Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
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XXXXX
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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 112425
Attention: XXXXX XXXXX
October 6, 2010
Dear XXXXX:
Subject:
GST/HST INTERPRETATION
Allocations for purposes of claiming input tax credits
Thank you for your letters of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to issues surrounding allocations of capital real property and input tax credits. We apologize for the delay in our response.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand as follows:
1. XXXXX universities that are registered for purposes of the GST/HST. The universities in question are engaged primarily in providing educational services which are exempt supplies. However, the universities also make other supplies, including both taxable supplies for consideration and other exempt supplies (referred to as "secondary supplies").
2. With respect to the capital real property of the universities discussed in this letter, the universities have filed or will be filing elections under section 211 in respect of a particular parcel of capital real property.
3. The universities have used a "space-based" method to measure the extent to which a particular parcel of capital real property covered by a section 211 election is used in commercial activities. Universities have determined areas within the property that are used in commercial activities or in making exempt supplies or in a combination thereof. These areas are referred to as "direct use space". Direct use space that is used for making both taxable supplies for consideration and exempt supplies is allocated a percentage of use in commercial activities based on square metres of the space devoted to one use or another, the time the space is used for one activity or another, or on the basis of revenues. This space.based allocation method uses square metres of floor space and land as the unit of measure for purposes of allocating the property to use in commercial activities or other uses.
4. You have classified those areas within a parcel of capital real property that are not direct use space as being either "common area space" or "support function space".
"Common area space" is that area of the property in question that is not used directly in making either taxable supplies for consideration, exempt supplies or a combination thereof. Common area space is located inside buildings and other structures (e.g., hallways, corridors, stairwells, building maintenance and service rooms, and electrical rooms) or is located outdoors (e.g., sidewalks, roads, walkways, parks, open fields and future development space).
"Support function space" is that area of the property in question that supports the operations of a university (e.g., areas relating to human resources, governance, the registrar's office, finance and administration, and security). These functions do not make taxable supplies for consideration or exempt supplies, but support other functions of the university that do make such supplies.
5. With respect to common area space, a university's approach to allocating that space in a given parcel of capital real property is to determine the direct use space in that parcel and then of that area, determine the space used in commercial activities and the space used in making exempt supplies. The percentage of direct use space that is used in commercial activities is then applied to the common area space in that parcel to determine the amount of common area space that is allocated to use in commercial activities.
6. You have advised that with respect to the support function space on a particular parcel of capital real property, universities have allocated the space on the basis of the university's taxable and exempt activities from the perspective of the university as a whole rather than an allocation of the support function space based only on the use of that particular property.
Interpretation Requested
You are requesting clarification of the CRA's general guidelines relating to the measurement of the extent that capital real property of a university is consumed, used or supplied in its commercial activities. Specifically, you are requesting our comments on the matters set out above.
You are also seeking confirmation that at the time of making an election under section 211 in respect of real property that is capital property of the university, the property that is the subject of the election is the same property referred to in subsection 141.01(2). That is, when determining the extent to which the elected property is acquired for use in making taxable supplies for consideration, it is the use of the entire property that must be considered.
Interpretation Given
We preface our comments with the statement that it is a question of fact whether the methods used by a person to determine the extent to which properties or services are for consumption or use, or are acquired, for the purpose of making taxable supplies for consideration or for other purposes are fair and reasonable. While we may be in a position to offer comments on whether a proposed allocation method is unreasonable in a particular set of circumstances, it is a question of fact whether a particular method used by a registrant is fair and reasonable in the circumstances.
Primary and secondary supplies
Although the primary purpose of a university is to provide exempt educational services, those areas of a parcel of capital real property that are used for the purpose of making taxable supplies for consideration should be reflected in an allocation method as contributing to the extent to which the property is so used. For example, if a building contains classrooms that are used to make exempt supplies and a cafeteria that is used to make taxable supplies for consideration and exempt supplies, an allocation method should recognize the extent that the cafeteria is for use in making taxable supplies for consideration, even if those supplies are considered to be secondary supplies in that the cafeteria is generally used by individuals attending courses which are exempt.
