Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions

GST/HST Technical Information Bulletin B-098
August 2011

NOTE: This version replaces the earlier version dated September 2007.

Table of Contents

• Introduction
• Business input
• Exclusive input
  • Meaning of consideration
  • Rules for exclusive inputs
• Excluded inputs
  • Allocation of excluded inputs
    • Specified method
    • Exceptions
• Conditions
  • Special circumstances
• Residual inputs
  • Prescribed percentage allocation method
  • Transitional year election
• Pre‑approved allocation methods
  • Form and manner of application
  • Authorization by the Minister
  • Revocation
  • Election to use particular methods
    • Form and manner of application
    • Revocation
• Appeals
• Proposed legislation

Introduction

Section 141.02 provides input tax credit (ITC) allocation rules that are to be used by financial institutions [including both listed and de minimis financial institutions as described in subsection 149(1)] when calculating ITCs for the GST/HST paid or payable on their inputs. Section 141.02 generally applies for the purpose of determining a financial institution's net tax for any of its fiscal years beginning after March 2007.

This bulletin provides information on the ITC allocation rules applicable to financial institutions that are qualifying institutions. In particular, it explains the rules that a qualifying institution will use regarding each exclusive input, excluded input and residual input (i.e., a direct input or a non-attributable input).

This bulletin also provides information on the process for a qualifying institution to use particular methods pre-approved by the Minister of National Revenue (the Minister) to determine the procurative extent or operative extent of each of its inputs.

Additionally, this bulletin explains the election that is available to a qualifying institution under subsection 141.02(27), where all of the conditions of that provision are met, to use particular methods that were submitted for pre-approval but were not approved by the Minister.

To determine if a particular financial institution is a qualifying institution, refer to GST/HST Technical Information Bulletin B-097, Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02.

If a financial institution is not a qualifying institution, refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions, for information on the allocation rules applicable to financial institutions that are not qualifying institutions.

Business input

A business input is an excluded input, an exclusive input or a residual input (i.e., a direct input or a non-attributable input).

Exclusive input

An exclusive input of a financial institution is property or a service (other than an excluded input, e.g., capital property) that is acquired, imported or brought into a participating province for consumption or use either directly and exclusively (i.e., 100%) for the purpose of making taxable supplies for consideration, or directly and exclusively for purposes other than making taxable supplies for consideration.

The attribution of an exclusive input may be done at successive levels of the organization (e.g., business lines or units) before being ultimately attributed to a particular supply or supplies. For example, a financial institution sends a particular employee on technical training related to an exempt product. The cost of the training is entered in the financial institution's cost accounting system first in the cost centre applicable to the department and then it is further allocated to the particular product line and product. This input is an exclusive input because it is consumed or used directly and exclusively for the purpose of making exempt supplies (a purpose other than making taxable supplies for consideration).

If it is clear that a particular cost relates to a single input (i.e., a single supply to the financial institution) and this input is consumed or used 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, it is an exclusive input. If, for example, a financial institution acquires a single supply for use directly and exclusively in making taxable supplies for consideration, the supply would be an exclusive input.

In some cases, where it is not clear whether a particular cost relates to a single input or multiple inputs (i.e., multiple supplies to the financial institution), it is necessary to make that determination before applying the relevant rules. If, for example, a financial institution receives an invoice with a number of line items, it is necessary to determine whether each of these line items refers to a separate supply (i.e., whether it is an invoice for multiple supplies or whether the invoice is for a single supply). If a financial institution receives two supplies (i.e., multiple supplies) of a particular type of input that are billed on the same invoice and uses one supply directly and exclusively in making taxable supplies for consideration and the other supply directly and exclusively in making exempt supplies, these supplies would each be exclusive inputs. However, if a financial institution receives a single supply for use in making both taxable supplies for consideration and exempt supplies, that single input would not be categorized as an exclusive input.

GST/HST Policy Statement P-077, Single and Multiple Supplies, provides guidance regarding whether a transaction consisting of several elements is a single supply or two or more supplies.

Meaning of consideration

Subsection 123(1) provides that consideration includes any amount that is payable for a supply by operation of law. For the purposes of section 141.02, consideration does not include nominal consideration.

Rules for exclusive inputs

Subsection 141.02(6) provides that, if an exclusive input is acquired, imported or brought into a participating province for consumption or use directly and exclusively for the purpose of making taxable supplies for consideration, the financial institution is deemed to have acquired, imported or brought into the participating province the exclusive input for consumption or use exclusively in the course of commercial activities of the financial institution. 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, use or supply in the course of commercial activities is generally equal to 100%. A financial institution will generally be eligible to claim an ITC equal to 100% of the GST/HST paid on 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.

