28 March 2002 GST/HST Interpretation 36322 - Racetracks / ITC Allocations

This concerns your enquiry of June 11, 2001 as to whether the documents that you received and forwarded to us, which originated from XXXXX (the "Organization"), accurately set out our administrative policy concerning ITC entitlements for racetracks. We understand that you received the documents in question from the XXXXX Race Track (the "Track") in the course of your audit of that registrant. We apologize for the delay in responding.

The documents in question consist of an internal memorandum from the Organization, dated XXXXX, that has a nine page attachment. These documents describe guidelines that, the Organization suggests, the CCRA has agreed to for the purpose of allocating the GST paid by racetracks on inputs. We have the following comments concerning this submission.

Early in 1991, our directorate had discussions with the Organization and its representatives, XXXXX concerning how racetracks should determine ITCs. This was an issue since, typically, some of the supplies by racetracks are taxable (e.g., admissions, concessions, advertising) and others are exempt (e.g., pari-mutual wagering). These discussions culminated in a submission addressed to us dated XXXXX from XXXXX. This submission included a schedule of "sample" categories of expenses (i.e.; pari-mutual, simulcasting, food and beverages ...) and their proposed treatment for ITC purposes. This schedule is included in the information referred to in the first two paragraphs above.

On XXXXX, we replied to the above-noted submission from XXXXX. This letter is published on our intranet HQ Letter database XXXXX XXXXX and represents our policy with respect to ITC allocations by racetracks. A copy is attached for your convenience. It should be noted that our letter did not confirm or endorse all of the suggested allocation methods and specific ITC attributions submitted by XXXXX in their XXXXX letter. Rather, our reply set out our position on these matters. The main points of this position are summarized as follows:

-    We cannot rule on how expense items common to racetracks will be treated since the use of inputs varies from situation to situation. This position is repeated near the end of the letter; i.e., "A definitive ruling in regards to ITC allocations can only be made on a case by case basis, as the facts of any particular case must be considered."

-    Even though we described, in our letter, certain allocation methods that are generally acceptable, it is also pointed out that in choosing any particular method a track is still subject to the legislative requirement that the method chosen be reasonable in the circumstances. This point is emphasized several times.

Our administrative policy on determining ITCs has evolved since 1991, as reflected in several rulings on our database, Memorandum 700-5-1 (ITC Allocations for Financial Institutions), and Policy Statement P-063 (Output Based Method for Input Tax Credit Allocation).

Although Memorandum 700-5-1 is written for financial institutions, the policies described in it have general application to other types of registrants. One allocation method described in it is the "direct allocation" method. This method is referred to in the memorandum as the "preferred method of allocating ITCs" where it is appropriate and administratively feasible to use it.

Notwithstanding that the direct allocation method may be the "preferred" one in many cases, the following commentary from Policy Statement P-063, which was published after Memorandum 700-5-1, makes clear that an output-based method may still be acceptable where circumstances warrant:

An allocation method based on outputs, i.e. revenues, may be acceptable for determining the extent to which property or services are used, consumed or supplied or intended to be used, consumed or supplied in the course of commercial activities if the method:

(a) reasonably reflects the use or intended use of the property or service;

(b) is fair and reasonable in the circumstances.

... The use of any allocation method is at the option of the registrant. Any method used must be supportable by the registrant, i.e. sufficient documentation to show that it is fair and reasonable in the registrant's particular circumstances. The supporting documentation should address why the output-based method is appropriate and deal with possible distorting factors ...

In the recent Tax Court of Canada case of Ville de Magog v. The Queen (TCC Docket 97-2797-GST-G), the Court examined the results of the "input based" method proposed by the Appellant in determining ITCs, and the "direct allocation" method applied by the CCRA. The Court's finding in favour of the CCRA was based not so much on the allocation method itself, but rather on the fact that the method used by the CCRA resulted in a reasonable reflection on the use of inputs, and that the method used by the Appellant did not. It should be noted, however, that the Federal Court has reversed (Ville de Magog v The Queen [2001] 3030 ETC (FCA) ) the Tax Court's decision on the basis that it was not the judge's role "to determine whether one method was more reasonable than the other; rather, she was to determine whether the method used by the appellant was fair and reasonable." The Federal Court then went on to find that the appellant's method was fair and reasonable and, in fact, that the auditor's method "is not any more objective or logical than that of the appellant."

In conclusion, the submissions you forwarded us do represent some general principles that we discussed with the Organization in 1991, and we agreed upon several "methods" of determining ITCs that could be employed. However, our letter of XXXXX makes clear that any method of determining ITCs remains subject to the legislative requirement (Now set out in subsection 141.01(5)) that it be "fair and reasonable" in the circumstances. Further, the policy that we have developed since 1991 describes other methods that may be applied.

We trust that our comments will clarify our administrative policy with respect to these issues. Please contact me at (613) 954-7936 if you have any further questions or concerns.

(encl.)

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