General input tax credit (ITC) provisions
As you are aware, subsection 141.01(5) provides that the methods used by a person in a fiscal year to determine the extent to which the consumption or use of property or services is for the purpose of making taxable supplies for consideration or for other purposes, or the extent to which property or services are acquired for such purposes, must be fair, reasonable and used consistently by the person throughout the year. Further, while the ITC calculation in paragraph (b) of the definition of element B in subsection 169(1) is based on the extent to which capital property was used in commercial activities after it was last acquired, or in the case of paragraph (c) of element B, the extent to which the property is for consumption, use or supply in commercial activities, subsections 141.01(2) and (3) refine the ITC eligibility set out in subsection 169(1).
Pursuant to subsection 141.01(2), a person is considered to have acquired property or a service for consumption or use in commercial activities only to the extent that the property or service is acquired for the purpose of making taxable supplies for consideration in the course of an endeavour of the person. To the extent that the property or service is acquired for the purpose of making supplies in the course of an endeavour that are not taxable supplies made for consideration or for a purpose other than making supplies, the person is deemed to have acquired the property or service for consumption or use otherwise than in commercial activities.
Similarly, subsection 141.01(3) provides that a person is considered to consume or use property or a service in commercial activities only to the extent that the property or service is consumed or used for the purpose of making taxable supplies for consideration in the course of an endeavour of the person. To the extent that the property or service is consumed or used for the purpose of making supplies in the course of an endeavour that are not taxable supplies made for consideration or for a purpose other than making supplies, the person is deemed to consume or use the property or service otherwise than in commercial activities.
As such, if capital real property is acquired for use for a purpose other than making taxable supplies for consideration (and such other use need not be specified), then the property will not be considered to be acquired for use in commercial activities pursuant to subsection 141.01(2). Similarly, if capital real property is not used for the purpose of making taxable supplies for consideration and is used for some other purpose (and again, such other use need not be specified), then the property will not be considered to be used in commercial activities pursuant to subsection 141.01(3).
We would add that capital real property must be used, or held for use, for one or more purposes at all times.
General comments on allocations for purposes of claiming ITCs
If more than one method of allocating an input is fair and reasonable in given circumstances, a registrant will be required to choose one of the methods and that method is to be used consistently throughout the year.
The concept underlying ITC allocation methods is that a method or methods used must link a particular property or service to its use for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. The purpose of any ITC allocation method is to produce a result that is a reasonable reflection of the extent to which inputs (upon which GST/HST has been paid or is payable) are for use in commercial activities. For example, if capital real property contains a research institute wherein access to highly specialized research equipment is supplied by way of licence as well as being provided to students and faculty for use in their academic research, it would be necessary to allocate the use of the research institute between use in making taxable supplies for consideration and otherwise.
For another example, if capital real property is used in producing zero-rated agricultural products as part of a university's exempt supplies of courses in agriculture, this property would not generally be for use exclusively in making taxable supplies of agricultural products as this approach would not accurately reflect the use of the property in making exempt supplies of agricultural education programs.
It is a question of fact whether a particular method accurately reflects the actual extent to which a particular input was acquired or is used in commercial activities or otherwise and does not provide distorted results in a particular circumstance.
Perhaps the most commonly used space-based factors for determining the extent of use of capital real property in making taxable supplies for consideration are: square footage/metres of floor space, square yards/metres of land and acres/hectares of land. However, these factors may not always provide an accurate measure of the extent to which the property is for use in making taxable supplies for consideration and we would caution against the use of factors that provide a measure of commercial activity that is not proportionately related to the extent that the property is for use in that commercial activity. Where these factors do not provide an accurate measure of the extent of use of the property, a space-based method will not be a fair and reasonable method of determining the extent of use of the property in commercial activities, as required by subsection 141.01(5). However, as a general rule, a space-based method is often the starting point for determining extent of use for capital real property.
