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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TO:
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XXXXX
XXXXX
XXXXX
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FROM:
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Marilena Guerra
Financial Institutions Unit
Excise and GST/HST Rulings
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Subject:
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Interest Income/Expense Arbitrage Accounts
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This is in reply to your memorandum XXXXX to XXXXX Tax Services office which has been forwarded to us.
You have requested our comments with respect to the proper treatment of the Arbitrage accounts in the calculation of the input tax credit allocation formula of the registrant, a Canadian bank.
Our understanding of the facts is as follows:
Facts
1. XXXXX (the Bank) is a financial institution engaged primarily in the business of providing financial services.
2. The Bank uses an output based allocation method for determining the percentage of input tax credits (ITCs) it is entitled to claim.
3. The Bank is using the following output based formula:
(Non-resident Interest Expense + Non-resident Interest Income + Other Income)
(Total Interest Expense + Total Interest Income + Total Other Income)
4. The total for the Interest Income Arbitrage account for the XXXXX fiscal year is - $XXXXX and the total for the Interest Expense Arbitrage account for the same fiscal year is $XXXXX.
Analysis
The issue raised XXXXX is whether the mathematical absolute values of the Interest Income Arbitrage and Interest Expense Arbitrage accounts should be used in the ITC formula. The Interest Income account is a credit account on the Balance Sheet and the Interest Expense account is a debit account on the Balance Sheet. If the actual balances in these accounts are used, the income account would most likely always be a negative (or credit) number and the expense account would most likely always be a positive (or debit) number. The fact that these accounts are a credit or debit account in the general ledger does not translate to positive and negative dollar amounts, they translate into cash inflows and cash outflows. All ledger accounts whether they are a credit account or a debit account in the ledger, are either a source or use of a positive number of dollars and should be reflected as such in the ITC allocation formula. The only time there may be a true negative balance in a ledger account is if there have een adjustments in respect of that account. Therefore, the actual absolute balances in the income and expense accounts irrespective of whether it's a credit or debit account, should be used in the ITC allocation formula.
Should you have further questions, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.
Marilena Guerra
Senior Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
XXXXX
2004/07/27 — RITS 51623 — GST/HST Treatment of Various Health-related Products
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