File: 11650-02
Subsection 141.01(5)2
XXXXX
December 8, 1995
Dear Ms. XXXXX
This letter is in reply to your fax to Chantal Quesnel of the Special Sectors Division, dated March 1, 1995, which was referred to our office for response. Your fax requested guidance on the method to be used to allocate input tax credits ("ITCs") when a museum adds space to be used in an exempt activity to capital real property currently used in a commercial activity. We apologize for the delay in this response.
Statement of Facts
1. A municipality owns a house that is used as a museum. The use of the museum is a "commercial activity" as defined under subsection 123(1) of the Excise Tax Act (the "ETA").
2. The municipality renovated the house and built an addition to the house. The addition will be used by the municipality for making exempt supplies.
3. The museum space represents 35% of the total floor space. The addition represents 65% of the total floor space
4. The costs of renovating the museum and constructing the addition are divided as follows: 75% for renovating the museum and 25% for constructing the addition.
5. The municipality plans to make an election under section 211 of the ETA.
Issue Raised
Whether the use of a cost-based allocation method for claiming ITCs would be acceptable under the provisions of subsection 141.01(5) of the ETA.
The Department's Position:
For purposes of this interpretation, we assume that the foregoing facts fully describe the situation and that the conduct of the parties is fully consistent with those facts.
A municipality is included in the definition of "public sector body" under subsection 123(1) of the ETA. Under the provisions of subsection 211(1) of the ETA, a public service body ("PSB") may elect, on a property by property basis, to opt out of the rules governing real property that generally allow for the claiming of ITCs based on primary use. Where such an election is made, the PSB apportions expenses between commercial and non-commercial activities and may claim ITCs in respect of the real property, at its acquisition, in proportion to its use in commercial activities.
The ETA does not dictate or prescribe any particular method of apportionment for use in any particular circumstance. Subsection 141.01(5) of the ETA allows a person to choose any method that is "fair and reasonable" to apportion consumption or use between commercial activities and other activities. Further, the chosen method must be used consistently through the fiscal year of the person.
In the case of multiple-use inputs (such as the services for construction and renovation in this particular case), the Department would consider the preferred method for allocating ITCs to be the direct allocation approach. The allocation of costs between the renovation and the construction of the addition would be considered a direct attribution method. While another method (such as a method based on floor space) may have a different result, this does not mean that using costs as the allocation method is not "fair and reasonable".
Therefore, the use by the museum of direct costs for construction and renovation would be acceptable provided this is a fair and reasonable allocation of expenses between the two activities.
If you require any information, please contact Gwen Preston at (613) 952-8530.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
GTP: 1174(REG) x
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