Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act

GST/HST Technical Information Bulletin B-106
August 2011

Table of contents

• Introduction
• Definitions
• ITC allocation for financial institutions
  • ITC allocation by input category
  • Overview of ITC allocation methods for excluded inputs, direct inputs and non-attributable inputs
  • Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods
    • Use of cost accounting allocation methods
    • Tracking
    • Causal allocation
    • Input-based allocation
    • Output-based allocation
    • Distorting factors
• Exclusive inputs
  • Rules for exclusive inputs
• Direct inputs
  • Direct attribution method
    • Criteria, rules, terms and conditions
    • Use of cost accounting allocation methods
    • Objective measure
    • Accurate application
    • Summary
• Non-attributable inputs
  • Specified method for non-attributable inputs
  • Criteria, rules, terms and conditions
    • Use of cost accounting allocation methods
    • Objective measure
    • Accurate application
    • Summary
• Excluded inputs
  • Specified method for excluded inputs
    • Criteria, rules, terms and conditions
    • Use of cost accounting allocation methods
    • Objective measure
    • Accurate application
    • Summary
• Additional requirements

Introduction

This bulletin explains some of the rules in section 141.02 regarding input tax credit (ITC) allocation methods that financial institutions, including both listed and de minimis financial institutions as described in subsection 149(1), must use when calculating ITCs for the GST/HST paid or payable on their inputs.

Section 141.02 applies in conjunction with existing ITC provisions such as section 169, and generally applies for the purpose of determining a financial institution's net tax for any of its fiscal years beginning after March 2007.

Section 169 generally provides that when a person acquires property or a service, and tax in respect of the supply becomes payable or is paid without becoming payable at any time when the person is a registrant, the person may claim an ITC for the tax paid or payable to the extent that the property or service was acquired for consumption, use or supply in the course of the person's commercial activities where all of the other conditions for claiming an ITC are met.

Section 141.02 provides clarification on determining the extent to which property or a service is for use in making taxable supplies for consideration, and includes provisions that apply to financial institutions that are qualifying institutions, provisions that apply to financial institutions that are not qualifying institutions, and provisions that apply to all financial institutions.

To determine if a particular financial institution is a qualifying institution (i.e., certain banks, insurers and securities dealers), refer to GST/HST Technical Information Bulletin B-097, Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02.

Financial institutions that are qualifying institutions should refer to GST/HST Technical Information Bulletin B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions, for additional information on the ITC allocation rules that apply to qualifying institutions. 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, and provides the circumstances when a qualifying institution may elect to use its own methods (under subsection 141.02(27)).

Financial institutions that are not qualifying institutions should refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions, for additional information on the ITC allocation rules that apply to financial institutions that are not qualifying institutions. This bulletin also provides information regarding the process for a financial institution to become a designated qualifying institution.

Certain financial institutions (selected listed financial institutions that are a stratified investment plan, a non-stratified investment plan, a non-stratified investment plan or an investment plan that is a pension entity of a pension plan or a private investment plan) should also refer to the Proposed Amendments to the GST/HST Legislation (including proposed section 225.4) released January 28, 2011 by the Department of Finance.

Examples provided in this bulletin are for illustrative purposes only.

Definitions

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

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, imported or brought into a participating province, 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 excluded input of a person is property (i.e., personal or real property) that is for use by the person 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.

An exclusive input of a person is property or a service (other than an excluded input) that is acquired, imported or brought into a participating province 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%.

A non-attributable input of a person is property or a service that is acquired, imported or brought into a participating province 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 a 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 a service is, as the case may be, the extent to which 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.

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.

ITC allocation for financial institutions

ITCs are generally available to a financial institution on a particular input to the extent that the financial institution acquired or used the particular input in the course of a commercial activity.

In determining this extent, a financial institution must do the following:

1. Categorize inputs.
   • Determine which inputs are excluded inputs (i.e., capital property and improvements thereto).
     • For inputs that are not excluded inputs:
       • first, determine whether the inputs are exclusive inputs,
       • second, determine whether the inputs are:
         • direct inputs, or
         • non-attributable inputs.
2. Determine, for the fiscal year, the ITC allocation methods appropriate for the particular category of input such as:
   • a specified method for excluded inputs (for all financial institutions);
   • a direct attribution method for direct inputs (for financial institutions that are not qualifying institutions); and
   • a specified method for non-attributable inputs (for financial institutions that are not qualifying institutions).
3. Apply the appropriate type of allocation(s) within the ITC allocation method, for example:
   • a specified method for excluded inputs based on tracking, causal allocation, input-based allocation, or output-based allocation;
   • a direct attribution method for direct inputs based on tracking, causal allocation, input-based allocation, or output-based allocation;
   • a specified method for non-attributable inputs based on input-based allocation or output-based allocation; or
   • another method where an exception applies (e.g., where the Minister has directed the financial institution to use a particular method).

The requirement to categorize inputs and the criteria, rules, terms and conditions contained in this bulletin also apply in determining whether any method that a qualifying institution is requesting to have pre-approved by the Minister, using Form GST116, Application, Renewal or Revocation of the Authorization for a Qualifying Institution to Use Particular Input Tax Credit Allocation Methods, is acceptable.

ITC allocation by input category

Categorizing inputs (i.e., excluded inputs, exclusive inputs, direct inputs or non-attributable inputs) is an important component in determining the ITC allocation method that should be used in the circumstances. The terms "tracking", "causal allocation", "input-based allocation" and "output-based allocation" are explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods".

