GST/HST Memorandum 17-12
July 2021

This memorandum cancels and replaces GST/HST Technical Information Bulletin B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act.

In this publication, all legislative references are to the Excise Tax Act (ETA) and all references to the “Regulations” are to the Input Tax Credit Allocation Methods (GST/HST) Regulations, unless otherwise specified. The information in this publication does not replace the law found in the ETA and its regulations.

If this information does not completely address your particular situation, you may wish to refer to the ETA or relevant regulation, or call GST/HST Rulings at 1-800-959-8287 for additional information. If you require certainty with respect to any particular GST/HST matter, you may request a ruling. GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, explains how to obtain a ruling or an interpretation and lists the GST/HST rulings centres.

If you are located in Quebec and wish to request a ruling related to the GST/HST, please call Revenu Québec at 1-800-567-4692. You may also visit the Revenu Québec website at revenuquebec.ca to obtain general information.

For listed financial institutions that are selected listed financial institutions (SLFIs) for GST/HST or Quebec sales tax (QST) purposes or both, whether or not they are located in Quebec, the CRA administers the GST/HST and the QST. If you wish to make a technical GST/HST or QST enquiry related to SLFIs, please call 1-855-666-5166.

GST/HST rates

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province.

Table of Contents

• Introduction
• Categorizing business inputs
  • Excluded inputs
  • Exclusive inputs
  • Direct inputs
  • Non-attributable inputs
• Determining the extent of use of business inputs
  • Determining the extent of use of an exclusive input
  • Allocating excluded, direct and non‑attributable inputs
  • Criteria, rules, terms and conditions specified by the Minister
    • Objective measure
      • Meaningful
      • Unbiased
      • Verifiable
  • Accurate application
    • Comparable results
    • Appropriate cost pools
  • Additional requirements for an ITC allocation method
    • Fair
    • Reasonable
    • Used consistently
    • Determined by the date specified in legislation
    • No alterations to ITC allocation method
  • Specified method for an excluded input
  • Direct attribution method for a direct input
  • Specified method for a non‑attributable input
• Non-qualifying institution electing to use a prescribed percentage for residual inputs
  • Revocation
  • Other methods
  • Direction by Minister
  • Appeals
• Appendix
  • Definitions

Introduction

1. Financial institutions are required to follow specific rules for apportioning the use of their inputs in order to determine their ITC eligibility with respect to those inputs. Section 141.02 sets out these rules, which in conjunction with section 169 and subsections 141.01(2) and 141.01(3), apply in determining the extent to which property or a service is consumed or used, or acquired, imported or brought into a participating province for consumption or use for the purpose of making taxable supplies for consideration or otherwise (for example, for making exempt supplies). These specific rules apply to all financial institutions, which include both listed financial institutions described in paragraph 149(1)(a) and de minimis financial institutions described in paragraph 149(1)(b) or (c). For further information on determining if a person is a listed financial institution, refer to GST/HST Memorandum 17-6, Definition of Listed Financial Institution, and for further information on determining if a person is a de minimis financial institution, refer to GST/HST Memorandum 17-7, De Minimis Financial Institutions.

2. Section 141.02 includes provisions that apply specifically to financial institutions that are qualifying institutions, provisions that apply specifically to financial institutions that are not qualifying institutions, and provisions that apply to both of these types of financial institutions. If a financial institution is a qualifying institution, refer to GST/HST Memorandum, 17-13, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions. It should be noted that a qualifying institution applying to have its methods authorized by the Minister is also required to categorize inputs and follow the criteria, rules, terms and conditions contained in this memorandum. Such an application is made using Form GST116, Application, Renewal or Revocation of the Authorization for a Qualifying Institution to Use Particular Input Tax Credit Allocation Methods, or Form RC7216, Application, Renewal or Revocation of the Authorization for a Qualifying Institution that is a Selected Listed Financial Institution to Use Particular Input Tax Credit Allocation Methods.

3. To determine if a particular financial institution is a qualifying institution and for information about the application for a non-qualifying institution to be designated as a qualifying institution, refer to GST/HST Memorandum, 17‑11, Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02.

4. In this memorandum, references to property or a service being acquired means property or a service being either acquired, imported or brought into a participating province, as the case may be.

5. Generally, under subsection 169(1), a person (who is a registrant) is only eligible to claim an ITC in respect of GST/HST paid or payable on property or a service acquired by the person to the extent that the property or service was acquired by the person for consumption, use or supply in the course of the person’s commercial activities. Subsection 141.01(2) clarifies the extent to which property or a service is acquired by the person for consumption or use in the course of the person’s commercial activities.

6. Pursuant to subsection 141.01(2), a person is deemed to have acquired property or a service for consumption or use:

• in the course of the person’s commercial activity to the extent that the property or service is acquired for the purpose of making taxable supplies for consideration in the course of an endeavour of the person
• otherwise than in the course of the person’s commercial activities to the extent the property or service was acquired for either of these purposes:
  • the purpose of making supplies in the course of an endeavour of the person that are not taxable supplies for consideration
  • a purpose other than the making of supplies in the course of an endeavour of the person

An endeavour includes a business; refer to the Appendix of this memorandum for the full definition of endeavour.

7. Similarly, pursuant to subsection 141.01(3), a person is deemed to consume or use property or a service:

• in the course of a person’s commercial activity to the extent that the property or service is consumed or used for the purpose of making taxable supplies for consideration in the course of an endeavour of the person
• otherwise than in the course of the person’s commercial activities to the extent the property or service was consumed or used for either of these purposes:
  • the purpose of making supplies in the course of an endeavour of the person that are not taxable supplies for consideration
  • a purpose other than the making of supplies in the course of an endeavour of the person

8. A financial institution is required to use section 141.02 to determine the extent to which property or a service is:

• acquired by the financial institution for consumption or use in making taxable supplies for consideration or otherwise (procurative extent)
• consumed or used by the financial institution for the purpose of making taxable supplies for consideration or otherwise (operative extent)

9. Subsection 141.02(1) defines procurative extent as the extent to which property or a service is acquired for the purpose of making taxable supplies for consideration or the extent to which the property or service is acquired for purposes other than making taxable supplies for consideration. The procurative extent is used in the application of subsection 141.01(2), which generally deems the financial institution to have acquired the property or service for consumption or use in commercial activities for purposes of subsection 169(1) to the extent that the financial institution acquired the property or service for the purpose of making taxable supplies for consideration.

