GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

S. 141.01(2) relevant to intended use of acquisitions (informed by actual use)

9. Subsection 141.02(1) defines procurative extent as the extent to which property or a service is acquired for the purpose of making taxable supplies for consideration or the extent to which the property or service is acquired for purposes other than making taxable supplies for consideration. The procurative extent is used in the application of subsection 141.01(2), which generally deems the financial institution to have acquired the property or service for consumption or use in commercial activities for purposes of subsection 169(1) to the extent that the financial institution acquired the property or service for the purpose of making taxable supplies for consideration. …

11. Although the procurative extent (intended use) of a business input is based on the purpose for which the particular business input was acquired at the time it was acquired, the actual use of the business input may help clarify what the financial institution’s intention was at the time the property or service was acquired.

Website highlighting community involvement of FI is for the purpose of making supplies

• A financial institution generally has very few non-attributable inputs. An example of a direct input (i.e., contributing to making both taxable and exempt supplies) given by CRA (in Example 7) is services received by an FI for the maintenance of a website providing information about its involvement in the community activities (e.g., sponsorship of children’s sports teams), as well as information about the various services it provides. Such acquired services can “be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).” (This appears to imply acceptance that such indirect promotional activity is for the purpose of making the taxable and exempt supplies of the FI).

Operative extent relevant to ITCs on improvements and change-in-use rules

10. Subsection 141.02(1) defines operative extent as the extent to which the consumption or use of property or a service is for the purpose of making taxable supplies for consideration or the extent to which the consumption or use is for purposes other than making taxable supplies for consideration. The operative extent of a particular input is relevant in determining the extent, under subsection 141.01(3), to which the property or service is deemed to be consumed or used by the financial institution in the course of its commercial activities. The extent to which the property or service is consumed or used in the course of the financial institution’s commercial activities is pertinent to those provisions that depend on whether, and to what extent, properties and services are, at any particular time, consumed or used in commercial activities (for example, provisions regarding ITCs on improvements and change-in-use rules for capital property).

S. 150(1) election renders inputs to services rendered by electing FI to another group FI exclusive inputs

Example 4

Financial Institution D is a financial institution as a result of an election under subsection 150(1). The only supplies that Financial Institution D makes are supplies of services to Financial Institution E, which are deemed to be financial services as a result of the election under subsection 150(1). The financial services supplied to Financial Institution E are exempt. Financial Institution D acquires a consulting service from a third party as an input into the services it supplies to Financial Institution E.

The third party’s supply of the consulting service to Financial Institution D is an exclusive input of Financial Institution D because it is not an excluded input and it is acquired by Financial Institution D for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration (that is, to make exempt supplies of financial services).

Direct input where FI partially leases out office building rather than using in its financial business

Example 5

Financial Institution E makes taxable supplies for consideration and exempt supplies. Financial Institution E enters into a lease agreement with a landlord for the lease of space in a downtown office building. The leased space is not capital property of Financial Institution E. Financial Institution E uses 10% of the space it leases in making taxable supplies for consideration and 90% of the space it leases in making exempt supplies.

The leased space in the building is a direct input because it is not an excluded or an exclusive input and because the use of the space can be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).

Direct input where website indirectly promotes the FI’s business

Example 7

Financial Institution G makes both taxable supplies for consideration and exempt supplies. Financial Institution G pays a monthly fee for the maintenance of a website which provides information about its involvement in the communities surrounding its offices (for example, sponsoring local children’s sports teams), as well as information about the various services it provides.

Although the maintenance of the website is a business input that relates, in part, to Financial Institution G’s community involvement, the website maintenance service is not a non‑attributable input but is a direct input of Financial Institution G. This is because it is not an excluded input or an exclusive input and it can, at least in part, be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).

Various overhead expenses were direct inputs

Example 16

• Office space, heating costs, electricity, equipment repair and office supplies of a financial institution making both exempt and taxable supplies were direct inputs.