In categorizing inputs, it must first be determined whether the input is an excluded input. Then, if the input is not an excluded input, it must be determined whether the input is:

• an exclusive input;
• a direct input (if the input is not an exclusive input); or
• a non-attributable input (if the input is neither an exclusive input nor a direct input).

Excluded inputs might be used exclusively for the purpose of making taxable supplies for consideration or exclusively for purposes other than making taxable supplies for consideration, in which case the extent of use in commercial activities would generally be either 100% or 0%.

The extent of use in making taxable supplies for consideration of excluded inputs that are used in part for the purpose of making taxable supplies for consideration and in part for purposes other than making taxable supplies for consideration must be determined, for a fiscal year, using a specified method for excluded inputs. A method is a specified method if it provides an accurate reflection of the use of an excluded input for the purpose of making taxable supplies for consideration or for other purposes, and is based on:

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

For an input that is not an excluded input, it must first be determined whether it is an exclusive input. If the input is an exclusive input, it is deemed to be for consumption or use either 100% or 0% in commercial activities depending on whether the particular input was acquired for consumption or use 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 an input that is neither an excluded input nor an exclusive input, it must be determined whether the input is a direct input or a non-attributable input. A direct input is attributable, at least in part, to the making of a particular supply or supplies. The extent of use in making taxable supplies for consideration of a direct input, for a fiscal year, must be determined using a direct attribution method. A direct attribution method is one that provides an accurate reflection of the use of a direct input for the purpose of making taxable supplies for consideration or for other purposes and is based on:

• first, tracking to the extent possible;
• second, causal allocation to the extent possible; and
• third, input-based allocation or output-based allocation to the extent that the use of the direct input cannot be allocated based on tracking or causal allocation.

For non-attributable inputs (inputs that are not excluded inputs, exclusive inputs or direct inputs), the extent of use in making taxable supplies for consideration, for a fiscal year, must be determined using a specified method for non-attributable inputs. A method is a specified method if it accurately reflects the use of the non-attributable input for the purpose of making taxable supplies for consideration or for other purposes, and is based on input-based allocation or output-based allocation. As a non-attributable input is not attributable to the making of any particular supply or supplies, a specified method for non-attributable inputs would not be based on tracking or on causal allocation.

Overview of ITC allocation methods for excluded inputs, direct inputs and non-attributable inputs

The concept underlying ITC allocation methods is that a method or methods used must link a particular property or service on which tax was paid or payable to its use for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

Where the use of a particular type of input has been established by the financial institution's past use of that type of input, the use of the input for ITC allocation purposes should be an accurate reflection of its actual use. Although the procurative extent of an input is based on the purpose for which the particular input was acquired, imported or brought into a participating province, the actual consumption or use of the input (the operative extent) should reflect the procurative extent of the input. The operative extent of inputs should be periodically reconciled to the procurative extent of the inputs and appropriate adjustments should be made.

Direct attribution methods and specified methods must accurately reflect the actual extent to which a particular input was acquired, imported or brought into a participating province for consumption or use, or was consumed or used ("acquired or used") for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

Direct attribution methods for direct inputs, specified methods for non-attributable inputs, and specified methods for excluded inputs are all methods conforming to criteria, rules, terms and conditions specified by the Minister for determining the procurative extent and the operative extent of property or a service.

The procurative extent of a particular input is, as the case may be, the extent to which the property or service is acquired, imported or brought into a participating province (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 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 by a financial institution for use in the course of its commercial activities, or otherwise than in the course of commercial activities. For example, under subsection 141.01(2), where a person acquires property or a service for use in its business, the person is deemed to have acquired it for use otherwise than in the course of the person's commercial activities to the extent it was acquired for purposes other than making taxable supplies for consideration (e.g., for the purpose of making exempt supplies).

The operative extent of a particular input is, as the case may be, the extent to which the use of the property or service is for the purpose of making taxable supplies for consideration, or the extent to which the 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 used by a financial institution in the course of its commercial activities or otherwise than in the course of its commercial activities. The extent to which property or a service is used in the course of commercial activities 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, used in commercial activities.

Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods

The criteria, rules, terms and conditions that a direct attribution method for direct inputs, a specified method for non-attributable inputs, and a specified method for excluded inputs must conform to are:

1. The method must employ an objective measure of use which is
   • meaningful,
   • unbiased, and
   • verifiable.
2. The method must be applied in a manner that accurately reflects the use of the input, including
   • providing comparable results, and
   • using cost pools only if they are appropriate cost pools.

Although the principles underlying the criteria, rules, terms and conditions for direct attribution methods for direct inputs, specified methods for non-attributable inputs, and specified methods for excluded inputs are similar, the application may vary depending on the type of input. Categorizing the input (i.e., excluded input, exclusive input, direct input or non-attributable input) is an important component in determining the ITC allocation method that should be used in the circumstances.

An allocation is a means of attributing an input to a particular supply or supplies. ITC allocations that are meaningful include tracking, causal allocation, input-based allocation and output-based allocation, depending on the particular circumstances.

A financial institution generally uses different ITC allocation methods (e.g., direct attribution methods and specified methods) and different types of allocation (e.g., tracking and causal allocation) depending on what is appropriate for a particular input. The ITC allocation method that is appropriate in a particular circumstance depends on the category of the particular input that is being allocated. Further, the type of allocation that is appropriate in the circumstances depends on the use of the input. Additionally, where it is not appropriate to use the same type of allocation for an entire input (e.g., where 90% of the use of a particular direct input can be tracked, but 10% cannot), the types of allocations used must provide an accurate reflection of the use of the input (e.g., if 90% of the input can be tracked, it must be tracked and if causal allocation can be used for the remaining 10%, it must be used).