10. Subsection 141.02(1) defines operative extent as the extent to which the consumption or use of property or a service is for the purpose of making taxable supplies for consideration or the extent to which the consumption or use is for purposes other than making taxable supplies for consideration. The operative extent of a particular input is relevant in determining the extent, under subsection 141.01(3), to which the property or service is deemed to be consumed or used by the financial institution in the course of its commercial activities. The extent to which the property or service is consumed or used in the course of the financial institution’s commercial activities is pertinent to those provisions that depend on whether, and to what extent, properties and services are, at any particular time, consumed or used in commercial activities (for example, provisions regarding ITCs on improvements and change-in-use rules for capital property).

11. Although the procurative extent (intended use) of a business input is based on the purpose for which the particular business input was acquired at the time it was acquired, the actual use of the business input may help clarify what the financial institution’s intention was at the time the property or service was acquired.

12. Where a financial institution is determining its eligibility to claim an ITC for the GST/HST paid or payable on a particular business input, the financial institution must do the following:

• first, categorize the business input
• second, apply the appropriate method to determine the procurative and operative extent of the business input that meets the requirements of section 141.02

13. Examples provided in this memorandum are for illustrative purposes only.

Categorizing business inputs

14. Section 141.02 defines four types of business inputs: excluded inputs, exclusive inputs, direct inputs and non-attributable inputs.

15. Section 141.02 requires a financial institution to categorize its business inputs into these four types in order to identify the allocation methods which apply in determining the ITCs of the financial institution. In categorizing a business input:

• the financial institution must determine whether the business input is an excluded input
• if the business input is not an excluded input, it must determine whether the business input is an exclusive input
• if the business input is not an excluded or exclusive input, it must determine whether the business input is a direct input
• if the business input is not an excluded, exclusive or direct input, then the business input is a non-attributable input

Excluded inputs

16. Subsection 141.02(1) defines excluded input of a financial institution to mean property (that is, personal property or real property) that is for use by the financial institution as capital property and any property or service that is acquired by the financial institution for use as an improvement to capital property of the financial institution. An excluded input may also include a prescribed property or service (there are currently no prescribed property or services).

17. Under subsection 123(1), the term capital property means, in respect of a person, property that is, or would be if the person were a taxpayer under the Income Tax Act (ITA), capital property of the person within the meaning of the ITA, other than property described in Class 12, 14, 14.1 or 44 of Schedule II to the Income Tax Regulations.

18. Under subsection 123(1), the term improvement, in respect of property of a person, means any property or service supplied to, or goods imported by, the person for the purpose of improving the property, to the extent that the consideration paid or payable by the person for the property or service or the value of the goods is, or would be if the person were a taxpayer under the ITA, included in determining the cost or, in the case of property that is capital property of the person, the adjusted cost base to the person of the property for the purposes of the ITA.

19. Paragraph 169(1.1)(a) provides that, where a person acquires property or a service partly for use in improving capital property of the person and partly for another purpose, for the purpose of determining an ITC in respect of the property or service, notwithstanding section 138, which applies to incidental supplies, that part of the property or service that is for use in improving the capital property is deemed to be a separate property or service from the remaining part of the property or service.

20. Where a financial institution is determining its eligibility to claim an ITC for the GST/HST paid or payable on a particular excluded input, subsection 141.02(14) requires that the financial institution use a specified method to determine the procurative extent and the operative extent of the excluded input. Refer to paragraphs 82 to 88 of this memorandum for information on a specified method for an excluded input.

Exclusive inputs

21. Subsection 141.02(1) defines exclusive input of a financial institution to mean property or a service (other than an excluded input) that is acquired for consumption or use either directly and exclusively for the purpose of making taxable supplies for consideration, or directly and exclusively for purposes other than making taxable supplies for consideration. For financial institutions, exclusively means, in respect of the consumption or use of property or a service of the financial institution, 100% of the consumption or use of a property or service by the financial institution. Refer to paragraphs 29 and 30 of this memorandum for information on the rules for an exclusive input.

22. As the definition of exclusive input does not include an excluded input, if a property or service is for use by the financial institution as capital property or as an improvement to capital property of the financial institution, and is acquired by the financial institution for consumption or use either directly and exclusively to make taxable supplies for consideration or directly and exclusively otherwise than to make taxable supplies for consideration, it will be an excluded input and not an exclusive input.

Direct inputs

23. Subsection 141.02(1) defines direct input to mean property or a service that is all of the following:

• not an excluded input (that is, it is not capital property or an improvement to capital property)
• not an exclusive input
• attributable (in whole or in part) to the making of a particular supply or supplies

24. A business input that might be considered an indirect input for cost allocation purposes (for example, certain overhead expenses) is a direct input for purposes of section 141.02 if the business input is not an excluded or exclusive input and can be attributed in whole or in part to the making of a particular supply or supplies.

25. Where a financial institution is determining its eligibility to claim an ITC for the GST/HST paid or payable on a particular direct input, subsection 141.02(12) requires that the financial institution use a direct attribution method to determine the procurative or operative extent of the direct input. Refer to paragraphs 89 to 94 of this memorandum for information on a direct attribution method for a direct input.