There is no requirement that the same allocation factor be used for an entire input (i.e., the whole capital real property) in any particular case. Indeed, if the use of a single factor in relation to a particular capital real property does not result in a fair and reasonable allocation of the property used in making taxable supplies for consideration and other uses, such a single factor approach cannot be used. The goal behind choosing a factor or factors is to establish a fair and reasonable allocation method that achieves the correct result (i.e., the extent to which the property is for use in making taxable supplies for consideration or for some other purpose).
In some cases, non-space-based factors may need to be considered to arrive at a fair and reasonable method of measuring the extent of use of the capital real property. For example, this could be the case where the GST/HST-taxable inputs were not equally distributed over the square metres of the property or if a given space is used for more than one purpose. On a case.by-case basis, it would need to be determined whether it is necessary to consider other factors (e.g., time spent, revenue or valuation of the property) in an ITC allocation method in order for that method to be fair and reasonable. For example, if the Registrar's Office is in a particular building and the employees in the Registrar's office are engaged in supporting both the making of taxable supplies for consideration and the making of exempt supplies, it may be appropriate to determine the time that the employees dedicate to commercial activities and otherwise and then use that result to determine the extent to which the square metres used by the Registrar's Office within the building are used in commercial activities.
Incorporating a "value of improvements" factor into an allocation method may be considered and such a factor is not inconsistent with the application of paragraph (b) of element B in subsection 169(1). Paragraph (b) requires one to determine the extent to which the whole of the capital property to which the improvement is made was used in commercial activities immediately after the capital property was last acquired. Similarly, incorporating a "value of improvements" factor into an allocation method is not inconsistent with the application of paragraph (c) of element B in subsection 169(1). Areas within a particular capital property may be used to a greater or lesser degree in commercial activities and the degree to which it is so used may be reflected by the value of improvements made to that area. Any ITC entitlement is still based on the extent to which the whole property is for use in commercial activities and this may be reflected by the relative value of those portions of the capital property that are used in commercial activities or otherwise. Similar to the discussion on subsection 141.01(2), in determining the use of capital real property it may be necessary to determine how different areas within the property are used.
Capital real property used in a business
The CRA's published position for determining whether capital real property is used primarily in a business for purposes of paragraph 9(2)(a) of Part I of Schedule V to the ETA, sets out a multi-factor approach in determining the extent of use of the property that is consistent with the principles outlined above.
Notice 236
The CRA has published draft GST/HST Notice No. 236, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act. While the notice is geared specifically to allocation issues for financial institutions under section 141.02, it nevertheless sets out some general guidelines that may be applied by all registrants with regards to allocations for ITC purposes.
A fair and reasonable ITC allocation method employs an objective measure of use which is meaningful, unbiased, and verifiable. A fair and reasonable ITC allocation method is also applied in a manner that accurately reflects the use of the input, including providing comparable results, and using cost pools only if they are appropriate cost pools.
A meaningful measure of use for capital real property is one that accurately reflects the actual extent to which a particular capital real property was acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. A meaningful measure of use is based on tracking (to the extent possible), causal allocation (to the extent possible), and, to the extent that the use of the property cannot be allocated based on tracking or causal allocation, input.based or output-based. In general, a substantial portion of a person's capital real property is used exclusively for particular purposes (i.e., the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration) or can be tracked or be allocated using causal allocation. As a result, few portions of the property will be allocated using either an input.based or an output-based allocation.
Tracking
Tracking is recording to the extent possible the actual use of the capital real property so that the actual use is linked to the purpose of making taxable supplies for consideration and to purposes other than making taxable supplies for consideration.
To provide an accurate reflection of the use of the capital real property, if it is possible to allocate such property by tracking the use of the property in making particular supplies, the ITC allocation method used must track the use of the particular property. Any method used to track the use of a particular capital real property must be logical and take a systematic approach to track the link between the property and the supplies to which the input relates.
