23 December 2002 GST/HST Interpretation 8067 - Method for Determining Proportion of Commercial Activities

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST) / Harmonized Sales Tax (HST) to your client's operations. We apologize for the delay in our response.

Your client, a university is a registrant for GST purposes. It owns a sports center. To determine the extent to which the sports center is used for commercial purposes the University carried out an exhaustive study detailing for each quarter the activities taking place on its premises and dissecting those activities taking place in each room on an hourly basis into taxable vs. exempt, thereby establishing a rate of use for commercial purposes for each room in the building. These results were then weighted according to the area of each room. The result obtained, in square feet of space used for commercial purposes, was then compared to the center's usable square footage to arrive at a final result, ie. percentage of space used for commercial purposes.

Interpretation Requested

You requested an interpretation as to whether the method of allocation it has chosen is fair and reasonable for purposes of subsection 141.01(5) of the Excise Tax Act (ETA).

Interpretation Given

The ETA does not specify any methods or formula that must be used to allocate property or services that are used partly in commercial activities and partly in other activities. However subsection 141.01(5) of the ETA requires that the methods used by a person to determine the extent to which property or services are used in the course of commercial activities be fair and reasonable in the circumstances and be used consistently throughout the year. It is a question of fact whether a particular method used by a registrant is fair and reasonable in the circumstances.

We have some concerns about the method used by the University to determine the extent of use of the sports center in commercial activities. For example, where the ETA refers to real property owned by a person, generally the real property referred to cannot be less than all the land included in a single legal description (including all structures and other improvements which are fixtures to such land). We were unable to obtain information concerning the legal description of the property on which the sports center is situated and therefore it is not clear whether the method uses a relevant base. We also have concerns about the exclusion of certain hours of operation from the hours of use calculation in the room example that was provided. Since we do not have all the relevant facts we can not comment on whether the method used by the University is fair and reasonable in the circumstances.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, 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 section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me, at (613) 957-8221.

Yours truly,

Denise Villeneuve
Corporate Reorganizations Unit
Financial Institution & Real Property Division
Excise and GST/HST Rulings Directorate