Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise & GST/HST Rulings Directorate
Place de Ville, Tower A 11th Floor
Ottawa, ON K1A 0L5
[Addressee]
Case number: 167875
Subject: GST/HST INTERPRETATION
Application of section 141.02 ITC allocation rules to a […][financial institution]
This memorandum is in response to your email which included a summary of the facts and positions taken on the issue of input tax credit (ITC) allocation under section 141.02 for […]([…][financial institution X]) in relation to certain ITCs […]. We apologize for the delay in our response.
All legislative references are to the (Excise Tax Act) ETA unless otherwise specified.
[…][INTERPRETATION REQUESTED]:
You would like […][to know about] the:
1. application of the ITC allocation rules in [financial institution X’s] situation, including where it is involved in […][commercial activities]; and
2. application of the ETA to supplies made to non-residents by [financial institution X].
[…][FACTS]:
[Financial institution X] is a publicly traded, […] listed financial institution under subparagraph 149(1)(a)[…]. It is also a selected listed financial institution for GST/HST purposes and is registered for GST/HST.
[Financial institution X] 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 also provides financial services of […].
[…]
The […] inputs at issue have been categorized by [financial institution X] 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]. […].
[…][Details of ITC allocation]
[…]
[…][INTERPRETATION GIVEN]
[…]. […] as we have not been provided with complete details regarding those expenses, we are not able to determine with certainty why they were specifically acquired. Therefore, our comments remain general in nature, and each expense, and the purpose for which it was acquired, will need to be examined to determine whether [financial institution X] is eligible to claim an ITC in relation to that expense.
[…], generally, where an amount of GST/HST is paid or payable on property or a service acquired by a person, the person is only eligible to claim an ITC under subsection 169(1) to the extent that the property or service was acquired by the person for consumption, use or supply in the course of the person’s commercial activities, where all other conditions for claiming an ITC are met.
Please note, that in order for [financial institution X] to be able to claim an ITC, the property or service acquired must be for consumption, use or supply by [financial institution X] in its commercial activities. Property and services for consumption, use or supply by another person would not be included as an ITC of [financial institution X]. For example, you have indicated […] that some of the services acquired from […][supplier A] are in relation to […][person Y]. […].
Subsection 141.01(2) clarifies the ITC eligibility set out in subsection 169(1). Under subsection 141.01(2), the extent to which a property or service is considered to be acquired for consumption or use in a person’s commercial activities is generally based on the extent to which the property or service is acquired by the person for making taxable supplies for consideration.
Section 141.02 applies in determining the extent under subsection 141.01(2) to which property or a service is acquired by a financial institution for consumption or use in making taxable supplies for consideration or otherwise and includes provisions that apply to financial institutions that are not qualifying institutions, such as [financial institution X].
According to section 141.02, [financial institution X] must first categorize its inputs (whether excluded, exclusive, direct or non-attributable) and then apply the appropriate ITC allocation method set out in that section. We understand from the information you provided that none of the inputs at issue […] are excluded inputs (that is, they are not for use as capital property, or as an improvement to capital property by [financial institution X]).
A non-attributable input of [financial institution X] is a property or service that is not an excluded or exclusive input, and cannot be attributed to the making of any particular supply by [financial institution X]. It is not clear whether any of the ITCs in question could be characterized as non-attributable inputs. 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. For more information about the allocation of non-attributable inputs, see GST/HST Technical Information Bulletin B-106, ITC Allocation Methods for Financial Institutions for Section 141.02 (B-106).
Under subsection 141.02(1), an exclusive input of [financial institution X] would include a property or a service (other than an excluded input) that is acquired, imported or brought into a participating province by [financial institution X] for consumption or use directly and exclusively for the purpose of making taxable supplies for consideration or directly and exclusively for purposes other than making taxable supplies for consideration. It should be noted that in the case of a financial institution such as [financial institution X], exclusive means all (100%).
Based on the information provided […], it appears that there may be items included in both the “overhead” pool and [type 1] pool that were acquired directly and exclusively for the purpose of either making taxable supplies for consideration, or for another purpose (for example, making exempt supplies). If so, they would be exclusive inputs, even though they were not categorized as such.
For example, it is not clear what the services of […][supplier B] were for, however, you seem to refer to some of them as being related to the issuance of [financial instruments]. If they were acquired directly and exclusively for the purpose of making exempt supplies of financial services, they would be exclusive inputs and subsection 141.02(6) would deem [financial institution X] to have acquired them for consumption or use exclusively otherwise than in the course of its commercial activities. If that is the case, there would be no ITC entitlement for those services. Conversely, if […] the services of […][supplier C] were acquired directly and exclusively for use by [financial institution X] […] to make taxable supplies for consideration, they would be an exclusive input and subsection 141.02(6) would deem [financial institution X] to have acquired them for consumption or use exclusively in the course of its commercial activities.
A direct input is defined in subsection 141.02(1) as a property or a service that is not an excluded input, an exclusive input, or a non-attributable input. Generally, a direct input of [financial institution X] is property or a service that is:
- neither capital property of [financial institution X] nor acquired for use as an improvement to capital property of [financial institution X];
- not acquired, imported or brought into a participating province by [financial institution X] for consumption or use directly and exclusively for purposes of making taxable supplies for consideration or otherwise; and
- can be attributed in whole or in part to the making of a particular supply or supplies by [financial institution X].