If a link between the capital real property and particular supplies cannot be tracked, any approximation(s) used must reasonably reflect the extent to which the property is acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.
Causal allocation
Causal allocation directly approximates, to the extent possible, the use of a particular input using a systematic approach and an appropriate allocation base. An allocation base is a factor used to link a particular input to a particular output or outputs where there is a link between the allocation base and the output or outputs, the link is logical, and the use of the particular input has a correlation to the allocation base (an example of a correlation would be where the input is used equally over the allocation base). For example, the number of employees making taxable supplies for consideration or exempt supplies might be used as an allocation base for a particular input where it is logical that the input be used equally by the relevant employees.
Causal allocation must also be logical and must use a systematic approach to link the capital real property to the supplies to which it relates. The allocation base used must be appropriate to the circumstances and must provide a reasonable approximation of the use of the particular input.
Input-based or output-based allocations
An input-based allocation uses a calculation based on the use of other inputs to allocate capital real property to the extent that the property cannot be allocated using either tracking or causal allocation. An output-based allocation uses a calculation based on an output measure (e.g., revenue) to allocate the use of the property to the extent that the property cannot be allocated using tracking or causal allocation.
Distorting factors must be excluded from ITC allocation calculations to avoid distortion of the results. It must be determined on a case-by-case basis whether a particular factor (e.g., revenues that include amounts that relate to prior periods such as the recovery of a bad debt) causes distortions in the particular circumstances. It is a question of fact whether a person has made adequate adjustments for all distorting factors. The elements of any ratios used must not produce distorted results.
Our comments on the "common area space" issue
We can confirm that the capital real property that is the subject of an election under section 211 is the same property referred to in subsection 141.01(2). That is, when determining the extent to which the property that is subject to the election is acquired for consumption or use in making taxable supplies for consideration, it is the consumption or use of the entire property that must be considered.
However, in determining the extent to which an entire parcel of capital real property is for use in commercial activities, or more specifically, for use in making taxable supplies for consideration and for one or more other purposes, it may be necessary to consider the extent to which areas within that parcel are for use in making taxable supplies for consideration. Such an approach supports the principles of ITC allocation. In determining how areas within a parcel are used, or the extent to which a parcel or parts thereof are for use, for a particular purpose, one is determining the extent to which the whole parcel is used for a particular purpose. This process allows one to then make a fair and reasonable allocation as to the extent to which the whole property is for use in making taxable supplies for consideration or otherwise.
We respectfully disagree with your view that, given the CRA's interpretation that a section 211 election applies in respect of the capital real property, the entire property is to be considered one building and the common areas that cannot be specifically linked to the making of taxable supplies for consideration or exempt supplies, must be common areas for the entire building and allocated in the same proportions as space that is used in making taxable supplies for consideration and exempt supplies.
Determining the extent to which parts of a parcel of capital real property are for use in commercial activity does not violate the words or spirit of subsection 141.01(2) or (3) and, in general, supports the requirements of 141.01(5). For example, the Tax Court of Canada had no concerns with this approach to an allocation methodology in Royal Canadian Legion (Branch 164) v The Queen [1997] 2820 ETC.
If a particular part of a parcel of capital real property is not being used for the purpose of making taxable supplies for consideration (e.g., if it is not used for the purpose of making a supply), a commercial activity should not be attributed to that portion of the property in determining the use of the property for ITC allocation purposes. For example, if capital real property includes a treed area that is not used by the university in the course of its endeavour, a commercial activity should not be attributed to this portion of the property in determining the use of the property. Similarly, if a university has capital real property that includes a walkway that is not for use in making taxable supplies for consideration, a commercial activity should not be attributed to this portion of the university's property in determining the use of the property. It would not be meaningful to attribute a purpose of making taxable supplies for consideration to the walkway on the basis that a person might use the walkway to travel from a parkade to a food kiosk on the way to a class. Nonetheless, that particular part of the parcel still forms part of the property for allocation purposes (i.e., still forms part of the denominator).
