’s cost.

Example 17: The exemption is not available where an NPO purchases résumé writing services and credit counseling services from two separate companies, bundles the services, and sells them to its client in the form of a life skills coaching service (i.e., the services are not resold in the same form as they were acquired.)

Usual charge requirement

• Regarding the "usual charge," the usual charge may vary depending on, for example, the volume or quantity purchased. It may also vary according to the type of recipient or its ability to pay (para. 34).

Example 6: An NPO resells mediation services to university students at their direct cost, which qualifies for the exemption because this is its usual charge to university students. However, the NPO marks up the cost of those services for other recipients.

• The direct cost exemption and usual cost exception do not apply where the charity or public service body sells off excess stock at or below cost (para. 36).

Choice if selling at direct cost

• If charities and public service bodies are selling for precisely their direct cost, they can choose as to whether or not to charge GST/HST (para. 36).

Exclusions

The direct cost exemption does not apply for supplies of:

• Tangible personal property (e.g., a party tent, Example 24) that is leased or licensed.
• Capital property, such as a band saw (Example 25) or computers (Example 26).
• A sale of real property, e.g., a sale of vacant land (Example 27).
• Intangible personal property, e.g., licensing of a software program (Example 29).

Points include:

• The direct cost exemption for a supply of services applies only if the service is sold in the same form as the form in which it was acquired – for example, the exemption is available where legal service are sold by an NPO to its clients at the NPO’s cost, whereas the exemption is not available where an NPO purchases résumé writing services and credit counseling services from two separate companies, bundles the services, and sells them to its client in the form of a life skills coaching service (i.e., the services are not resold in the same form as they were acquired.)
• Regarding the requirement that the charge at or at less than the direct cost be the "usual charge," the usual charge may vary depending on, for example, the volume or quantity purchased, and may also vary according to the type of recipient or its ability to pay.
• If charities and public service bodies are selling for precisely their direct cost, they can choose as to whether or not to charge GST/HST.

The direct cost exemption s. V-VI-6 for a supply of services applies only if the service is sold in the same form as the form in which it was acquired – for example, the exemption is available where legal service are sold by an NPO to its clients at the NPO’s cost (Example 14), whereas (in Example 17) the exemption is not available where an NPO purchases résumé writing services and credit counseling services from two separate companies, bundles the services, and sells them to its client in the form of a life skills coaching service (i.e., the services are not resold in the same form as they were acquired.)