The sum of the extent to which an input was acquired or used for the purpose of making taxable supplies for consideration and the extent to which an input was acquired or used for purposes other than making taxable supplies for consideration (calculated using the same method) must be equal to 100%. For example, if the extent to which a particular input is used for the purpose of making taxable supplies for consideration is equal to 3%, the extent to which that same input is used for purposes other than making taxable supplies for consideration must be equal to 97%.

Use of cost accounting allocation methods

To the extent that a financial institution's cost accounting system uses a method that meets the criteria, rules, terms, conditions, and requirements (the requirements are explained under "Additional Requirements") for a direct attribution method, a specified method for non-attributable inputs, or a specified method for excluded inputs, the financial institution must use its cost accounting allocation method as a direct attribution method, a specified method for non-attributable inputs, or a specified method for excluded inputs. For example, if a financial institution's cost accounting system tracks the extent to which certain inputs are used in making taxable supplies for consideration on an input-by-input basis, and the method of tracking is logical and systematic, then the financial institution must use its cost accounting allocation method for these particular inputs.

Tracking

Tracking is recording to the extent possible the actual use of a particular input so that the actual use is linked to the purpose of making taxable supplies for consideration and to purposes other than making taxable supplies for consideration.

Causal allocation

Causal allocation directly approximates to the extent possible the use of a particular input using a systematic approach and an appropriate allocation base. An allocation base is a factor used to link a particular input to a particular output or outputs where there is a link between the allocation base and the output or outputs, which is logical and where the use of the particular input has a correlation to the allocation base (an example of a correlation would be where the input is used equally over the allocation base). For example, the number of employees making taxable supplies for consideration or exempt supplies might be used as an allocation base for a particular input where it is logical that the input be used equally by the relevant employees. Where an increase in the allocation base (e.g., square footage) leads to an increase in input costs (i.e., a cause and effect relationship exists between an allocation base and an output), it would generally be appropriate to use this allocation base.

Input-based allocation

An input-based allocation uses a calculation based on the use of other inputs to allocate inputs to the extent that they cannot be allocated using either tracking or causal allocation. This might include a ratio of the value of inputs allocated to taxable supplies for consideration to the value of total inputs allocated. If an input-based allocation is used, the property and services allocated through the rules for exclusive inputs and through tracking of direct inputs and causal allocation of direct inputs must represent a substantial portion of the inputs that relate to the financial institution's business or the relevant part of the business. What constitutes a substantial portion varies depending on the circumstances of each particular financial institution, but a substantial portion is generally almost all of the financial institution's inputs.

An input-based allocation must provide a reasonable approximation of the use of the particular input. To provide results that are more reliable, input-based allocation must be calculated using exclusive inputs and direct inputs that have either been tracked or allocated through the use of causal allocation (i.e., it would not include excluded inputs; non-attributable inputs which cannot be allocated using tracking or causal allocation; or direct inputs allocated using input-based allocation or output-based allocation). This is because the allocation of exclusive inputs and of direct inputs through tracking or causal allocation is more accurate than input-based allocation and output-based allocation because it involves less approximation. Additionally, the use of an excluded input is generally over a longer period than the use of a direct input or a non-attributable input, so that its use in making taxable supplies for consideration might not provide an accurate estimate of the use of direct or non-attributable inputs, or other excluded inputs, in making taxable supplies for consideration.

Output-based allocation

An output-based allocation uses a calculation based on an output measure (e.g., revenue) to allocate the use of inputs to the extent that they cannot be allocated using tracking or causal allocation. If an output-based allocation is used, the calculation must give a reasonable approximation of the use of the inputs for the purpose of making taxable supplies for consideration. For example, inputs should be used in the same proportion in making the supplies included in the calculation and the average profit margin for the supplies included in the calculation should be the same.

Distorting factors

Distorting factors must be excluded from ITC allocation calculations to avoid distortion of the results. Examples of distorting factors are:

• including any amount receivable for the supply of capital property used in the business (e.g., proceeds from the sale of fixed assets/lands) in a revenue calculation;
• including the value of the sale of a business or part of a business as a going concern in a revenue calculation; or
• including proceeds from the sale of financial instruments held in the registrant's own account in a revenue calculation.

It must also be determined on a case-by-case basis whether a particular factor (e.g., revenues that include amounts that relate to prior periods such as the recovery of a bad debt) causes distortions in the circumstances. It is a question of fact whether the financial institution has made adequate adjustments for all distorting factors. The elements of any ratios used must not produce distorted results (e.g., using gross revenue from taxable supplies for consideration for the whole business over net revenue from all sources for the whole business clearly produces distorted results).

Exclusive inputs

An exclusive input of a financial institution is property or a service (other than an excluded input, i.e., capital property, an improvement to capital property or any prescribed property or service) that is acquired or used 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%.

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 exempt supplies, 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 be a direct input, rather than 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.

Rules for exclusive inputs

Subsection 141.02(6) applies to financial institutions that are not qualifying institutions, and to financial institutions that are qualifying institutions and that have not received authorization from the Minister to use a pre-approved method or that have not elected to use their own methods (under subsection 141.02(27)).

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 the exclusive input into the participating province 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, use or supply in the course of commercial activities is generally equal to 100%. A financial institution is generally 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 the exclusive input into the participating province for consumption or use otherwise than in the course of its commercial activities. 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 is generally not 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 purposes other than making taxable supplies for consideration.