If there is no evidence that a particular part of a parcel of capital real property is used for the purpose of making taxable supplies for consideration, an allocation method that implicitly assumes that the particular part can be used in making taxable supplies for consideration will not be a fair and reasonable allocation method. With respect to undeveloped land, we would advise that a stated intent to use the property in making taxable supplies for consideration cannot be based on the mere possibility of so using the undeveloped area. This principle was espoused by the Tax Court of Canada in Université de Sherbrooke v The Queen 2007 TCC 229.
In respect of some common area spaces, it may not be fair and reasonable to allocate particular parts of the common area space to the purpose of making taxable supplies for consideration or to some other purpose. For example, suppose a parcel of capital real property contains a building, some surrounding land and an outdoor parking lot. The building contains classrooms that are used solely for the purpose of making exempt supplies of educational services while the parking lot is used in making taxable supplies of parking spaces for consideration. The building contains common areas (e.g., hallways and heating and electrical rooms) and the parking lot contains a booth from which an attendant dispenses tickets and collects fares. An allocation method that attributes any of the common areas of the building to the making of taxable supplies for consideration, on the basis that the parking lot is used in that manner, would not be a fair and reasonable allocation method in the absence of a causal link or correlation between the use of the hallways and heating/electrical rooms and the making of taxable supplies for consideration from the parking lot. Similarly, the space occupied by the ticket booth from which a parking attendant dispenses tickets and collects fees if used directly and exclusively in making taxable supplies of parking for consideration would not be attributable to the use of the building. The area occupied by the ticket booth would be attributable to use in making taxable supplies for consideration under these principles. On the same principles, no part of the area occupied by the hallways and other common areas in the building would be attributable to use in making taxable supplies for consideration.
Similarly, where, for example, the upper floors of a building are used exclusively for the purpose of making exempt supplies, it would not be fair and reasonable to allocate the common area space on those floors (e.g., the hallways) to the making of taxable supplies for consideration that occurs on the ground floor or in another building or location on the property. For example, if a building contains an electrical room that has a use that is equally attributable to all of the space in the building, the space that the electrical room occupies can reasonably be attributed to use for the purpose of making taxable supplies for consideration to the extent that the remainder of the building space is for use in making taxable supplies for consideration. If, on the other hand, the electrical room has a use that is only attributable to a particular floor or part of a building, then the space that the electrical room occupies can only reasonably be attributed to the making of taxable supplies for consideration based on the extent that the remainder of the space on that floor or in that part of the building is for use in making taxable supplies for consideration.
With respect to common area space outside of buildings and structures, if the particular space is not for use for the purpose of making taxable supplies for consideration, it is considered to be for use for purposes other than making taxable supplies for consideration. As such, contrary to your submission, green space that forms part of a university's property and that is generally accessible to any person entering the university is not considered to be used by the university for the purpose of making taxable supplies for consideration.
We recognize that the allocation of common area space is very fact specific and an appropriate allocation in one set of circumstances may not be an appropriate allocation in other circumstances.
Our comments on support function space
If a space-based allocation method does not accurately reflect the extent to which the support function space is for use for the purpose of making taxable supplies for consideration, then it will not be considered a fair and reasonable method and it will be necessary to use one or more other factors in establishing the extent of use in making such supplies. For example, a space-based allocation method is not an appropriate allocation base if there is no correlation between the use of the space and the square metres of space the support function occupies because the space.based allocation method would not provide a reasonable approximation of the use of the space in making taxable supplies for consideration. As mentioned above, a method based on the time employees spend on a particular activity, the number of employees engaged exclusively in a particular activity or the number of invoices processed or fees collected could have a direct correlation to taxable and exempt activities and may be a fair and reasonable method of allocating the space occupied by support functions.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-4393. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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