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 and GST/HST Rulings Directorate
320 Queen St., Tower A
11th Floor, Ottawa, ON
K1A 0L5
[Addressee]
Case Number: 210124
Subject: [GST/HST INTERPRETATION]
Appropriateness of proposed ITC allocation method
[Thank you for your enquiry regarding the GST/HST input tax credit (ITC) allocation methods […] used by a financial institution.]
[INTERPRETATION REQUESTED]
[…][You would like an interpretation addressing the appropriateness of an ITC allocation method proposed by a financial institution.]
[INTERPRETATION GIVEN]
We have considered the new ITC allocation method proposed by […][the financial institution], as explained by […], and as outlined in the documentation you provided, for claiming its excluded, direct and non-attributable inputs.
We are providing the following comments based on that limited information. We apologize for the delay.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Under subsection 141.02(17), [the financial institution] cannot, after the day on or before which [the financial institution] is required to file a GST/HST return for the first reporting period in the fiscal year, 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.
Therefore, a change in ITC allocation methodology now […] is not allowed unless the Minister consents. Alternatively, if [the financial institution] did not use methods which conform to […][the criteria, rules, terms and conditions specified by the Minister] and therefore the definitions of specified method and direct attribution method, it would not be eligible to claim ITCs for the inputs at issue. Where the Minister consents to [the financial institution] revising its method, its new methods must conform […][to those specified criteria, rules, terms and conditions] to be specified methods and direct attribution methods and in order for [the financial institution] to be able to use those methods. […].
We have the following comments specific to the new proposed ITC allocation method:
1. The first step is to categorize inputs:
According to section 141.02, and explained in GST/HST Technical Information Bulletin B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act, [(effective July 2021, in GST/HST Memorandum 17- 12),] [the financial institution] must first categorize its inputs (whether excluded, exclusive, non-attributable or direct) and then apply the appropriate ITC allocation method set out in that section to each input. It is a question of fact whether or not that was done.
When the same method and rate is applied across all categories of inputs we do not believe that a person can say that they have met this condition.
Note that an input that might be considered an indirect input for cost allocation purposes (for example, certain overhead expenses) is a direct input for purposes of section 141.02 if the business input is not an excluded or exclusive input and can be attributed in whole or in part to the making of a particular supply or supplies.
2. The new method should conform to […][the specified criteria, rules, terms and conditions]:
Any specified method or direct attribution method must conform to the criteria, rules, terms and conditions […] specified by the Minister in B-106 [effective July 2021, in GST/HST Memorandum 17- 12]. […][The criteria, rules, terms and conditions] to which a specified method or a direct attribution method must conform are that the 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. The following highlights some of the specific requirements of [the specified criteria, rules, terms and conditions] which should be considered in [the financial institution]’s proposed method:
The method should be meaningful:
To be meaningful, the method should accurately reflect the extent to which the particular business inputs were acquired or consumed and used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. […][The specified criteria, rules, terms and conditions require] that a specified method for an excluded input or a direct attribution method for a direct input employ tracking to allocate an input if possible before using causal allocation, and use causal allocation where possible before using an input-based allocation or an output-based allocation. In addition, a direct attribution method must attribute a direct input in the most direct manner.
If a person has a cost accounting system that meets […][the criteria, rules, terms and conditions specified by the Minister], for example, if it tracks the extent to which certain inputs are used in making taxable supplies for consideration on an input-by-input basis, and the method of tracking is logical and systematic, then the person must use its cost accounting allocation method for these particular inputs. If [the financial institution] can use causal allocation for a particular input (because its use cannot be tracked), and it is logical that the input be used equally by the relevant employees, then using an allocation base of the relevant employees’ time may be appropriate and could reflect the use of the input; however, an allocation base of employees time may not be used for an input unless the input is used equally amongst all employees included in that base. […].
Note that because a non-attributable input cannot, by definition, be attributed to the making of any particular supply, it would not be tracked or allocated using causal allocation.
The method should only use appropriate cost pools:
An ITC allocation method should not include inputs from more than one input category in the same cost pool (that is, its direct, non-attributable and excluded inputs can’t be in the same pool), as different inputs included in that pool may be used to different extents for making taxable supplies for consideration and otherwise. As explained in B-106 [effective July 2021, in GST/HST Memorandum 17- 12], according to [the specified criteria, rules, terms and conditions], all the inputs within a cost pool must be included in a single business input category and must be acquired to the same extent for the purpose of making taxable supplies for consideration or other purposes. Any use of pooling must result in the same ITC allocation result as would be arrived at if each individual input was allocated without the use of pooling. […].
3. The new method should be fair and reasonable:
Under subsection 141.02(16), a specified method for an excluded input, a direct attribution method for a direct input or a specified method for a non-attributable input that a financial institution uses for a fiscal year must be fair and reasonable. A fair ITC allocation method should allocate each business input to the purposes for which the business input was acquired in a manner that is objective, equitable, impartial, unbiased and consistent with the nature of the financial institution’s business. A reasonable ITC allocation method should allocate each business input to the purposes for which the business input was acquired in a manner that is logical, rational, sensible and based on reason.
[In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations 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 interpretations or the additional information provided herein.]
If you have any questions regarding the above comments, please feel free to contact me.
Yours Truly,
Eleanor Struth
Industry Sector Specialist
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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