26 November 2007 GST/HST Interpretation 100083 - Subsection 141.02(7) - Election for Transitional Year

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.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the financial services sector.

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, including the proposed amendments announced on January 26, 2007, unless otherwise specified.

Effective January 1, 2008, the rate of the GST will be reduced from 6% to 5% and the rate of the HST from 14% to 13%. The new rates will apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules will apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

We understand that you would like clarification of one of the conditions that must exist in order for a qualifying institution to make an election under proposed subsection 141.02(7). Specifically, proposed subsection 141.02(7) requires that, "... the Minister has assessed the net tax of the person for any reporting period included in any of the four fiscal years immediately preceding that first fiscal year ..."

In the example you have provided, Bank X (a qualifying institution) has a fiscal year end of October 31, 2007, and is required to file its return for the fiscal year November 1, 2006, to October 31, 2007, no later than January 31, 2008.

Interpretation Requested

You would like us to confirm that the term 'assessed' will be interpreted in accordance with the principles of standardized accounting, which became effective April 1, 2007. In other words, where a GST/HST return has been filed after this date and it has been processed by the Canada Revenue Agency (CRA), it will be considered to have been assessed and that this satisfies the condition under proposed subsection 141.02(7).

Interpretation Given

Proposed subsection 141.02(7) provides a transitional year election to a qualifying institution for its first fiscal year that begins after March 2007 (the transitional year). It allows the qualifying institution to elect to use an allocation method that meets certain conditions to determine input tax credits (ITCs) in respect of its residual inputs, as defined in proposed subsection 141.02(1).

In order to be eligible to make the transitional year election, a qualifying institution must meet certain criteria, including the following:

1. the qualifying institution's net tax must have been assessed in at least one of the reporting periods in one of four fiscal years that immediately precedes the transitional year (the chosen reporting period);

2. the Minister's notice of assessment, subsequent assessment or reassessment in respect of the chosen reporting period does not reflect any inappropriateness in respect of the methods used by the qualifying institution to determine ITCs in respect of all of its residual inputs; and

3. the methods used would be fair and reasonable if used in the same manner by the qualifying institution for the transitional year.

With the introduction of standardized accounting in April 2007, every GST/HST return remitting tax or claiming a refund, as well as all rebate applications, will be assessed, and a Notice of Assessment will be issued. The only exception is for nil returns, which will not be assessed. Accordingly, the return filed by Bank X for its fiscal year ending October 31, 2007, (provided it is not a nil return) would meet criterion one above, even though the qualifying institution was not audited, so that a Notice of Reassessment was not issued.

Nevertheless, it should be noted that in order to be eligible to file a transitional year election, a qualifying institution would also have to meet the other criteria set out above, as well as meeting the requirements set out in proposed subsection 141.02(23) for filing the election, including that the election be made in prescribed form and contain prescribed information. We are currently developing the required form, which will be available shortly. The form will have to be filed with the Minister on or before the day which the qualifying institution must file a return under Division V of Part IX for the first reporting period of the transitional year (except where late filing of the election is allowed by the Minister).

The foregoing comments represent our general views with respect to the proposed amendments to the ETA as they relate to the subject matter of your request. Any change to the wording of these proposed amendments or any future proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. 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 CRA with respect to a particular situation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9210.

Yours truly,

Dawn Weisberg
Manager
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2007/12/03 — RITS 99212 — FCTIP Rebate Claims