CRA confirms the cumulative application of the ETA change in use rules
Aco changes its use of a building, which had been used 100% in making exempt supplies, so that thereafter it is used 90% for making exempt supplies and 10% in the course of commercial activities. Two years later, the commercial use is further increased to 20%.
ETA s. 197 indicates that changes of “less than 10%” are not to be taken into account, suggesting that a change of 10% is to be recognized for purposes of the change in use rules. However, s. 141 indicates that a use of 90% (under CRA’s interpretation of “substantially all”) for exempt use is equivalent to 100% for exempt use, so that in Year 1, Aco could not claim an input tax credit based on a 10% change in use, whereas two years later, it could claim an ITC based on a 20% change in use.
CRA essentially confirmed this interpretation, stating:
While a change in use of 10% or more is normally considered to be a significant change in use (i.e. because section 197 considers any change of less than 10% to be insignificant), section 141 nevertheless considers that the entire use of the capital property is not commercial activities.
Accordingly, ETA s. 206(2) would only apply when the registrant (Aco) began to use capital property in commercial activities to an extent greater than 10% - which occurred two years later, permitting Aco at that time to claim an ITC based on a 20% change in use.
However, CRA went on to note that if Aco instead was a financial institution (to which the s. 141 rules do not apply), the rules in s. 206(2) could now apply to generate an ITC based on a 10% change of use in Year 1 and s. 206(3) would permit an ITC based on a further 10% change in use two years later.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.19 under ETA s. 206(2).