Based on the information provided […], it appears that there may be inputs included in both the “overhead” and “[type 1]” pools that may in fact be direct inputs. […]
As [financial institution X] has not made an election under subsection 141.02(9), under subsection 141.02(12), [financial institution X] must use a direct attribution method to determine, for a particular fiscal year, the operative and procurative extent of each direct input. This method must conform to the criteria, rules, terms and conditions specified by the Minister and must determine the operative extent and the procurative extent of the property or service in the most direct manner.
Criteria, rules, terms and conditions specified by the Minister
The criteria, rules, terms and conditions are specified by the Minister in B-106.
In order to conform to the criteria, rules, terms and conditions specified by the Minister, an allocation method must employ an objective measure of use which is meaningful, unbiased and verifiable, and be applied in a manner that accurately reflects the use of the particular business input including providing comparable results and using cost pools only if they are appropriate cost pools.
Direct attribution method
Tracking is recording to the extent possible the actual use of a particular input so that the actual use is linked to the purpose of making taxable supplies for consideration and to other purposes. 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, a direct attribution method which determines the extent of use of a direct input of [financial institution X] in making taxable supplies for consideration or otherwise in the most direct manner should include tracking to the extent possible.
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. Therefore, the use of the input should have a correlation to the allocation base.
It appears that [financial institution X] used causal allocation to determine its ITC eligibility for [type 1] expenses (that is, it generally linked the expenses related to its supplies to […]). However, from the information provided, it is not clear that there is a clear and logical link between all of the [type 1] expenses and the provision of taxable and exempt supplies […], partly because of [financial institution X’s] use of cost pools.
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. Therefore, cost pools are only appropriate where the use of grouping or pooling of business inputs results in the same ITC allocation result as would be arrived at if each business input was allocated without the use of pooling and the pooling does not distort the results.
[Financial institution X] has included various expenses in [type 1] and overhead pools, however, as mentioned, it appears that these pools may include inputs of more than one category, such as, exclusive and direct inputs. […].
[…] it appears that [financial institution X] has used an input-based method to calculate its ITCs on overhead expenses, however, if any of the overhead expenses are direct inputs, [financial institution X] was required to allocate them in the most direct manner, tracking their use to the extent possible, and using causal allocation to the extent possible where tracking cannot be done.
In the limited situations where it is appropriate for a financial institution to use input-based allocation, such allocation must provide a reasonable approximation of the extent to which the consumption or use of a particular business input is for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.
If input-based allocation is used as a direct attribution method, the property and services allocated as exclusive inputs or through tracking of direct inputs and causal allocation of direct inputs must represent a substantial portion of the inputs that relate to the financial institution’s business or relevant part of the business. An input-based allocation for direct inputs should be calculated using exclusive inputs and direct inputs that have either been tracked or allocated through the use of causal allocation (that is, it would not include excluded inputs, non-attributable inputs or direct inputs allocated using input-based or output-based allocation).
Since limited information was provided, it is unclear whether the inputs used in the ratio in [financial institution X’s] input-based method include a substantial number of inputs that were exclusive inputs or were allocated through tracking or causal allocation. Furthermore, as discussed above, it is not clear that the type of causal allocation used for [type 1] expenses is appropriate. Therefore, if it was not appropriate to allocate the [type 1] expenses in this manner, calculating ITCs on overhead expenses using an input method based on an inappropriate causal allocation for [type 1] expenses would also not be appropriate.
Based on all of the above, it is not clear that the allocation methods employed by [financial institution X] for claiming ITCs for its [type 1] and overhead expenses meet the conditions outlined in section 141.02, including the criteria, rules, terms and conditions specified by the Minister. Each input that is part of this claim should be categorized properly and the provisions of section 141.02 should be applied, including using a specified method or direct attribution method that meets the criteria, rules, terms and conditions specified by the Minister.
Additional Requirements
Under subsection 141.02(16), any method that a financial institution uses in accordance with subsections 141.01(10) to (15) (for example, a specified method for an excluded input, a direct attribution method for a direct input or a specified method for a non-attributable input) for a fiscal year must be fair and reasonable, used consistently by the financial institution throughout the fiscal year, and be determined by the date specified in the legislation. Furthermore, under subsection 141.02(17), after that same date, the financial institution cannot alter or substitute a method used by the financial institution for that fiscal year under any of subsections 141.02(10) to (15) with another method without the Minister’s written consent.
[…]
Further discussion and examples on the use of allocation methods for exclusive, direct and non--attributable inputs may be found in B-106.
Supplies of Financial Services to non-residents
The definition of financial service in subsection 123(1) includes, in paragraph (d), the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer or ownership or repayment of a financial instrument, and in paragraph (f), the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument. A financial instrument is defined in subsection 123(1) […]. […].
All supplies of financial services are exempt under section 1 of Part VII of Schedule V to the ETA, unless zero-rated under Part IX of Schedule VI to the ETA. Under section 1 of Part IX of Schedule VI, a supply of a financial service (other than a supply that is included in section 2, which relates to an insurance policy), made by a financial institution to a non-resident person is zero-rated, except where the service relates to certain debts, or to a financial instrument (other than an insurance policy or a precious metal) acquired, otherwise than directly from a non-resident issuer, by the financial institution acting as principal.
Supplies of financial services of [financial institution X] […] to non-residents may be zero-rated under section 1 of Part IX of Schedule VI.
[In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.]
If you have further questions or require clarification on the above information, please contact [Eleanor Struth] at 780-495-7507.
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