GST/HST Memorandum 17-13 [17.13] "Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions" 23 July 2021

Appraisal received by bank regarding proposed mortgage loan is an exclusive input

Example 3

Bank C provides a mortgage loan to an individual who is purchasing a house. Bank C acquires an appraisal service regarding the value of the house. Bank C does not charge the individual a fee for the appraisal. Bank C uses the appraisal service directly and exclusively to provide an exempt financial service of issuing a mortgage loan to a homebuyer in Canada (that is, the service is in no way used to provide a taxable supply for consideration).

The supply of the appraisal service is an exclusive input of Bank C because it is not an excluded input and it is acquired by Bank C for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration (that is, for making exempt supplies of financial services).

Overhead expense is a direct input if it can be attributed even in part to making of particular supplies

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

Paraphrase of s. 141.02(8)

48. … [U]nder 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 prescribed percentage for the prescribed class of financial institution
• 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 prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
• the extent to which the residual input is acquired by the qualifying institution for the purpose of making taxable supplies for consideration is deemed to be equal to the prescribed percentage for the prescribed class of financial institution
• the extent to which the residual input is acquired 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 prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
• for the purpose of determining an ITC in respect of the residual input of the qualifying institution, the description of Element B of the formula in subsection 169(1) is deemed to be equal to the prescribed percentage for the prescribed class of financial institution

Required to follow the usual rules for exclusive and excluded inputs

A qualifying institution will still generally be required to follow the rules in subsection 141.02(6) in respect of each exclusive input and use a specified method pursuant to subsection 141.02(14) for each excluded input. For information on the rules in subsection 141.02(6), refer to paragraphs 31 to 33 of this memorandum. For information on a specified method for an excluded input, refer to GST/HST Memorandum 17-12.

Example of application of s. 141.02(8) to insurer

Example 7

Insurer G is a qualifying institution that was not authorized under subsection 141.02(20) to use particular ITC allocation methods for determining the procurative and operative extent of each business input for its fiscal year ending December 31, 2021. Subsection 141.02(8) applies to Insurer G for its fiscal year ending December 31, 2021. As a result, the extent to which each of Insurer G’s direct and non-attributable inputs is acquired, imported or brought into a participating province, or consumed or used, for the purpose of making taxable supplies for consideration is 10% (that is, the prescribed percentage for insurers) and the extent to which each of Insurer G’s direct and non-attributable inputs is acquired, imported or brought into a participating province, or consumed or used, for purposes other than making taxable supplies for consideration is 90%. Additionally, for the purpose of determining an ITC in respect of each direct and non-attributable input, the description of element B of the formula in subsection 169(1) is deemed to be 10%.

Minister required to establish that changed method is fair and reasonable

40. Under subsection 141.02(32), the Minister may, by notice in writing, direct a financial institution to use a particular method that is fair and reasonable for determining the procurative and operative extent of a business input for a particular fiscal year and any subsequent fiscal year of the financial institution, rather than the method used by the financial institution under subsection 141.02(14) or (15) for that year. There is no requirement that the Minister prove that the Minister’s method is more fair and reasonable than the method used by the financial institution, only that it be fair and reasonable.

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