Financial institution X, a publicly traded listed financial institution under s. 149(1)(a), is engaged both in making taxable supplies of and in making exempt supplies of financial services including the issuance, sale, and purchase of financial instruments. It has categorized the inputs at issue either as type 1 expenses, meaning those inputs which are related to certain financial instruments, or “overhead” expenses, meaning those inputs not related to certain financial instruments.
In commenting on the application of s. 141.02, CRA indicated that “in general, a substantial portion of a financial institution’s inputs that are not excluded inputs will be allocated through the rules for exclusive inputs or the direct attribution method for direct inputs, and will not be non-attributable inputs,” whereas here, there appeared to be exclusive inputs included in both the “overhead” pool and type 1 pool that were not so categorized.
After noting that, as financial institution X had not made an s. 141.02(9) election, it was required to use a direct attribution method, in determining the operative and procurative extent of each direct input, and that conformed to the criteria, rules, terms and conditions specified by the Minister in B-106, it indicated that as “tracking the use of a particular input is more direct than approximating the use of the input through causal allocation or input-based or output-based allocation,” tracking should be used “to the extent possible,” and that:
To the extent that tracking is not possible, [financial institution X] must use causal allocation to the extent possible. Causal allocation directly approximates to the extent possible the use of a particular input using a systematic approach and an appropriate allocation base which provides a reasonable approximation of the use or intended use of a business input.
CRA went on to note that the following principle had not been adhered to:
Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on a group of business inputs. If cost pools are used, all the business inputs within a cost pool must be included in a single business input category (for example, be included in the direct input category) and must be acquired, or be consumed or used, to the same extent for the purpose of making taxable supplies for consideration or other purposes.