Subsection 141.02(6) also provides that, if an exclusive input is acquired, imported or brought into a participating province for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration, the financial institution is deemed to have acquired, imported or brought into the participating province the exclusive input for consumption or use otherwise than in the course of commercial activities of the financial institution. As a result, for the purpose of determining an ITC in respect of that exclusive input under section 169, the extent to which the property or service is for consumption, use or supply in the course of commercial activities is generally equal to 0%. A financial institution will generally not be eligible to claim an ITC for any of the GST/HST paid on an exclusive input that is for consumption or use directly and exclusively for the purpose other than making taxable supplies for consideration.

There are also specific circumstances where subsection 141.02(6) may not apply, which are explained below under the heading "Pre-approved allocation methods".

Excluded inputs

There are particular rules that a qualifying institution is required to use to determine for a fiscal year of the financial institution the operative extent or procurative extent of each excluded input.

An excluded input includes property (i.e., personal property, including personal property of a financial institution having a cost to the institution of $50,000 or less, and real property) that is for use as capital property and any property or service that is acquired, imported or brought into a participating province by the person for use as an improvement to capital property. An excluded input may also include a prescribed property or service. At this time, regulations have not been made to prescribe any particular property or service.

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, capital property of the person within the meaning of that Act, other than property described in Class 12, 14 or 44 of Schedule II of the Income Tax Regulations.

Under subsection 123(1), the term "improvement", in respect of property of a person, means any property or services 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 Income Tax Act, 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 Act.

Allocation of excluded inputs

Subsection 141.02(14) requires that a financial institution use a specified method to determine, for a fiscal year of the financial institution, the operative extent and the procurative extent of each excluded input of the financial institution. The specified methods used must satisfy the conditions contained in subsection 141.02(16), which are discussed below under the heading "Conditions". There are also specific circumstances where subsection 141.02(14) will not apply which are explained below under the headings "Special circumstances" and "Pre-approved allocation methods".

Specified method

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

Operative extent

The operative extent of a particular property or a service means, 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 operative extent of a particular input is relevant in determining the extent, under subsection 141.01(3), to which property or a service is deemed to have been consumed or used by a financial institution in the course of commercial activities or otherwise than in the course of commercial activities. Subsection 141.01(3) is pertinent to those provisions (e.g., change-in-use rules for capital property) that depend on whether, and to what extent, property or a service is, at any particular time, consumed or used in commercial activities. Where it is clear that a financial institution has made a taxable supply for no consideration, subsection 141.01(4) would also apply where all of the conditions of that subsection are met.

Procurative extent

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

The procurative extent of a particular input is relevant in determining the extent, under subsection 141.01(2), to which property or a service is deemed to have been acquired, imported or brought into a participating province by a financial institution for consumption or use in the course of commercial activities or otherwise than in the course of commercial activities. Where it is clear that a financial institution has made a taxable supply for no consideration, subsection 141.01(4) would also apply where all of the conditions of that subsection are met. A financial institution will generally be entitled to claim ITCs under subsection 169(1) to the extent that a particular property or service is deemed to be for use in commercial activities under subsection 141.01(2) subject to any restrictions that may apply (e.g., section 170) where all of the other ITC conditions are met.

Exceptions

Although subsection 141.02(14) requires that a qualifying institution use a specified method to determine the operative extent and the procurative extent of an excluded input, subsection 141.02(15) provides an exception that applies where a financial institution cannot do so because no specified method applies during a fiscal year of the financial institution to a particular excluded input. Where no specified method applies to an excluded input of a financial institution, the financial institution must use another method to determine for the fiscal year the operative extent and the procurative extent of the particular excluded input. While the financial institution can choose which method it will use for the purposes of subsection 141.02(15), the financial institution must choose a method that satisfies the conditions contained in subsection 141.02(16), which are discussed below under the heading "Conditions". There are also specific circumstances where subsection 141.02(15) will not apply, and these are explained below under the headings "Special circumstances" and "Pre-approved allocation methods".

Conditions

A specified method or other method chosen by a financial institution that the financial institution is required to use in accordance with subsection 141.02(14) or (15) must be:

• fair and reasonable;
• used consistently by the financial institution throughout the fiscal year; and
• subject to subsection 141.02(17), determined by the financial institution no later than the day on or before which the financial institution is required to file a return under Division V with the Minister for the first reporting period in the fiscal year.