FIs have few non-attributable inputs

27. A financial institution generally has very few non-attributable inputs.

Example of (rare) non-attributable inputs

Example 6

Financial Institution F makes taxable supplies for consideration and exempt supplies. Financial Institution F purchases pamphlets that demonstrate ergonomic principles and illustrate various stretching techniques for its office staff. These pamphlets are left in a central location where employees can take one if they wish.

The pamphlets are non‑attributable inputs of Financial Institution F because they are not excluded or exclusive inputs and cannot be attributed, even in part, to the making of any particular supply.

Direct input where website indirectly promotes the FI’s business

Example 7

Financial Institution G makes both taxable supplies for consideration and exempt supplies. Financial Institution G pays a monthly fee for the maintenance of a website which provides information about its involvement in the communities surrounding its offices (for example, sponsoring local children’s sports teams), as well as information about the various services it provides.

Although the maintenance of the website is a business input that relates, in part, to Financial Institution G’s community involvement, the website maintenance service is not a non‑attributable input but is a direct input of Financial Institution G. This is because it is not an excluded input or an exclusive input and it can, at least in part, be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).

Allocation of non-attributable input of FI based on allocation of its exclusive and direct inputs

Example 18

• A financial institution pays a fee to an external provider of employee assistance services related to the mental health and welfare of its employees, on which it pays the GST, without receiving information about which employees by name or department use the service, so that it categorizes such services as a non-attributable input. The value of all of the FI’s business inputs other than non-attributable inputs are properly allocated between the taxable and exempt supplies made by it as follows:

• The FI calculates that 8.5% [$702,800 ÷ ($702,800 + $7,565,300)] of the services is for the purpose of making taxable supplies for consideration, and claims 8.5% of the GST on the invoice of the service provider as an ITC. CRA indicated that this was a specified method.

Hierarchy of methods

42. A meaningful ITC allocation method must be based:

• first, on tracking to the extent possible
• second, to the extent that the use of the business input cannot be tracked, on causal allocation to the extent possible
• third, to the extent that the use of the business input cannot be allocated based on tracking or causal allocation, on input‑based allocation or output‑based allocation

Tracking method

44. Tracking is using a logical and systematic method to accurately record, to the extent possible, the purpose or purposes for which a financial institution acquired a business input or the actual use of a business input, including considering the context of the financial institution’s core business. …

Causal allocation

46. Causal allocation directly approximates the use of a particular business input using a logical and systematic approach and an appropriate allocation base.

47. An allocation base (for example, square footage or number of employees) is used to link a particular business input to the making of a particular supply or supplies by the financial institution. The use of the input should have a correlation to the allocation base. …

Example of causal allocation (exam cost allocated based on where hires went)

Example 10

Financial Institution J had 100 applicants who went through a general process to qualify to be considered for a position with Financial Institution J, and it hired 5 new employees as a result of this process: 1 employee to work in Department A to make taxable supplies for consideration and 4 employees to work in Department B to make exempt supplies. All of the 100 applicants, regardless of which department they would be working for, went through the same hiring process. Financial Institution J paid for the cost of a standardized exam and allocated it to Department A and Department B based on the number of employees that were hired in each department (that is, 20% for the purpose of making taxable supplies for consideration and 80% for the purpose of making exempt supplies).

Input-based allocation

49. An input-based allocation uses a calculation based on the procurative extent of other business inputs. …

51. Input‑based allocation is only meaningful if it is calculated using exclusive and direct inputs that have either been tracked or allocated through the use of causal allocation. …

52. Furthermore, input‑based allocation can only be used if a substantial portion of the financial institution’s business inputs (other than excluded inputs) that relate to the financial institution’s business or relevant part of the business are exclusive and direct inputs that have been tracked or allocated through the use of causal allocation.

Output-based allocation

54. Output-based allocation uses a calculation based on an output measure (for example, revenue or number of transactions) to allocate the consumption or use of a business input.