Direct inputs

A direct input is property or a service other than an excluded input, an exclusive input or a non-attributable input. Therefore, direct inputs are generally inputs that:

• are neither capital property nor acquired for use as improvements to capital property;
• can be attributed to the making of particular supplies; and
• are acquired or used, both for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

Direct inputs are inputs that can be attributed in whole or in part to the making of a particular supply or supplies even where this attribution may be done at successive levels of the organization (e.g., business lines or units) before ultimately being attributed to a particular supply. For example, a financial institution acquires a direct input for one of its departments that uses the input in making both taxable and exempt supplies. This direct input is attributed first to the department, and then to the particular taxable and exempt supplies.

Direct inputs also include inputs that can be attributed in part to the making of a particular supply. Although the input may not be attributable in whole to the making of any particular supply or supplies, the input is a direct input if it is not an excluded input, an exclusive input or a non-attributable input.

An input that might be considered an indirect input for cost allocation purposes (e.g., certain overhead expenses) is a direct input for purposes of section 141.02 if the input can be attributed to the making of a particular supply or supplies in whole or in part.

In some cases, where it is not clear whether a particular cost relates to a single input (i.e., a single supply to the financial institution) 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 the line items refers to a separate supply (i.e., whether it is an invoice for multiple supplies) or whether it is an invoice for a single supply. If a financial institution receives an invoice for a single supply for use in making both taxable supplies for consideration and exempt supplies, that single input would be a direct input.

Direct attribution method

If a financial institution is not a qualifying institution in a particular fiscal year and has not made an election under subsection 141.02(9), subsection 141.02(12) provides that the financial institution is required to use a direct attribution method to determine the procurative extent or operative extent of each direct input for the fiscal year. There are certain situations (e.g., where the Minister has directed the financial institution to use a particular method) where subsection 141.02(12) would not apply to the direct inputs of a financial institution that is not a qualifying institution. These situations are explained in GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions.

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

The concept underlying the criteria, rules, terms and conditions is that a method used must accurately reflect the actual use of the input in the making of the supplies to which the input can be attributed. A direct attribution method is a method of determining the operative extent and the procurative extent of property or a service in the most direct manner. It is a question of fact whether a particular method determines use in the "most direct manner" in particular circumstances. For example, where an input is clearly used in making particular supplies, its use must be tracked to these supplies.

Criteria, rules, terms and conditions

The criteria, rules, terms and conditions that a direct attribution method must conform to are:

1. A direct attribution method must employ an objective measure of use which is
   • meaningful,
   • unbiased, and
   • verifiable.
2. A direct attribution method must be applied in a manner that accurately reflects the use of the direct input, including
   • providing comparable results, and
   • using cost pools only if they are appropriate cost pools.

Use of cost accounting allocation methods

To the extent that a financial institution's cost accounting system uses a method that meets the criteria, rules, terms, conditions, and requirements, the financial institution must use its cost accounting allocation method as a direct attribution method.

Objective measure

An objective measure of use is meaningful, unbiased, and verifiable.

Meaningful

A meaningful measure of use for a direct input is one that accurately reflects the actual extent to which a particular input was acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

A direct input can, at least in part, be attributed to the making of a particular supply. A direct attribution method must be based on:

• first, tracking to the extent possible;
• second, causal allocation to the extent possible; and
• third, input-based allocation or an output-based allocation to the extent the input cannot be allocated based on tracking or causal allocation.

The terms "tracking", "causal allocation", "input-based allocation" and "output-based allocation" apply as explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods".

Tracking the use of a particular input is more direct than approximating the use of the input. A direct attribution method requires that a determination be made in the most direct manner. As a result, where tracking specific inputs is possible, the most direct method would be a method that tracks the use of the input in making particular supplies. Any method used to track the use of a particular input must be logical and take a systematic approach to track the link between the direct input and the supplies to which the input relates.

If a link between a direct input and particular supplies cannot be tracked, any approximation(s) used must reasonably reflect the extent to which the direct input is acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

Causal allocation must also be logical and must use a systematic approach to link the direct input to the supplies to which it relates. Causal allocation utilizes an allocation base (e.g., square footage, employee numbers). The allocation base used must be appropriate to the circumstances and must provide a reasonable approximation of the use of the particular input. For example, an allocation based on square footage could be used where it is logical that the input be used equally over the relevant floor space.

While not as direct as tracking or causal allocation, an input-based allocation or an output-based allocation may be appropriate in circumstances where the link between a direct input and particular supplies cannot be tracked or allocated using causal allocation, and either an input-based allocation or an output-based allocation would provide a reasonable approximation of the use of the direct input. For example, if 80% of the use of a particular input can be tracked to making exempt supplies, 15% can be allocated using causal allocation, and 5% cannot be tracked or allocated using causal allocation, the 5% can be allocated using input-based allocation or output-based allocation, depending on the circumstances.

As a direct attribution method requires that a determination be made in the most direct manner, any method chosen to provide a reasonable approximation must be as direct as possible in the circumstances. For example, if an input relates to a portion of a business rather than the whole business, the use of the input must be allocated based on the particular portion of the business and not the whole business.

An input-based allocation uses a calculation based on the use of other inputs to allocate the use of a particular direct input to the extent that it cannot be allocated using tracking or causal allocation. For example, an input-based allocation may be a ratio of the value of inputs allocated to taxable supplies for consideration to the value of total inputs allocated, which is used to allocate the remainder of a direct input that cannot be directly allocated. An input-based allocation must provide a reasonable approximation of the use of the particular input. If an input-based allocation is used as a direct attribution method, the property and services allocated as exclusive inputs or through tracking of direct inputs and causal allocation of direct inputs must represent a substantial portion of the inputs that relate to the financial institution's business or the relevant part of the business. An input-based allocation for direct inputs should be calculated using exclusive inputs and direct inputs that have either been tracked or allocated through the use of causal allocation (i.e., it would not include excluded inputs, non-attributable inputs or direct inputs allocated using input-based allocation or output-based allocation).