Subsection 141.02(17) provides that the attribution method used by a financial institution for the purpose of either of subsection 141.02(14) or (15) in respect of a fiscal year may not 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.

Special circumstances

There are circumstances where neither a specified method nor another method chosen by a qualifying institution will apply to determine the procurative extent or the operative extent of an excluded input. This is the case where a qualifying institution has used a method for the purpose of subsections 141.02(14) or (15) for a particular fiscal year, but the Minister determines that the financial institution should use another method that is fair and reasonable in the circumstances. Under subsection 141.02(32), the Minister may, by notice in writing, direct the financial institution to use the Minister's method for the purposes of determining the operative extent and the procurative extent of each excluded input throughout the particular fiscal year and/or throughout any subsequent fiscal year of the financial institution.

If the Minister makes such a direction that is in effect for a particular reporting period in respect of an excluded input of a qualifying institution, the requirements in subsection 141.02(31) which are discussed below under the heading "Appeals" will not apply in an appeal respecting an assessment for that particular reporting period in respect of a matter relating to the determination of an operative extent or a procurative extent of the particular input. As a result, when this determination is the subject of a ministerial direction the burden of proof that applies is for the Minister to establish that the directed method is fair and reasonable in the circumstances.

Residual inputs

There are particular rules that a qualifying institution is required to use to determine the extent to which the consumption or use of each residual input of the financial institution is for the purpose of making taxable supplies for consideration or for purposes other than making taxable supplies for consideration.

A residual input is property or a service that is either a direct input or a non-attributable input.

As a result of the definitions of direct input and non-attributable input, a residual input of a person is a property or a service of the person, which is neither an excluded input nor an exclusive input. Residual inputs are, therefore, inputs that are acquired, imported or brought into a participating province, or consumed or used both for the purpose of making taxable supplies for consideration and for other purposes, and which are neither capital personal property nor capital real property (nor improvements to those capital properties).

Prescribed percentage allocation method

Subsection 141.02(8) applies to residual inputs of all qualifying institutions unless the qualifying institution has been authorized to use pre-approved methods (discussed below), has a transitional year election in effect for the transitional year (discussed below) or has elected to use particular methods where subsection 141.02(27) applied (also discussed below).

Under subsection 141.02(8), the extent to which a residual input of a qualifying institution is acquired, imported or brought into a participating province, or consumed or used for the purpose of making taxable supplies for consideration is deemed to be the prescribed percentage for the prescribed class of the financial institution, i.e., 12% for banks, 10% for insurers and 15% for securities dealers (the particular prescribed percentage). More specifically, under subsection 141.02(8), the following rules apply:

• the extent to which the consumption or use of the residual input is for the purpose of making taxable supplies for consideration is deemed to be equal to the particular prescribed percentage;
• the extent to which the consumption or use of the residual input is for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the particular prescribed percentage (that difference being 88% for banks, 90% for insurers and 85% for securities dealers);
• the extent to which the residual input is acquired, imported or brought into a participating province by the qualifying institution for the purpose of making taxable supplies for consideration is deemed to be equal to the particular prescribed percentage;
• the extent to which the residual input is acquired, imported or brought into a participating province by the qualifying institution for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the particular prescribed percentage; and
• for the purpose of determining an ITC in respect of the residual input of the qualifying institution, the description of B in the formula in subsection 169(1) is deemed to be equal to the particular prescribed percentage.

The circumstances where subsection 141.02(8) will not apply are explained under the headings "Transitional year election" and "Pre-approved allocation methods".

Transitional year election

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 its ITCs in respect of its residual inputs. This election is only available in the transitional year.

To make or revoke an election under subsection 141.02(7), use Form GST117, Transitional Year Election or Revocation of an Election for a Qualifying Institution to Determine Input Tax Credits on Residual Inputs.

Pre-approved allocation methods

Subsection 141.02(18) provides that a person that is, or is reasonably expected to be, a qualifying institution for a fiscal year may apply to the Minister to use particular methods (the pre-approved methods) to determine the operative extent and the procurative extent of each business input of the qualifying institution for the purpose of determining the net tax for any reporting period included in a fiscal year of the person beginning after March 2008. A financial institution that is not a qualifying institution may be eligible to apply to be designated as a qualifying institution for a particular fiscal year for the purposes of subsection 141.02(18) and paragraph 141.02(23)(c). This designation is discussed in GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions.