Non-attributable inputs

26. Subsection 141.02(1) defines non‑attributable input to mean property or a service that is all of the following:

• not an excluded input (that is, it is not capital property or an improvement to capital property)
• not an exclusive input
• not attributable (even in part) to the making of any particular supply (that is, it is also not a direct input)

27. A financial institution generally has very few non-attributable inputs.

28. Where a financial institution is determining its eligibility to claim an ITC for the GST/HST paid or payable on a particular non‑attributable input, subsection 141.02(10) requires that the financial institution use a specified method to determine the procurative or operative extent of the non‑attributable input. Refer to paragraphs 95 and 96 of this memorandum for information on a specified method for a non‑attributable input.

Determining the extent of use of business inputs

Determining the extent of use of an exclusive input

29. Paragraph 141.02(6)(a) provides that if an exclusive input is acquired for consumption or use directly and exclusively for the purpose of making taxable supplies for consideration, the financial institution is deemed to have acquired the exclusive input for consumption or use exclusively in the course of its commercial activities. As a result, for the purpose of determining an ITC under section 169 in respect of that exclusive input, the extent to which the property or service is for consumption or use in the course of commercial activities is generally equal to 100%. A financial institution is therefore generally eligible to claim an ITC equal to 100% of the GST/HST paid or payable in respect of an exclusive input that is for consumption or use directly and exclusively for the purpose of making taxable supplies for consideration where all other conditions for claiming an ITC are met.

30. Paragraph 141.02(6)(b) provides that if an exclusive input is acquired for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration, the financial institution is deemed to have acquired the exclusive input for consumption or use exclusively otherwise than in the course of its commercial activities. As a result, for the purpose of determining an ITC under section 169 in respect of that exclusive input, the extent to which the property or service is for consumption or use in the course of commercial activities is generally equal to 0%. A financial institution is therefore generally not eligible to claim an ITC for any of the GST/HST paid or payable in respect of an exclusive input that is for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration.

Allocating excluded, direct and non‑attributable inputs

31. Where a financial institution is determining its eligibility to claim an ITC for the GST/HST paid or payable in respect of a particular business input (other than an exclusive input), the financial institution must generally determine the procurative extent and the operative extent of the business input using a specified method under subsection 141.02(10) or (14) or a direct attribution method under subsection 141.02(12). These methods must conform to the criteria, rules, terms and conditions specified by the Minister in this memorandum. Refer to paragraphs 36 to 74 of this memorandum for these criteria, rules, terms and conditions. Refer to paragraphs 82 to 88 of this memorandum for additional information regarding a specified method for an excluded input, paragraphs 89 to 94 of this memorandum for additional information regarding a direct attribution method for a direct input and paragraphs 95 and 96 of this memorandum for additional information regarding a specified method for a non‑attributable input. Refer to paragraphs 106 to 108 of this memorandum for exceptions that are provided under subsections 141.02(11), (13), (15) and (32) and that apply in very limited circumstances.

32. Any ITC allocation method that a financial institution uses in accordance with any of subsections 141.02(10) to (15) in respect of a fiscal year is also required to meet the conditions set out in subsection 141.02(16) which require the method to be fair and reasonable, used consistently throughout the fiscal year and determined by the financial institution within the deadline specified in that subsection. These conditions are explained in more detail in paragraphs 75 to 80 of this memorandum. It is a question of fact what allocation(s) are appropriate and meet the requirements of section 141.02 for each particular business input.

33. Any ITC allocation method used should also be reviewed each year. If there are discrepancies between the intended use of a business input for ITC allocation purposes and the actual use of the business input, it is a question of fact whether it was appropriate to use the particular ITC allocation method and whether the method should be corrected for future fiscal years.

34. The sum of the procurative extents of a business input (or the operative extents of a business input) for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration must be equal to 100%.

35. Certain financial institutions which are selected listed financial institutions (SLFIs) and are investment plans (as defined by the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations) and have not made an election under subsection 225.4(6) or (7), are restricted under section 225.4 from claiming any ITC in respect of a business input unless the business input is an exclusive input of the SLFI. For further information, refer to GST/HST Technical Bulletin B-107, Investment Plans (Including Segregated funds of an Insurer) and the HST. For a definition of investment plan for purposes of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, refer to the appendix to this memorandum.

Criteria, rules, terms and conditions specified by the Minister

36. Section 141.02 provides that a specified method and a direct attribution method must conform to the criteria, rules, terms and conditions specified by the Minister. Where a particular allocation does not conform to all of the criteria, rules, terms and conditions, it may not be used. It is a question of fact whether a particular allocation meets all of the criteria, rules, terms and conditions specified by the Minister.

37. Financial institutions may have a system in place which is not designed for ITC allocation purposes but which provides the information necessary to determine the use of business inputs. To the extent that a financial institution’s cost accounting system uses a method that meets the criteria, rules, terms and conditions specified by the Minister for a specified method or a direct attribution method, the financial institution must use its cost accounting system in that specified method or direct attribution method.

38. For example, if a financial institution’s cost accounting system tracks the extent to which certain business inputs are used in making particular supplies on an input‑by‑input basis and this results in a specified method or direct attribution method that meets the criteria, rules, terms and conditions specified by the Minister in this memorandum, then the financial institution must use its cost accounting system in a specified method or direct attribution method of the financial institution for those particular business inputs.

39. The criteria, rules, terms and conditions specified by the Minister to which a specified method or a direct attribution method must conform are that the method must employ an objective measure of use which is meaningful, unbiased and verifiable, and be applied in a manner that accurately reflects the use of the particular business input, including providing comparable results and using cost pools only if they are appropriate cost pools. These criteria, rules, terms and conditions are discussed below.

Objective measure

40. A specified method or direct attribution method must employ an objective measure of use which is:

• meaningful
• unbiased
• verifiable

Meaningful

41. A meaningful allocation method accurately reflects the extent to which a particular business input was acquired, or consumed or used, for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. For a financial institution whose core business is making exempt supplies of financial services, to be meaningful, any ITC allocation method used should accurately reflect the use of the business input in the context of the financial institution’s core business of making exempt supplies of financial services. For an example of this situation, refer to Example 17 in this memorandum. The ITC allocation method should reflect the use of an input in the context of the reality of the financial institution’s business.