An output-based allocation uses a calculation based on an output measure (e.g., revenue) to allocate the use of a particular direct input to the extent that the input cannot be allocated using tracking or causal allocation. If an output-based allocation is used as a direct attribution method, the calculation must give a reasonable approximation of the use of the inputs for the purpose of making taxable supplies for consideration.

Distorting factors (as explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods") must be excluded from ITC allocation calculations to avoid distortion of the results.

Unbiased

An objective measure of use is also unbiased.

An unbiased measure of use is impartial, is based on the facts surrounding the use of the direct input and is not a measure designed to achieve a particular result (e.g., an allocation method would be biased if it produces a pattern of higher ITC claims than a reasoned review of the facts would substantiate).

A direct attribution method requires that the method must determine in the most direct manner the procurative extent and the operative extent of property or a service. An unbiased measure uses a logical and systematic approach to produce a result that is supported by the facts surrounding the use of a particular input. If assumptions concerning an input or output are made in allocating a direct input, these assumptions must be probable and not merely possible. Where an allocation base is chosen for inputs that cannot be tracked, the allocation base must be one that logically relates the use of the direct input to the output rather than one that produces a particular ITC result.

Verifiable

An objective measure of use is also verifiable.

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

Where the use of a particular type of direct input in making particular supplies has been established by a financial institution's past use of this type of direct input, the use of the direct input for ITC allocation purposes should be an accurate reflection of its actual use. If there is a discrepancy between the use for ITC allocation purposes and the actual use of the direct input, the method used for ITC allocation purposes must be reviewed and revised as required. It is a question of fact whether it was appropriate to use that particular method.

A registrant must be able to support with documentation any method that it chooses (e.g., there must be sufficient documentation to show that it is appropriate in the registrant's particular circumstances). The supporting documentation must demonstrate how the method meets the criteria, rules, terms, conditions, and requirements for direct attribution methods.

A financial institution's books and records must be in an appropriate form and contain sufficient information to allow the determination of the amount of tax to be paid or collected, or the amount to be refunded, rebated or deducted from net tax. Accordingly, the books and records, including electronic 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.

Accurate application

A direct attribution method must apply an objective measure of use in a manner that accurately reflects the use of the direct input. It is applied in a manner that accurately reflects the use of the input if it provides comparable results and any cost pools used are appropriate cost pools.

Comparability

The ITC allocation method used must accurately and consistently reflect the use of the direct input in making taxable supplies for consideration. For example, if two direct inputs are used to the same extent for the purpose of making taxable supplies for consideration, the ITC allocation method or methods used for these two inputs must provide the same result in terms of their extent of use. Conversely, if two inputs are not acquired or used to the same extent for the purpose of making taxable supplies for consideration, the ITC allocation method or methods used to allocate these two inputs must provide different results in terms of the extent of use.

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. If the method were not consistent from year-to-year, a financial institution would need to show that there are changes in the business that affect what would constitute the most direct manner of attributing the use of the particular input.

Appropriate cost pools

Generally, the use of individual direct inputs must be tracked to a particular supply or supplies. Direct inputs must not be grouped with other categories of inputs (e.g., non-attributable inputs or excluded inputs) for ITC allocation purposes because the category of input (e.g., a direct input or a non-attributable input) is important in determining an ITC allocation method that is appropriate in the circumstances.

If direct inputs are grouped together for ITC allocation purposes, all the direct inputs within the cost 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 (e.g., 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; and
• apply to the same portion of the business and use the same appropriate output measures (e.g., revenue) if the input is allocated using output-based allocation.

As noted previously, if the link between a particular direct input and the particular supplies to which the input is attributed cannot be tracked, any approximation(s) used must reasonably reflect the extent to which the input is acquired 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.

Summary

A direct attribution method must use an objective measure of use that is meaningful, unbiased and verifiable. It must be applied in a manner that accurately reflects the use of the direct input through comparable results and the use of cost pools only if they are appropriate cost pools.

A direct attribution method used under subsection 141.02(12) must also satisfy the conditions contained in subsection 141.02(16), which are discussed below under "Additional requirements".

Non-attributable inputs

A non-attributable input is property or a service that is neither an excluded input nor an exclusive input, and is not attributable to the making of any particular supply. Non-attributable inputs are, therefore, inputs that are acquired, imported or brought into a participating province by a person both for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration, and that are neither capital personal property nor capital real property (nor improvements to capital property) and that cannot be attributed to the making of any particular supply.

Specified method for non-attributable inputs

Subsection 141.02(10) provides that a financial institution that is not a qualifying institution in a particular fiscal year and has not made an election under subsection 141.02(9) is required to use a specified method to determine the procurative extent or operative extent of each non-attributable input. There are certain situations (e.g., where the Minister has directed the financial institution to use a particular method) where subsection 141.02(10) would not apply to the non-attributable inputs of a financial institution that is not a qualifying institution. These situations are explained in GST/HST technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions.

A specified method for non-attributable inputs 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.

The concept underlying the criteria, rules, terms and conditions is that a method used must provide a reasonable approximation of the use of the non-attributable input in the making of taxable supplies for consideration or otherwise. The criteria, rules, terms and conditions for a specified method for non-attributable inputs rely on the same general principles as the direct attribution method, but the application is somewhat different because, unlike a direct input, a non-attributable input cannot be attributed to the making of any particular supply.