The requirement to categorize inputs and the criteria, rules, terms and conditions contained in TIB B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02of the Excise Tax Act also apply in determining whether any method that a qualifying institution is requesting to have pre-approved by the Minister is acceptable.

Form and manner of application

An application by a qualifying institution to use pre-approved methods must:

• be made in prescribed form and contain prescribed information, including the particular method to be used in respect of each direct input, excluded input, exclusive input and non-attributable input of the person (i.e., the application must propose methods to cover each of the qualifying institution's business inputs in the fiscal year in question); and
• be filed by the person with the Minister in prescribed manner on or before:
  • the day that is 180 days before the first day of the fiscal year to which the application applies, or
  • any later day that the Minister may allow on application by the person.

To make or revoke a request to use pre-approved methods, use Form GST116, Application, Renewal, or Revocation of the Authorization for a Qualifying Institution to Use Particular Input Tax Credit Allocation Methods.

Authorization by the Minister

Subsection 141.02(20) provides that, upon receiving an application to use pre-approved methods, the Minister shall consider the application and authorize or deny the use of the particular methods, and notify the person in writing of the decision on or before:

• the later of:
  • the day that is 180 days after that receipt; and
  • the day that is 180 days before the first day of the fiscal year to which the application applies; and
• any later date that the Minister may specify, if the date is set out in a written application filed by the person with the Minister.

If the Minister authorizes the use of pre-approved methods by a person in respect of a fiscal year of the person, subsection 141.02(21) requires that:

• the particular methods must be used consistently and as indicated in the application by the person throughout the fiscal year to determine the operative extent and the procurative extent of each business input of the person; and
• subsections 141.02(6) to (15) and (27) do not apply, for the fiscal year, for any business inputs of the person.

If the Minister denies the use of pre-approved methods by a person in respect of a fiscal year of the person and the person has, in respect of the application, complied with the requirements noted above under the heading "Form and manner of application" and provided to the Minister all requested information (i.e., information, additional information or document in respect of the application that the Minister requests from the person in writing), the Minister shall notify the person in writing of the reasons for not authorizing the use of the particular methods on or before the particular day that is the later of:

• 60 days after the day the person last provided any requested information to the Minister, and
• the day on or before which the notification of the decision is required to be given under subsection 141.02(20).

Subsection 141.02(27) provides an election (election to use particular methods) that a qualifying institution may make if the Minister has denied the use of pre-approved methods and certain conditions are met. This election allows the qualifying institution to use particular methods that were specified in an application to use pre-approved methods. This election is discussed below under the heading "Election to use particular methods".

Revocation

Subsection 141.02(23) provides that an authorization to use pre-approved methods in respect of a fiscal year of a person ceases to have effect on the first day of the fiscal year, and is deemed never to have been granted, if:

• the Minister revokes the authorization and sends a notice of revocation to the person on or before the day that is 60 days before the first day of the fiscal year; or
• the person files in prescribed manner with the Minister a notice of revocation in prescribed form (Form GST116, Application, Renewal, or Revocation of the Authorization for a Qualifying Institution to use Particular Input Tax Credit Allocation Methods) containing prescribed information on or before the day that is 60 days before the first day of the fiscal year; or
• the person is not a qualifying institution for the fiscal year.

If no authorization is received or if an authorization to use pre-approved methods in respect of a fiscal year of a person ceases to have effect, the rules for exclusive inputs under subsection 141.02(6), the use of the prescribed percentage for residual inputs under subsection 141.02(8), the use of a specified method for excluded inputs under subsection 141.02(14), and the use of another method chosen by the financial institution for excluded inputs if the specified method does not apply under subsection 141.02(15) will apply for the person's property and services in respect of the fiscal year. As noted above, where authorization ceases because the person is not a qualifying institution it may be eligible to apply to be designated as a qualifying institution for the purposes of subsection 141.02(18) and paragraph 141.02(23)(c) for a particular fiscal year.

