CRA will not accept revenue-based methods for calculating ITCs if they do not reflect the relative taxable/exempt use of inputs for GST/HST purposes

In its memo dealing with input tax credit methodologies for registrants (other than financial institutions), CRA has expanded the discussion of the requirement in ETA s. 141.01(5) that the registrant’s method be "fair and reasonable," stating that this requires that the "particular method accurately reflects the purpose for which the property or service was acquired."  It gives the example of a public institution which is mostly government-funded and is mostly engaged in making (free) exempt supplies, but makes minor sales which are mostly taxable rather than exempt.  CRA considers that it would be unreasonable for the institution to use a revenue-based methodology to claim most of its HST costs as ITCs (i.e., on the basis that most of its sales were taxable.)

There's probably an audit story associated with this example.

Neal Armstrong.  Summaries of Memorandum (New Series) 8-3 "Calculating Input Tax Credits" August 2014 under ETA – s. 141.10(5) and ETA – s. 169(1).