Criteria, rules, terms and conditions

The criteria, rules, terms and conditions that a specified method for non-attributable inputs must conform to are:

1. A specified method for non-attributable inputs must employ an objective measure of use which is
   • meaningful,
   • unbiased, and
   • verifiable.
2. A specified method for non-attributable inputs must be applied in a manner that accurately reflects the use of the input, including
   • providing comparable results, and
   • using cost pools only if they are appropriate cost pools.

Use of cost accounting allocation methods

To the extent that a financial institution's cost accounting system uses a method that meets the criteria, rules, terms, conditions, and requirements, the financial institution must use its cost accounting allocation method as a specified method for non-attributable inputs.

Objective measure

An objective measure of use is meaningful, unbiased and verifiable.

Meaningful

A meaningful measure of use for a non-attributable input is one that provides a reasonable approximation of the extent to which a particular input was acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

Because a non-attributable input is one that cannot be attributed to the making of a particular supply or supplies, it would not be tracked or allocated using causal allocation. However, any approximations used must still reasonably reflect the extent to which an input is acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. In general, a substantial portion of a financial institution's inputs that are not excluded inputs will be allocated through the rules for exclusive inputs or the direct attribution method for direct inputs.

An input-based allocation or output-based allocation (as these terms are explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods") is appropriate for non-attributable inputs where the allocation provides a reasonable approximation of the use of the input.

An input-based allocation uses a calculation based on the use of other inputs to allocate the use of a particular non-attributable input. For example, an input-based allocation may be a ratio of the value of inputs allocated to taxable supplies for consideration to the value of total inputs allocated. An input-based allocation must provide a reasonable approximation of the use of the particular input. An input-based allocation for non-attributable inputs should be calculated using exclusive inputs and direct inputs that have either been tracked or allocated through the use of causal allocation (i.e., it would not include excluded inputs, non-attributable inputs or direct inputs allocated using input-based allocation or output-based allocation).

An output-based allocation uses a calculation based on an output measure (e.g., revenue) to allocate the use of a particular non-attributable input. If an output-based allocation is used as a specified method for non-attributable inputs, the calculation must give a reasonable approximation of the use of the inputs for the purpose of making taxable supplies for consideration.

Distorting factors (as explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods") must be excluded from ITC allocation calculations to avoid distortion of the result.

Unbiased

An objective measure of use is also unbiased.

An unbiased measure of use is impartial, is based on the facts surrounding the use of the non-attributable input and is not a measure designed to achieve a particular result. An unbiased measure uses a logical and systematic approach to produce a result that is supported by the facts surrounding the use of a particular non-attributable input (e.g., if a particular non-attributable input relates to a distinct portion of a particular financial institution's business it would be inappropriate to use a method that applied to the whole business to allocate that particular non-attributable input). If assumptions concerning the use of a non-attributable input are made in allocating the input, these assumptions must be probable and not merely possible.

Verifiable

An objective measure of use is also verifiable.

A verifiable measure is one that a knowledgeable independent third party could use to arrive at the same procurative extent or operative extent using accurate information regarding the use of the non-attributable input. The data and method used must be comprehensive, understandable, available for review, and must lead to an accurate result. Any method used is subject to audit and verification.

Where the use of a particular type of non-attributable input in making supplies has been established by a financial institution's past use of this type of non-attributable input, the use of the non-attributable input for ITC allocation purposes should be an accurate reflection of its actual use. For example, if an input is acquired to contribute to the operation of the whole business, the actual use of the input would generally be in contributing to the operation of the whole business. If there is a discrepancy between the use for ITC allocation purposes and the actual use of the non-attributable input, the method used for ITC allocation purposes must be reviewed and revised as required. It is a question of fact whether it was appropriate to use that particular method.

A registrant must be able to support with documentation any method that it chooses. The supporting documentation must demonstrate how the method meets the criteria, rules, terms, conditions and requirements for a specified method for non-attributable inputs.

A financial institution's books and records must be in an appropriate form and contain sufficient information to allow a determination of the amount of tax to be paid or collected, or the amount to be refunded, rebated or deducted from net tax. Accordingly, the books and records, including electronic 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.

Accurate application

A specified method for a non-attributable input must apply an objective measure of use in a manner that accurately reflects the use of the non-attributable input. It is applied in a manner that accurately reflects the use of the input if it provides comparable results and any cost pools used are appropriate cost pools.

Comparability

The ITC allocation method used must accurately and consistently reflect the use of the input in making taxable supplies for consideration. For example, if two non-attributable inputs are acquired or used to the same extent for the purpose of contributing to the whole business, the ITC allocation method or methods used for these two inputs must provide the same result in terms of the extent of use.

Appropriate cost pools

If non-attributable inputs are grouped together for ITC allocation purposes, it must be appropriate to use the same ITC allocation method for these inputs, and the method must apply in the same manner (i.e., produce the same result). Any use of grouping or pooling must result in the same ITC allocation result as would be arrived at if each individual input was allocated without the use of pooling (e.g., if a particular non-attributable input relates to the whole business, it must not be pooled with other inputs that only relate to a portion of the business).

Non-attributable inputs must not be grouped with other categories of inputs (e.g., direct inputs or excluded inputs) for ITC allocation purposes because the category of input (e.g., a non-attributable input or a direct input) is important in determining an ITC allocation method that is appropriate in the circumstances.

Non-attributable inputs within a cost pool that is used for purposes of calculating an ITC must relate to the same portion of the business (e.g., the whole business or a specific part of the business). If non-attributable inputs within a cost pool do not have the same tax status, the use of pooling must not distort the ITC results. In situations where it is not appropriate to use the same method, a separate pool or pools must be created, or the inputs must be allocated input by input.

