B-106 Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act 26 August 2011

Required homogeneity of cost pools

Appropriate costs pools

… If direct inputs are grouped together for ITC allocation purposes, all the direct inputs within the cost pool must:

• be for use to the same extent for the purpose of making taxable supplies for consideration if the inputs in the pool are tracked (e.g., a pool of inputs that are tracked cannot include an input that is used 2% for the purpose of making taxable supplies for consideration with an input that is used 30% for the purpose of making taxable supplies for consideration);
• be allocated using the same, appropriate, allocation base if the inputs in the pool are allocated using causal allocation;
• apply to the same portion of the business if the input is allocated using input-based allocation; and
• apply to the same portion of the business and use the same appropriate output measures (e.g., revenue) if the input is allocated using output-based allocation.

Example of inappropriate use of output based method where zero-rated revenue increases do not affect inputs

Example 32

Financial Institution N uses an output-based method (a ratio of foreign, zero-rated interchange transactions to total interchange transactions) to allocate all its inputs (e.g., capital property and inputs that can be attributed to particular supplies) for its credit card division. Most of Financial Institution N's revenue from its credit card division is from interest income from cardholders and annual credit card fees. There is no proportionate increase in interchange transactions with an increase in inputs on which GST/HST is paid. Not all of Financial Institution N's inputs are non-attributable inputs (e.g., some are excluded inputs and some are direct inputs). As a result, tracking and causal allocation would apply to many inputs, and it would not be appropriate to use an output-based method for all the inputs. The method used by Financial Institution N would not be a specified method for a non-attributable input.

Data entry for supplies made to insurance company clients are direct inputs

Example 29

Insurance Company H requires data entry services in respect of the information provided by clients on its various forms. Some forms relate to taxable supplies for consideration and some forms relate to exempt supplies. Insurance Company H purchases these data entry services from an unrelated company. This is a direct input rather than a non-attributable input because it can be attributed to the making of particular supplies.

Employee surveys re environmental practices, or employee assistance programs, are non-attributable inputs

Example 27

Financial Institution G makes both taxable supplies for consideration and exempt supplies. Financial Institution G has an in-house sustainable development program to encourage employees to make more environmentally sustainable choices in their home and work lives. As part of this program, Financial Institution G hires an external consulting firm to conduct anonymous electronic surveys to determine how the employees feel about the current sustainable development program and to provide ideas on how the program could be improved. The supply of conducting the electronic surveys that Financial Institution G receives is a non-attributable input because it is not an excluded input or an exclusive input, and it cannot be attributed to the making of any particular supply.

Example 28

Financial Institution P makes both taxable and exempt supplies. It hires an external contractor (a corporation that provides employee assistance program (EAP) services) to provide taxable EAP services. Financial Institution P receives a monthly bill from its EAP provider, which includes the number of employees who received services that month, but for confidentiality purposes, Financial Institution P does not receive the names of the employees who used the EAP services or the name of department where they work. As a result, it is not possible to attribute the EAP services to the making of any particular supply. The supply of EAP services that Financial Institution P receives is a non-attributable input because it is not an excluded input or an exclusive input, and it cannot be attributed to the making of any particular supply.