Election to use particular methods

Subsection 141.02(27) provides that, despite subsections 141.02(6), (8), (14) and (15), a qualifying institution for a fiscal year may elect to use particular methods (an election to use particular methods) for the fiscal year to determine the operative extent and the procurative extent of every business input of the qualifying institution if:

1. the particular methods were specified in an application filed under subsection 141.02(18) by the qualifying institution for the fiscal year that:
   
   1. complies with the requirements set out in subsection 141.02(19), and
   2. is the last such application filed by the qualifying institution for the fiscal year;
2. the use of the particular methods was not authorized by the Minister under paragraph 141.02(20)(a);
3. the qualifying institution has provided all requested information within the time set out in the written notice requesting the information;
4. the Minister has not complied with the notification requirements set out in paragraph 141.02(20)(b) and subsection 141.02(22) in respect of the application; and
5. if the Minister has provided modifications in writing to the particular methods on or before the particular day described in subsection 141.02(22), the particular methods with those modifications (the "modified methods") are not fair and reasonable for the purpose of determining the operative extent and the procurative extent of the business inputs of the qualifying institution for the fiscal year.

If a qualifying institution makes an election to use particular methods, the particular methods shall be:

• fair and reasonable for the purpose of determining the operative extent and the procurative extent of the business inputs of the qualifying institution for the fiscal year; and
• used consistently, and as indicated in the application referred to in paragraph 141.02(27)(a), by the qualifying institution throughout the fiscal year.

Form and manner of application

An election to use particular methods in respect of a fiscal year of a person must be:

• made in prescribed form containing prescribed information; and
• the form must be filed by the person with the Minister in prescribed manner on or before the day on or before which the person must file a return under Division V for the first reporting period of the fiscal year in respect of which the election is made (or any later day that the Minister may allow on application by the person).

To make or revoke an election to use particular methods, a qualifying institution uses Form RC4522, Election or Revocation for a Qualifying Institution to use Particular Methods Specified in an Application under Subsection 141.02(18).

Revocation

This election in respect of a fiscal year of a person ceases to have effect on the first day of the fiscal year, and is deemed never to have been made if:

• a notice of revocation of the election in prescribed form (Form RC4522, Election or Revocation for a Qualifying Institution to use Particular Methods Specified in an Application under Subsection 141.02(18)) containing prescribed information is filed in prescribed manner with the Minister on or before the day on or before which the return under Division V is required to be filed for the first reporting period of the fiscal year;
• any of the requirements to make the election that are set out in subsection 141.02(27) is not met; or
• the particular methods referred to in subsection 141.02(27) are:
  • not fair and reasonable for the purpose of determining the operative extent and the procurative extent of the business inputs of the qualifying institution for the fiscal year,
  • not used consistently, or as indicated in the application referred to in paragraph 141.02(27)(a), by the financial institution throughout the fiscal year.

Appeals

Under subsection 141.02(31), if a financial institution appeals an assessment under Part IX 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 residual input under subsection 141.02(7), an excluded input under subsection 141.02(14) or (15) or a business input under subsection 141.02(21) or (27), the financial institution must establish, on a balance of probabilities in any court proceeding relating to the assessment that:

• in the case of the determination, under subsection 141.02(7), of the operative extent or the procurative extent of the business input:
  • the methods used by the financial institution to determine the operative extent and the procurative extent of all residual inputs of the financial institution for the fiscal year were:
    • fair and reasonable, and
    • used consistently by the financial institution throughout the fiscal year.
• in the case of the determination, under subsection 141.02(14), of the operative extent or the procurative extent of the 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 excluded input
• in the case of the determination, under subsection 141.02(15), of the operative extent or the procurative extent of the excluded input:
  • no specified method applied to the excluded input and the other attribution method the qualifying 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(21), of the operative extent or the procurative extent of the business input:
  • the particular methods referred to in subsection 141.02(21) were used consistently, and as indicated in the application referred to in that subsection, throughout the fiscal year.
• in the case of the determination, under subsection 141.02(27), of the operative extent or the procurative extent of the business input:
  • the methods specified by the financial institution in the application referred to in subsection 141.02(27) were:
    • fair and reasonable, and
    • used consistently, and as indicated in the application referred to in paragraph 141.02(27)(a), by the financial institution throughout the fiscal year, and
  • if the Minister has provided modifications to those methods as described in paragraph 141.02(27)(e), the modified methods are not fair and reasonable for the purpose of determining the operative extent and the procurative extent of the business inputs of the financial institution for the fiscal year.

Proposed legislation

Certain financial institutions (selected listed financial institutions that are a stratified investment plan, a non-stratified investment plan or an investment plan that is pension entity of a pension plan or a private investment plan) should also refer to the Proposed Amendments to the GST/HST Legislation released by the Department of Finance on January 28, 2011.

Enquiries by telephone

All technical publications related to the GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech.

Date modified:

2011-08-25