Approximations used must reasonably reflect the extent to which the input is acquired 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 non-attributable inputs if pooling does not distort the results.

Summary

A specified method for non-attributable inputs must use an objective measure of use that is meaningful, unbiased and verifiable. It must also be applied in a manner that accurately reflects the use of the non-attributable input through comparable results and the use of cost pools only if they are appropriate cost pools.

A specified method for non-attributable inputs used under subsection 141.02(10) must also satisfy the conditions contained in subsection 141.02(16), which are discussed under "Additional requirements".

Excluded inputs

An excluded input is property (i.e., personal property or real property) that is for use as capital property and any property or service that is acquired 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 to the Income Tax Regulations.

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 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 that Act.

Paragraph 169(1.1)(a) provides that, where a person acquires or imports property or a service, or brings it into a participating province 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, 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.

Specified method for excluded inputs

Subsection 141.02(14) requires that a financial institution use a specified method to determine for a fiscal year the procurative extent and the operative extent of each excluded input of the financial institution. There are certain situations (e.g., where the Minister has directed the financial institution to use a particular method) where subsection 141.02(14) would not apply to the excluded inputs of a financial institution. These situations are explained in GST/HST Technical Information Bulletins B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions, for qualifying institutions and B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions, for financial institutions that are not qualifying institutions.

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.

The concept underlying the criteria, rules, terms and conditions is that a method used must accurately reflect the actual use of the input in the making of the supplies to which the input can be attributed. Wherever possible, the purpose for which a particular excluded input is acquired or used must be tracked. Where it is not possible to track the purpose of a particular excluded input, the method used must reflect the purpose based on the connection between the input and the supply or supplies for which the input is acquired or used.

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 than either a direct input or a non-attributable input. Excluded inputs may be used exclusively for the purpose of making taxable supplies for consideration or for purposes other than making taxable supplies for consideration. Excluded inputs may also be tracked or allocated using causal allocation. Inputs or portions of inputs that cannot be attributed to the making of any particular supply may be allocated using an input-based allocation or an output-based allocation. Excluded inputs are also subject to change-in-use provisions that do not apply to direct inputs or non-attributable inputs. As a result, although the criteria, rules, terms and conditions for the specified method for excluded inputs rely on the same general principles as the direct attribution method and the specified method for non-attributable inputs, the application is somewhat different.

The extent to which a particular excluded input can be attributed to the making of particular supplies depends on the circumstances. For example, some excluded inputs may be used exclusively for the purpose of making exempt supplies while other excluded inputs may be used for the purpose of making both exempt supplies and taxable supplies for consideration.

Criteria, rules, terms and conditions

The criteria, rules, terms and conditions that a specified method for excluded inputs must conform to are:

1. A specified method for excluded inputs must employ an objective measure of use which is
   • meaningful,
   • unbiased, and
   • verifiable.
2. A specified method for excluded inputs must be applied in a manner that accurately reflects the use of the input, including
   • providing comparable results, and
   • using cost pools only if they are appropriate cost pools.

Use of cost accounting allocation methods

To the extent that a financial institution's cost accounting system uses a method that meets the criteria, rules, terms, conditions, and requirements, the financial institution must use its cost accounting allocation method as a specified method for excluded inputs.

Objective measure

An objective measure of use is meaningful, unbiased and verifiable.

Meaningful

A meaningful measure of use for an excluded input is one that accurately reflects the actual extent to which a particular input was acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

In general, a substantial portion of a financial institution's excluded inputs is used exclusively for particular purposes, or can be tracked or be allocated using causal allocation. As a result, few excluded inputs will be allocated using either an input-based allocation or an output--based allocation.

The terms "tracking", "causal allocation", "input-based allocation" and "output-based allocation" apply as explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods".

If an excluded input is acquired or used exclusively for the purpose of making taxable supplies for consideration, the procurative extent and the operative extent of the particular excluded input is 100% for the purpose of making taxable supplies for consideration. If an excluded input is acquired or used exclusively for purposes other than making taxable supplies for consideration, the procurative extent and the operative extent of the particular input is 100% for purposes other than making taxable supplies for consideration.

To provide an accurate reflection of the use of an excluded input, if it is possible to allocate the input by tracking the use of the particular excluded input in making particular supplies, the ITC allocation method used must track the use of the particular input. Any method used to track the use of a particular input must be logical and take a systematic approach to track the link between the excluded input and the supplies to which the input relates.

If a link between an excluded input and particular supplies cannot be tracked, any approximation(s) used must reasonably reflect the extent to which the input is acquired or used for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.

Causal allocation must also be logical and must use a systematic approach to link the excluded input to the supplies to which it relates. Causal allocation utilizes an allocation base (e.g., square footage, employee numbers). The allocation base used must be appropriate to the circumstances and must provide a reasonable approximation of the use of the particular input. For example, the number of employees might be used as an allocation base for an excluded input where it is logical that the excluded input be used equally by the relevant number of employees.

An input-based allocation or an output-based allocation may be appropriate in circumstances where the link between an excluded input and particular supplies cannot be tracked or allocated using causal allocation, and either an input-based allocation or an output-based allocation would provide a reasonable approximation of the use of the excluded input.

An input-based allocation uses a calculation based on the use of other inputs to allocate the use of a particular excluded input to the extent that it cannot be allocated using tracking or causal allocation. An input-based allocation must provide a reasonable approximation of the use of the particular input. An input-based allocation for excluded inputs should be calculated using exclusive inputs and direct inputs that have either been tracked or allocated through the use of causal allocation (i.e., it would not include excluded inputs, non-attributable inputs or direct inputs allocated using input-based allocation or output-based allocation).