42. A meaningful ITC allocation method must be based:

• first, on tracking to the extent possible
• second, to the extent that the use of the business input cannot be tracked, on causal allocation to the extent possible
• third, to the extent that the use of the business input cannot be allocated based on tracking or causal allocation, on input‑based allocation or output‑based allocation

43. An ITC allocation method employing a measure of use that is not meaningful will not conform to the criteria, rules, terms and conditions specified by the Minister for a specified method or a direct attribution method and may not be used.

Tracking

44. Tracking is using a logical and systematic method to accurately record, to the extent possible, the purpose or purposes for which a financial institution acquired a business input or the actual use of a business input, including considering the context of the financial institution’s core business. As noted above, the actual use of a business input may help clarify what the financial institution’s intention was at the time the property or service was acquired.

45. Where it is not possible to track the entire use or intended use of a business input, it should be tracked to the extent possible and the remainder of the use or intended use of the business input may be allocated using another appropriate allocation.

Causal allocation

46. Causal allocation directly approximates the use of a particular business input using a logical and systematic approach and an appropriate allocation base.

47. An allocation base (for example, square footage or number of employees) is used to link a particular business input to the making of a particular supply or supplies by the financial institution. The use of the input should have a correlation to the allocation base. For example, where an input is used equally over the allocation base and an increase in the allocation base leads to an increase in the use of the input (that is, there is a cause‑and‑effect relationship), it would generally be appropriate to use that allocation base.

48. The allocation base must provide a reasonable approximation of the use or intended use of a business input. Causal allocation may only be used to the extent that the use of the business input cannot be tracked. Therefore, to be able to use causal allocation, a financial institution must be able to demonstrate that causal allocation was only used to the extent that tracking the use or intended use of the particular business input was not possible.

Input-based allocation

49. An input-based allocation uses a calculation based on the procurative extent of other business inputs. For example, the allocation of a non‑attributable input could be based on a ratio of exclusive and direct inputs allocated to the making of taxable supplies for consideration to the total of all exclusive and direct inputs that have been allocated.

50. Input‑based allocation has limited application. An input‑based allocation must provide a reasonable approximation of the extent to which the consumption or use of a particular business input is for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. Input‑based allocation may only be used to the extent that the use of the business input cannot be tracked or allocated through causal allocation. Therefore, to be able to use an input‑based allocation, a financial institution must be able to demonstrate that an input‑based allocation was only used to the extent that tracking and causal allocation were not possible.

51. Input‑based allocation is only meaningful if it is calculated using exclusive and direct inputs that have either been tracked or allocated through the use of causal allocation. This is because the allocation of exclusive and direct inputs through tracking or causal allocation involves less approximation and therefore more closely reflects the use of those inputs in making taxable supplies for consideration and for other purposes than input-based allocation and output-based allocation. In addition, an input-based allocation is not calculated using excluded inputs because although a financial institution may be eligible to claim an ITC for all or part of the GST/HST payable on an excluded input upon its acquisition, the use of the excluded input is generally over a longer period of time than the use of other business inputs. Therefore, the use of an excluded input may not provide an accurate estimate of the use of other business inputs in that period.

52. Furthermore, input‑based allocation can only be used if a substantial portion of the financial institution’s business inputs (other than excluded inputs) that relate to the financial institution’s business or relevant part of the business are exclusive and direct inputs that have been tracked or allocated through the use of causal allocation. What constitutes a substantial portion of the business inputs (other than excluded inputs) varies depending on the circumstances, but a substantial portion is generally almost all of the financial institution’s business inputs (other than excluded inputs).

53. An example of the use of an input-based method can be found in Example 18 of this memorandum.

Output-based allocation

54. Output-based allocation uses a calculation based on an output measure (for example, revenue or number of transactions) to allocate the consumption or use of a business input.

55. An output‑based allocation has limited application. An output‑based allocation must give a reasonable approximation of the extent to which the consumption or use of the business input is for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. To be able to use an output‑based allocation, a financial institution must show that it was not possible to fully track the use of the particular business input or fully use causal allocation to allocate the particular business input.

56. An allocation based on revenue is not appropriate where the amount of revenue generated from making particular supplies is not indicative of the cost of taxable inputs used in making those supplies. In this case, a revenue‑based allocation will not provide a reasonable approximation of the extent to which the consumption or use of the business input is for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. For example, inputs should be used in the same proportion in making the supplies included in the calculation. Further, in order for a revenue‑based allocation to be appropriate, the average profit margin for the supplies included in the calculation should be the same because having different profit margins for different products may result in a particular type of supply being allocated a proportion of inputs that does not reflect the true proportion of inputs used in making that supply.

57. Further, other distorting factors must be excluded from the ITC calculations in a revenue‑based method to avoid distortion of the results. For example, the financial institution should not include an amount receivable for the supply of capital property, an amount for the sale of a business or part of a business as a going concern, or an amount of proceeds from the sale of financial instruments held in the financial institution’s own account. These amounts will distort the calculation in a revenue‑based method.

58. In a revenue‑based method, the elements of the ratios used must be consistent so as to not produce distorted results (for example, using gross revenue from taxable supplies for consideration for the whole business over net revenue from all sources for the whole business in a revenue-based method would produce distorted results).

59. It must be determined on a case-by-case basis whether a particular factor causes distortions in the circumstances. It is a question of fact whether a financial institution has made adequate adjustments for all distorting factors in an output‑based allocation. Further, if the output-based allocation is applied to inappropriate inputs, for example, if it is applied to all business inputs in all categories or to all residual business inputs (that is, direct and non-attributable inputs), the output-based allocation would not conform to the criteria, rules, terms and conditions specified by the Minister.

