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.
DATE November 3, 2011
TO [Client]
FROM
Ivan Bastasic
Director
Financial Institutions and Real Property Division
320 Queen Street
Place de Ville, Tower A
Ottawa, ON
FILE 139189
SUBJECT:
GST/HST INTERPRETATION
Input tax credit eligibility for [...] [Organizations]
This concerns your [...] [enquiry] of [mm/dd/yyyy] to [...] with regard to input tax credit (ITC) eligibility for [...] [(Organizations)].
We are unable to provide more detail than what is provided in our comments below because we do not have all of the facts in this situation (e.g., we do not know what the actual inputs are that are being allocated and we do not have the actual revenue and expense figures or copies of the funding agreements with the various levels of government). We would be pleased to provide a more detailed opinion regarding this matter if we are provided with additional facts.
COMMENTS
Overview of ITC allocation
Subsection 141.01(5) provides that the methods used by a person in a fiscal year to determine the extent to which property or services are acquired, imported or brought into a participating province by the person for the purpose of making taxable supplies for consideration or for other purposes shall be fair and reasonable and used consistently by the person throughout the year. Subsection 141.01(5) also provides that the methods used by a person in a fiscal year to determine the extent to which the consumption or use of properties or services is for the purpose of making taxable supplies for consideration or for other purposes shall be fair and reasonable and used consistently by the person throughout the year. Further, in general terms, the ITC calculation in paragraph (c) of element B is based on the extent to which the property was acquired for consumption, use or supply in commercial activities. However, 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 deemed 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 deemed 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 have acquired the property or service for consumption or use otherwise than in commercial activities.
Whether or not a particular ITC allocation method is fair and reasonable is a question of fact. 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.
It appears that the primary purpose of [an Organization] is to [...]. This purpose of [an Organization] appears to be supported, in part, by the revenue from taxable supplies made by [an Organization] and capital and operating grants provided by various levels of government. Any ITC allocation method used should produce a result that is a reasonable reflection of this. For example, in order for a [...]% ITC recovery rate to be 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, [...]% of those inputs should be for use in making taxable supplies for consideration.
Based on the facts provided, it appears that all of the inputs are being allocated using a single revenue-based method that yields a [...]% ITC recovery rate (excluding the grants from the revenue used in the calculation even though those grants would be used to purchase inputs). If [an Organization] has an overall purpose that is not the making of taxable supplies for consideration (e.g., related to the provision of exempt supplies) it is unlikely that [...]% of the entity's inputs are for use in making taxable supplies for consideration [...].
Further, if it is determined that an output-based method is fair and reasonable and an output-based allocation is used, the calculation must give a reasonable approximation of the use of the inputs for the purpose of making taxable supplies for consideration. A revenue-based method that excludes grants from the denominator is not likely to give a reasonable approximation of the use of inputs because those grants are used to pay for the inputs used by the [Organization] and ITCs are available only to the extent that inputs are for use in making taxable supplies for consideration. As a result, if [an Organization] receives grants or subsidies to support its overall purpose and if that purpose is otherwise than making taxable supplies for consideration, an output-based method would need to reflect this (i.e., the grants or subsidies would be included in the denominator, but generally not in the numerator unless the grants or subsidies relate to making taxable supplies).
It also appears that the [Organizations] are grouping all inputs into a single pool and claiming ITCs based on applying a revenue-based method to this pool. If inputs are grouped together for ITC allocation purposes, this 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. It is only appropriate to pool particular inputs if pooling does not distort the ITC allocation results. It is unlikely that pooling all of the inputs (e.g., multiple-use inputs with specific-use inputs) would result in a fair and reasonable allocation of inputs for ITC purposes.
ITC allocation for improvements to capital real property
For ITC allocation purposes the [Organization] must determine the extent to which each input used in making the improvements (improvement input) is for use in making taxable supplies for consideration and otherwise. In general, [an Organization] undertakes improvements to capital real property of a [...] [real property] owner for the purpose of [...]. Certain improvement inputs will be acquired specifically for the purpose of making taxable supplies for consideration [...]. Other improvement inputs will be acquired specifically for the purpose of making exempt supplies [...] or for another purpose other than making taxable supplies [...].
Generally, where a [real property] owner that is a municipality makes a supply of real property by way of lease, licence or similar arrangement to [an Organization] and the [Organization] undertakes improvements to that real property for the purpose of [...], the [Organization] is also considered to make a supply to the [real property] owner (the improvement supply). The improvement supply may be that of property or a service and depending upon the status of the [Organization] (e.g., whether a charity, non-profit organization, or otherwise), may be a taxable supply or an exempt supply.
Where an improvement input is for use both for the purpose of making taxable supplies for consideration and otherwise, a fair and reasonable ITC allocation would be required. Although the improvement inputs are acquired for the purpose of [...] these inputs may also be considered to be for use in making the improvement supply and a fair and reasonable ITC allocation method would reflect this. A fair and reasonable ITC allocation method would generally not result in an allocation of the value of improvement inputs to the improvement supply that exceeds the sum of the value of a supply of a similar right to use similar property (i.e., the [real property]) under the same conditions and, if applicable, any amount paid by the municipality to the [Organization] that is consideration for the improvement supply.
Please note that, for purposes of this response, we have not considered a situation where the [real property] owner is a commercial enterprise rather than a municipality.
ITC allocation for other inputs that are not capital property
If [an Organization] acquires property or a service for use directly and exclusively in making taxable supplies for consideration [...], the [Organization] is eligible for ITCs on the tax paid or payable on that property or service if all other conditions for claiming an ITC are met. If [an Organization] acquires property or a service for use directly and exclusively for a purpose other than making taxable supplies for consideration (e.g., as an input into [...] an exempt supply [...]), the [Organization] is not eligible for ITCs on the tax paid or payable on that property or service. If an input is for use in making taxable supplies for consideration and for use in some other purpose, the [Organization] will generally be eligible for ITCs only to the extent that the inputs are for use in making taxable supplies for consideration.
[...]
CONCLUSION
It appears that the [Organizations'] use of pooling and output-based method is unlikely to be fair and reasonable in the circumstances. However, we would need to be provided with additional facts to provide a more specific response.
UNCLASSIFIED
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