56. An allocation based on revenue is not appropriate where the amount of revenue generated from making particular supplies is not indicative of the cost of taxable inputs used in making those supplies. In this case, a revenue‑based allocation will not provide a reasonable approximation of the extent to which the consumption or use of the business input is for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. For example, inputs should be used in the same proportion in making the supplies included in the calculation. Further, in order for a revenue‑based allocation to be appropriate, the average profit margin for the supplies included in the calculation should be the same because having different profit margins for different products may result in a particular type of supply being allocated a proportion of inputs that does not reflect the true proportion of inputs used in making that supply.

57. Further, other distorting factors must be excluded from the ITC calculations in a revenue‑based method … .

Cost pools

70. The legislation provides that 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. Therefore, cost pools are only appropriate and may only be used where the use of grouping or pooling of business inputs has the same ITC allocation result as would be arrived at if each business input was allocated without the use of pooling.

Change of use reflected in specified method applied to computer use

• Example (Example 13) of application of s. 206(3) so that a financial institution claims an ITC based on the commercial use of a computer increasing from 3% to 15% based on the number of employees, using dedicated portions of the computer, increasing due to chanted product lines.

Most direct inputs will be allocated through tracking or causally

93. Generally, a substantial portion of a financial institution’s direct inputs can be tracked or allocated through causal allocation. As a result, few, if any, direct inputs will be allocated using either an input-based allocation or an output-based allocation.

Allocation of vacant and common ares in rented space was not a direct attribution method

Example 17

• The FI rents an office building 25% of which it subleases at less than cost to independent contractors who do work for it and 35% of which is used by employees engaged in making exempt supplies. CRA indicated that allocating all of the 20% of the building that was vacant as being for commercial use (on the basis that it was available for taxable rentals) and allocating the 20% of the space that was common space as being 75% for commercial use, did not qualify as a direct attribution method (noting inter alia that these allocations did reflect the context of the FI’s core business.)

Change of use reflected in specified method applied to computer use

• Example (Example 13) of application of s. 206(3) so that a financial institution claims an ITC based on the commercial use of a computer increasing from 3% to 15% based on the number of employees, using dedicated portions of the computer, increasing due to changed product lines.

FI precluded from using a different (causal) method in subsequent year

Example 15

Financial Institution O has allocated the cost of consulting services between exempt and taxable supplies made by it based on the breakdown appearing in the consulting firm’s invoices.

The next year, Financial Institution O wants to also claim an additional ITC for the prior year on the consulting services paid to the accounting firm based on a calculation using causal allocation instead of tracking. Financial Institution O has not received written consent from the Minister to use this altered method.

Financial Institution O is not eligible to alter or substitute its method for the prior year because the new method is not the most direct method, the new method does not use tracking although tracking is possible and Financial Institution O does not have written consent from the Minister pursuant to subsection 141.02(17).

Implications of s. 141.02(9) election

100. Where an election under subsection 141.02(9) is in effect for a particular fiscal year for a financial institution, the extent to which a residual input of the financial institution is acquired, or consumed or used, for the purpose of making taxable supplies for consideration is deemed to be the particular prescribed percentage for the prescribed class of the financial institution (that is, 12% for banks, 10% for insurers and 15% for securities dealers).

101. Where an eligible financial institution makes the election under subsection 141.02(9) in respect of a particular fiscal year of the financial institution, subsections 141.02(10), (11), (12) and (13) do not apply to the financial institution in respect of that fiscal year (that is, generally the requirement to use a direct attribution method for a direct input and the requirement to use a specified method for a non-attributable input). As well, if the election is in effect, the following rules apply in respect of each residual input of the financial institution:

• the extent to which the residual input is acquired by the financial institution or is consumed or used for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
• for the purpose of determining an ITC in respect of the residual input, the description of B in the formula in subsection 169(1) is deemed to be equal to the prescribed percentage for the prescribed class of financial institution …

103. To make an election under subsection 141.02(9), use Form GST118 … .

Example 2

• Contractor’s service to complete improvements to capital real property is an excluded input.