Unbiased

60. An unbiased measure of use is impartial and is based on the facts surrounding the consumption or use of the business input. An unbiased measure uses a logical and systematic approach to produce a result that is supported by the facts surrounding the consumption or use of a particular business input. An unbiased measure is not designed to produce a result that cannot be substantiated by a reasoned review of the facts (for example, an allocation method would be biased if it produces a pattern of higher ITC claims than a reasoned review of the facts would substantiate). If assumptions concerning a business input are made in allocating a particular business input, they must be probable and not merely possible for a measure to be unbiased. For example, if it is assumed that vacant space will be used in making taxable supplies for consideration, it must be probable that it will be used that way, taking into consideration factors such as the consumption or use of the space in the context of the financial institution’s core business.

61. A method employing a biased measure of use would not conform to the criteria, rules, terms and conditions specified by the Minister for a direct attribution method or a specified method and cannot be used.

Verifiable

62. A verifiable measure is one that a knowledgeable independent third party could use to arrive at the same procurative extent or operative extent of a business input using accurate information regarding the intended or actual consumption or use of the business input. The data and method used must be comprehensive, understandable, available for review, and must lead to an accurate result.

63. A financial institution is expected to have appropriate systems in place which enable an ITC to be determined using a specified method or direct attribution method that meets the criteria, rules, terms and conditions specified by the Minister if the financial institution is claiming an ITC in respect of the GST/HST paid or payable on an excluded, direct or non‑attributable input. The financial institution’s system should also make it possible to verify that the criteria, rules, terms and conditions are met.

64. A financial institution’s books and records must be in an appropriate form and contain sufficient information to allow a determination and verification of the amount of any ITC that is claimed. For additional information regarding books and records, refer to GST/HST Memorandum 15-1, General Requirements for Books and Records, and GST/HST Memorandum 15-2, Computerized Records.

65. In addition to meeting the documentation requirements set out in subsection 169(4), a financial institution must be able to demonstrate with documentation that the financial institution has properly categorized its business inputs (that is, excluded inputs, exclusive inputs, direct inputs and non‑attributable inputs) and is using a specified method or a direct attribution method that meets the criteria, rules, terms and conditions specified by the Minister, as well as the requirements for the particular method. The documentation must also show that the requirements of subsection 141.02(16) are met because the method is fair and reasonable, used consistently throughout the year and was determined within the deadline specified in that subsection.

66. Any ITC allocation method used is subject to verification by audit. A method employing a measure of use that is not verifiable will not conform to the criteria, rules, terms and conditions specified by the Minister for a specified method or a direct attribution method and cannot be used.

Accurate application

67. A specified method or a direct attribution method must be applied in a manner that accurately reflects the use of the business input. The accurate application of a specified method or a direct attribution method provides comparable results and uses cost pools only if they are appropriate cost pools.

Comparable results

68. The ITC allocation method used must provide comparable results which accurately reflect the extent to which a particular input was acquired, or consumed or used, for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. For example, if two business inputs of the same category (for example, direct inputs) are used to the same extent for the same purpose, the ITC allocation method or methods used for these two business inputs should provide the same result in terms of the extent of use. If two business inputs of the same category are used to different extents for the same purpose, the ITC allocation method or methods used should provide different results.

69. If an ITC allocation method does not provide comparable results which accurately reflect the consumption or use of the business input, it will not conform to the criteria, rules, terms and conditions specified by the Minister for a specified method or a direct attribution method and cannot not be used.

Appropriate cost pools

70. The legislation provides that the categorization and allocation of business inputs must be done on an input‑by‑input basis, and not based on a group of business inputs. Therefore, cost pools are only appropriate and may only be used where the use of grouping or pooling of business inputs has the same ITC allocation result as would be arrived at if each business input was allocated without the use of pooling.

71. If business inputs are grouped together for ITC allocation purposes, it must be appropriate to use the same ITC allocation method for these business inputs, and the method must apply in the same manner (that is, produce the same result). All the business inputs within a cost pool must be included in a single business input category (for example, be included in the direct input category).

72. Even where business inputs are included in the same business input category (that is, are all excluded, direct or non-attributable inputs), it may not be appropriate to pool the inputs and apply the same ITC allocation method to all inputs in that category. In situations where it is not appropriate to include particular inputs in a single pool, a separate pool or pools must be created or the inputs must be allocated input by input. If inputs in a particular business input category are grouped together for ITC allocation purposes, all of the inputs within the pool must:

• be for use to the same extent for the purpose of making taxable supplies for consideration if the inputs in the pool are tracked (for example, a pool of inputs that are tracked cannot include an input that is used 2% for the purpose of making taxable supplies for consideration with an input that is used 30% for the purpose of making taxable supplies for consideration)
• be allocated using the same appropriate allocation base if the inputs in the pool are allocated using causal allocation
• apply to the same portion of the business if the input is allocated using input-based allocation
• apply to the same portion of the business and use the same appropriate output measures (for example, revenue) if the input is allocated using output-based allocation.

73. As noted previously, if the link between a particular business input and the particular supplies to which the business input is attributed cannot be tracked, any approximation(s) used must reasonably reflect the extent to which the input is acquired, or consumed or used, for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. As a result, it is only appropriate to pool particular inputs if pooling does not distort the results.

74. If inappropriate cost pools are used in a particular ITC allocation method, the method will not conform to the criteria, rules, terms and conditions specified by the Minister for a specified method or a direct attribution method and cannot be used.

Additional requirements for an ITC allocation method

75. Under subsection 141.02(16), any method that a financial institution uses in accordance with subsections 141.02(10) to (15) (for example, a specified method for an excluded input, a direct attribution method for a direct input or a specified method for a non-attributable input) for a fiscal year must be all of the following:

• fair and reasonable
• used consistently by the financial institution throughout the fiscal year
• determined by the date specified in the legislation

Fair

76. The terms fair and reasonable are not defined in the ETA. The word fair generally means equitable, impartial, objective, unbiased and consistent with the applicable rules. As a result, a fair ITC allocation method should allocate each business input to the purposes for which the business input was acquired (that is, it should determine the procurative and operative extent of the business input) in a manner that is objective, equitable, impartial, unbiased and consistent with the applicable rules.