An output-based allocation uses a calculation based on an output measure (e.g., revenue) to allocate the use of excluded inputs to the extent that it cannot be allocated using tracking or causal allocation. If an output-based allocation is used as a specified method for excluded inputs, the calculation must give a reasonable approximation of the use of the excluded inputs for the purpose of making taxable supplies for consideration.

Distorting factors (as explained under "Overview of the criteria, rules, terms and conditions for direct attribution methods and specified methods") must be excluded from ITC allocation calculations to avoid distortion of the results.

Unbiased

An objective measure of use is also unbiased.

An unbiased measure of use is impartial, is based on the facts surrounding the use of the excluded input, and is not a measure designed to achieve a particular result. An unbiased measure uses a logical and systematic approach to produce a result that is supported by the facts surrounding the use of a particular excluded input. If assumptions concerning an input or output are made in allocating an excluded input, these assumptions must be probable and not merely possible. Where an allocation base is chosen for inputs that are not exclusively for a particular purpose and cannot be tracked, the allocation base must be one that logically relates the use of the excluded input to the output rather than one that produces a particular ITC result.

Verifiable

An objective measure is also verifiable.

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

Where the use of a particular type of excluded input in making particular supplies has been established by the financial institution's past use of that type of excluded input, the use of the excluded input for ITC allocation purposes should be an accurate reflection of its actual use. If there is a discrepancy between the use for ITC allocation purposes and the actual use of the excluded input, the method used must be reviewed and revised as required. It is a question of fact whether it was appropriate to use that particular method.

The operative extent of an excluded input is based on the extent of use for the purpose of making taxable supplies for consideration or for purposes other than making taxable supplies for consideration. Upon verification, the extent to which an excluded input is used for the purpose of making taxable supplies for consideration or for purposes other than making taxable supplies for consideration must be the same as the operative extent used for the purpose of calculating ITCs. As a result, any ITC claimed on a change-in-use based on the calculation of the use of a particular excluded input must be the result of a change in how the particular excluded input is actually used.

The operative extent of an excluded input is particularly important in the application of the change-in-use provisions that apply to certain capital property (e.g., capital personal property having a cost to the financial institution of more than $50,000). If the use of a particular excluded input changes, various existing change-in-use provisions (e.g., sections 204 and 205) may apply.

A financial institution must be able to support with documentation any method that it chooses. The supporting documentation must demonstrate how the method meets the criteria, rules, terms, conditions, and requirements for a specified method for excluded inputs.

A financial institution's books and records must be in an appropriate form and contain sufficient information to allow a determination of the amount of tax to be paid or collected, or the amount to be refunded, rebated or deducted from net tax. Accordingly, the books and records, including electronic 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.

Accurate application

A specified method for an excluded input must apply an objective measure of use in a manner that accurately reflects the use of the excluded input. It is applied in a manner that accurately reflects the use of the excluded input if it provides comparable results and any cost pools used are appropriate cost pools.

Comparability

The ITC allocation method used must accurately and consistently reflect the use of the excluded input in making taxable supplies for consideration. For example, if two excluded inputs are used to the same extent for the purpose of making taxable supplies for consideration, the ITC allocation method or methods used for these two inputs must provide the same result in terms of the extent of use. Conversely, if two excluded inputs are not used to the same extent for the purpose of making taxable supplies for consideration, the ITC allocation method or methods used to allocate these two excluded inputs must provide different results in terms of the extent of use.

Appropriate cost pools

Generally, the use of individual excluded inputs must be tracked to a particular supply or supplies. Excluded inputs must not be grouped with other types of inputs (e.g., direct inputs or non-attributable inputs) for ITC allocation purposes because the type of input (e.g., an excluded input or a non-attributable input) is important in determining an ITC allocation method that is appropriate in the circumstances.

If excluded inputs are grouped together for ITC allocation purposes, all the excluded inputs within the cost 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 (e.g., a pool of inputs that are tracked cannot include an input that is used 5% for the purpose of making taxable supplies for consideration with an input that is used 80% for the purpose of making taxable supplies for consideration);
• be allocated using the same 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; and
• apply to the same portion of the business and use the same appropriate output measures (e.g., revenue) if the input is allocated using output-based allocation.

Any use of grouping or pooling must result in the same ITC allocation result as would be arrived at if each individual input was allocated without the use of pooling. If excluded inputs within a cost pool do not have the same tax status (e.g., a cost pool that includes both inputs on which GST/HST is not payable and inputs on which tax is payable), the use of the cost pool must not distort the ITC results (e.g., ITCs must not be claimed on exempt inputs). 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.

As noted previously, if the link between a particular excluded input and the particular supplies to which the input is attributed cannot be tracked, any approximation(s) used must reasonably reflect the extent to which the input is acquired 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 excluded inputs if pooling does not distort the results.

Summary

A specified method for excluded inputs must use an objective measure of use that is meaningful, unbiased and verifiable. It must be applied in a manner that accurately reflects the use of the excluded input through comparable results and the use of cost pools only if they are appropriate cost pools.

A specified method used under subsection 141.02(14) must also satisfy the conditions contained in subsection 141.02(16), which are discussed under "Additional requirements".

Additional requirements

Subsection 141.02(16) provides that a specified method, a direct attribution method or another method used by a financial institution in accordance with subsections 141.02(10) to (15) must:

• be fair and reasonable;
• be used consistently by the financial institution throughout the fiscal year; and
• be 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.

In addition, the ITC allocation method used by a financial institution in respect of a fiscal year for purposes of any of subsections 141.02(10) to (15) 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.

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:

2011-08-26