77. An ITC allocation method designed to achieve a particular result that leads to a higher ITC claim than an objective review of the facts would substantiate is not a fair ITC allocation method.

Reasonable

78. The word reasonable generally means logical, rational, sensible, based on reason and within the bounds of common sense. As a result, a reasonable ITC allocation method should allocate each business input to the purposes for which the business input was acquired (that is, it should determine the procurative and operative extent of the business input) in a manner that is logical, rational, sensible and based on reason. To be reasonable, any method used should properly reflect the nature of the financial institution’s business.

Used consistently

79. A specified method for an excluded input, a direct attribution method for a direct input and a specified method for a non-attributable input that meet the requirements of section 141.02, including the criteria, rules, terms and conditions specified by the Minister, must be used consistently by the financial institution throughout the particular fiscal year of the financial institution.

Determined by the date specified in legislation

80. The method used in accordance with subsection 141.02(10) to (15) for a fiscal year must be determined by the financial institution no later than the day on or before which the financial institution is required to file a GST/HST return with the Minister for the first reporting period in the fiscal year.

No alterations to ITC allocation method

81. Under subsection 141.02(17), the ITC allocation method used by a financial institution for excluded, direct and non‑attributable inputs in respect of a fiscal year for purposes of any of subsections 141.02(10) to (15) cannot be altered or substituted with another method for that year at any time after the day the financial institution is required to file its return under Division V for the first reporting period of that fiscal year unless the Minister consents in writing to the alteration or substitution.

Specified method for an excluded input

82. A specified method for an excluded input is a method conforming to the criteria, rules, terms and conditions specified by the Minister in this memorandum for determining the procurative or operative extent of property or a service. Refer to paragraphs 36 to 74 of this memorandum for these criteria, rules, terms and conditions. Any specified method for an excluded input that a financial institution uses in respect of a fiscal year is also required to meet the conditions set out in subsection 141.02(16), which are explained in paragraphs 75 to 80 of this memorandum.

83. The criteria, rules, terms and conditions specified by the Minister for a specified method for an excluded input rely on the same general principles as they do for a direct attribution method for a direct input and a specified method for a non‑attributable input. However, an excluded input is different from a direct input or a non-attributable input in that capital property and improvements to capital property generally have a longer period of use. As a result, excluded inputs may be subject to change‑in‑use provisions that do not apply to direct inputs or non‑attributable inputs. As well, excluded inputs may be used exclusively for the purpose of making taxable supplies for consideration or exclusively for purposes other than for making taxable supplies for consideration (direct and non‑attributable inputs cannot be exclusive inputs).

84. The procurative extent of an excluded input is relevant to the determination of a financial institution’s eligibility to claim an ITC for the GST/HST paid or payable on an excluded input upon its initial acquisition. A specified method for an excluded input conforming to the criteria, rules, terms and conditions specified by the Minister for determining the procurative extent of an excluded input will accurately reflect the extent to which the input was acquired for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

85. The operative extent of an excluded input is the extent that the actual consumption or use of the excluded input is for the purpose of making taxable supplies for consideration or for purposes other than making taxable supplies for consideration. The operative extent of an excluded input is particularly important in the application of those provisions that depend on whether, and to what extent, property or a service is, at any particular time, consumed or used in commercial activities. For example, change-in-use provisions apply to certain capital property having a cost to the financial institution of more than $50,000. Additionally, in accordance with paragraph (b) of Element B of the formula in subsection 169(1), a financial institution is generally only eligible to claim an ITC for the GST/HST paid or payable on the acquisition of property or a service for use as an improvement to capital property to the extent that the financial institution was using the capital property in commercial activities immediately after the property was last acquired by the financial institution where all other conditions for claiming an ITC are met.

86. For a method to be considered a specified method for an excluded input, it must accurately reflect the extent to which a particular excluded input was acquired, or consumed or used, both for the purpose of making taxable supplies for consideration and for other purposes. It must be based on:

• first, tracking to the extent possible
• second, to the extent that the use of the excluded input cannot be tracked, causal allocation to the extent possible
• third, to the extent that the use of the excluded input cannot be allocated based on tracking or causal allocation, input‑based allocation or output‑based allocation

87. The terms tracking, causal allocation, input-based allocation and output-based allocation apply as explained in paragraphs 41 to 59 of this memorandum.

88. In general, few, if any, excluded inputs will be allocated using either an input-based allocation or an output-based allocation because most of a financial institution’s excluded inputs:

• are consumed or used exclusively for particular purposes (for example, purposes other than making taxable supplies for consideration such that the extent of consumption or use in commercial activities is 0%)
• can be tracked
• can be allocated using causal allocation

Direct attribution method for a direct input

89. A direct attribution method for a direct input is a method, conforming to the criteria, rules, terms and conditions specified by the Minister, of determining the procurative and operative extent of a property or service in the most direct manner. Those criteria, rules, terms and conditions are specified in this memorandum (refer to paragraphs 36 to 74). Any direct attribution method for a direct input that a financial institution uses in respect of a fiscal year is also required to meet the conditions set out in subsection 141.02(16), which are explained in paragraphs 75 to 80 of this memorandum.

90. A direct input can, at least in part, be attributed to the making of a particular supply. It is a question of fact whether a particular method determines consumption or use of the direct input in the most direct manner. Where there is more than one method which conforms to the criteria, rules, terms and conditions specified by the Minister and which could be used to allocate a direct input, the method chosen must be the one that allocates the property or service in the most direct manner, even where each method may appear to be fair and reasonable.

91. As a direct attribution method requires that a determination be made in the most direct manner, the method used would also generally be consistent from year to year unless there are changes in the business that affect what would constitute the most direct manner of attributing the consumption or use of the particular direct input.

92. For a method to be considered a direct attribution method, it must accurately and consistently reflect the use for which a particular direct input was acquired, or consumed or used, both for the purpose of making taxable supplies for consideration and for other purposes. It must be based on:

• first, tracking to the extent possible
• second, to the extent that tracking the use of the direct input is not possible, causal allocation to the extent possible
• third, to the extent that the use of the direct input cannot be allocated based on tracking or causal allocation, input‑based allocation or output‑based allocation

93. Generally, a substantial portion of a financial institution’s direct inputs can be tracked or allocated through causal allocation. As a result, few, if any, direct inputs will be allocated using either an input-based allocation or an output-based allocation.

94. The terms tracking, causal allocation, input‑based allocation and output‑based allocation apply as explained in the “Meaningful” section of this memorandum.

Specified method for a non‑attributable input

95. A specified method for a non‑attributable input is a method conforming to the criteria, rules, terms and conditions specified by the Minister in this memorandum for determining the procurative and operative extent of a non‑attributable input. Refer to paragraphs 36 to 74 of this memorandum for these criteria, rules, terms and conditions. Any specified method for a non‑attributable input that a financial institution uses in respect of a fiscal year is also required to meet the conditions set out in subsection 141.02(16), which are explained in paragraphs 75 to 80 of this memorandum.

96. As mentioned in paragraph 27 of this memorandum, a financial institution generally has very few non‑attributable inputs. The criteria, rules, terms and conditions for a specified method for a non‑attributable input are the same as those for a direct attribution method for a direct input or a specified method for an excluded input, but the application is somewhat different because, unlike a direct or excluded input, a non‑attributable input cannot be attributed to the making of any particular supply by the financial institution. Any non‑attributable inputs of the financial institution would generally not be tracked or allocated using causal allocation but would be allocated using an input‑based or an output‑based allocation.

Non-qualifying institution electing to use a prescribed percentage for residual inputs

97. A financial institution that is not a qualifying institution may be eligible to make an election under subsection 141.02(9) to use a prescribed percentage for its residual inputs (that is, direct inputs and non-attributable inputs) for a particular fiscal year. A financial institution may make this election where both of these conditions are met:

• the financial institution is, at any time in that particular fiscal year, a financial institution of a prescribed class (that is, it is a bank, an insurer or a security dealer as defined in the Regulations). For the definitions of bank, insurer and security dealer for purposes of the Regulations, refer to the appendix to this memorandum.
• its tax credit rate for each of its two fiscal years immediately preceding the particular fiscal year equals or exceeds the prescribed percentage for the prescribed class of the financial institution (that is, 12% for banks, 10% for insurers and 15% for security dealers) for the particular fiscal year

98. A financial institution eligible to make this election is one that would meet the definition of qualifying institution except that the financial institution does not meet the condition in paragraph (b) of that definition relating to its tax credit amount.

99. For more information on prescribed classes, tax credit rates, tax credit amounts and qualifying institutions, refer to GST/HST Memorandum 17‑11.

100. Where an election under subsection 141.02(9) is in effect for a particular fiscal year for a financial institution, the extent to which a residual input of the financial institution is acquired, or consumed or used, for the purpose of making taxable supplies for consideration is deemed to be the particular prescribed percentage for the prescribed class of the financial institution (that is, 12% for banks, 10% for insurers and 15% for securities dealers).

101. Where an eligible financial institution makes the election under subsection 141.02(9) in respect of a particular fiscal year of the financial institution, subsections 141.02(10), (11), (12) and (13) do not apply to the financial institution in respect of that fiscal year (that is, generally the requirement to use a direct attribution method for a direct input and the requirement to use a specified method for a non-attributable input). As well, if the election is in effect, the following rules apply in respect of each residual input of the financial institution:

• the extent to which the residual input is acquired by the financial institution or is consumed or used for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
• for the purpose of determining an ITC in respect of the residual input, the description of B in the formula in subsection 169(1) is deemed to be equal to the prescribed percentage for the prescribed class of financial institution

102. An election under subsection 141.02(9) in respect of a fiscal year of a financial institution must be made in prescribed form and contain prescribed information. The form must be filed by the financial institution with the Minister in prescribed manner not later than the day by which the financial institution must file its GST/HST return for the first reporting period of that fiscal year, or any later day that the Minister may allow on application by the financial institution.

103. To make an election under subsection 141.02(9), use Form GST118, Election or Revocation of an Election for a Financial Institution to Use the Prescribed Percentage.

Revocation

104. The election under subsection 141.02(9) in respect of a fiscal year of the financial institution ceases to have effect on the first day of the fiscal year and is deemed never to have been made if one of the following applies:

• a notice of revocation of the election in prescribed form is filed in prescribed manner with the Minister not later than the day by which the financial institution’s GST/HST return for the first reporting period of the fiscal year is required to be filed
• the financial institution is not of a prescribed class at any time in the fiscal year
• the tax credit rate of the financial institution for each of the two fiscal years immediately preceding the fiscal year does not equal or exceed the prescribed percentage for the financial institution’s prescribed class for the fiscal year

105. To revoke an election under subsection 141.02(9), use Form GST118.

Other methods

106. Subsections 141.02(11), (13) and (15) provide for the use of another method if no specified method applies to a particular non-attributable input, if no direct attribution method applies to a particular direct input or if no specified method applies to a particular excluded input, respectively. However, given the criteria, rules, terms and conditions specified by the Minister for specified methods and for direct attribution methods, it would be exceptional for a specified method or a direct attribution method to not apply to a particular business input.

Direction by Minister

107. Under subsection 141.02(32), the Minister may, by notice in writing, direct a financial institution to use a particular method that is fair and reasonable for determining the procurative and operative extent of a business input for a particular fiscal year and any subsequent fiscal year of the financial institution, rather than the method used by the financial institution under any of subsections 141.02(10) to (15) for that year. There is no requirement that the Minister prove that the Minister’s method is more fair and reasonable than the method used by the financial institution, only that it be fair and reasonable.

108. If a financial institution appeals an assessment in respect of an issue relating to the application of subsection 141.02(32), where the Minister directed the financial institution to use a method for a particular business input for a particular fiscal year and the Minister assessed the net tax of the financial institution for a reporting period included in the fiscal year, then subsection 141.02(33) applies. In that case, pursuant to subsection 141.02(33), the Minister is required to establish, on a balance of probabilities, that the method is fair and reasonable. Further, if the final determination by the courts is that the method is not fair and reasonable, the Minister may not direct the financial institution under subsection 141.02(32) to use another method for the fiscal year in respect of the particular business input.

Appeals

109. Under subsection 141.02(31), if a financial institution appeals a GST/HST assessment for a reporting period in a fiscal year of the financial institution in respect of an issue relating to the determination of the operative extent or the procurative extent of a business input under any of subsections 141.02(10) to (15), the financial institution must establish on the balance of probabilities in any court proceeding relating to the assessment that:

• in the case of the determination, under subsection 141.02(10) or (14), of the operative extent or the procurative extent of a non-attributable input or excluded input:
  • the financial institution used a specified method consistently throughout the fiscal year to determine the operative extent or the procurative extent of the non-attributable or excluded input
• in the case of the determination, under subsection 141.02(11) or (15), of the operative extent or the procurative extent of a non-attributable input or excluded input:
  • no specified method applied to the non-attributable or excluded input and the other attribution method the financial institution used to determine the operative extent or procurative extent was fair and reasonable and used consistently by the financial institution throughout the year
• in the case of the determination, under subsection 141.02(12), of the operative extent or the procurative extent of a direct input:
  • it used a direct attribution method consistently throughout the fiscal year
• in the case of the determination, under subsection 141.02(13), of the operative extent or the procurative extent of a direct input
  • no direct attribution method applied to the direct input and the other attribution method that the financial institution used to determine the extent was fair and reasonable and used consistently throughout the year

Appendix

Definitions

A bank is defined in the Regulations to mean, in respect of a fiscal year, a person who is a bank or an authorized foreign bank within the meaning of section 2 of the Bank Act, but it does not include a person that is at any time in the fiscal year an insurer.

A business input means an excluded input, an exclusive input, a direct input or a non-attributable input.

A direct attribution method is a method, conforming to criteria, rules, terms and conditions specified by the Minister, of determining in the most direct manner the operative extent and procurative extent of property or a service. These criteria, rules, terms and conditions are specified by the Minister.

A direct input is property or a service that is not an excluded input, an exclusive input or a non‑attributable input. Generally, a direct input is property or a service that is neither capital property nor an improvement to capital property, that can be attributed in whole or in part to the making of a particular supply or supplies and that is acquired, or consumed or used, both for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

An endeavour of a person is defined in subsection 141.01(1) to mean a business of a person, an adventure or concern in the nature of trade of a person, or the making of a supply by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.

An excluded input of a person is property (that is, personal or real property) that is for use by the person as capital property and any property or service that is acquired by the person for use as an improvement to capital property. An excluded input may also include a prescribed property or service. There are currently no prescribed property or services.

An exclusive input of a person is property or a service (other than an excluded input) that is acquired by the person for consumption or use either directly and exclusively for the purpose of making taxable supplies for consideration, or directly and exclusively for purposes other than making taxable supplies for consideration. For financial institutions, exclusively means 100%.

An insurer is defined in the Regulations to mean, in respect of a fiscal year, a person who is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or under the laws of another jurisdiction to carry on in that other jurisdiction an insurance business, and that carries on at any time in the fiscal year an insurance business as its principal business in Canada.

An investment plan, as defined in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, means a segregated fund of an insurer (as defined in subsection 123(1)) or an investment plan (as defined in subsection 149(5)), other than:

• a trust governed by a registered retirement savings plan, a registered retirement income fund, a registered disability savings plan or a TFSA (tax‑free savings account)
• a trust governed by a registered education savings plan if the trust does not have more than one beneficiary at any one time or each of the beneficiaries of the trust is connected to each living subscriber under the plan, or was connected to a deceased original subscriber under the plan, by blood relationship or adoption (within the meaning of subsection 251(6) of the ITA)

A non-attributable input of a person is property or a service that is acquired by the person and is neither an excluded input nor an exclusive input of the person and is not attributable to the making of any particular supply by the person.

The operative extent of a particular property or service is, as the case may be, the extent to which the consumption or use of the property or service is for the purpose of making taxable supplies for consideration, or the extent to which the consumption or use of the property or service is for purposes other than making taxable supplies for consideration.

The procurative extent of a particular property or service is, as the case may be, the extent to which the property or a service is acquired for the purpose of making taxable supplies for consideration, or the extent to which the property or service is acquired by the person for purposes other than making taxable supplies for consideration.

A residual input is a direct input or a non-attributable input.

A securities dealer is defined in the Regulations to mean, in respect of a fiscal year, a person that is all of the following:

• carries on at any time in the fiscal year a business as a trader or dealer in, or as a broker or salesperson of, securities as the person’s principal business in Canada
• is registered under the laws of Canada or a province to carry on in Canada at any time in the fiscal year a business as a trader or dealer in, or as a broker or salesperson of, securities
• is not a bank or an insurer (as these terms are defined in the Regulations) at any time in the fiscal year

A specified method is a method, conforming to the criteria, rules, terms and conditions specified by the Minister, for determining the operative extent and the procurative extent of property or a service. These criteria, rules, terms and conditions are specified by the Minister.

Further information