Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 90943
XXXXX
XXXXX
September 11, 2008
Subject:
GST/HST INTERPRETATION
PROPOSED LAW/REGULATION
Proposed Subsection 141.02(7)
Dear XXXXX:
Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST), and proposed amendments thereto announced on January 26, 2007, and more specifically, various aspects of proposed subsection 141.02(7), to certain financial institutions. We apologize for the delay in replying.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, and proposed amendments thereto announced on January 26, 2007 unless otherwise specified.
Background Facts
Proposed subsection 141.02(7) provides an election (the transitional year election) for qualifying institutions (QFIs), as defined in proposed subsection 141.02(1), for their first fiscal year that begins after March 2007 (the transitional year). It allows a QFI to elect to use an allocation method or methods that meet certain conditions to determine input tax credits (ITCs) in respect of its residual inputs. The term residual inputs is also defined in proposed subsection 141.02(1).
In order to be eligible to make the transitional year election, a QFI must meet certain criteria, including the following:
1. the QFI's net tax must have been assessed in at least one of the reporting periods in one of the four fiscal years that immediately precedes the transitional year (the chosen reporting period);
2. the Minister's notice of assessment, subsequent assessment or reassessment in respect of the chosen reporting period does not reflect any inappropriateness in respect of the methods used by the QFI to determine ITCs in respect of all of its residual inputs; and
3. the methods used would be fair and reasonable if used in the same manner by the QFI for the transitional year, for the purpose of determining the operative extent and procurative extent of all of its residual inputs.
With the introduction of standardized accounting in April 2007, every GST/HST return remitting tax or claiming a refund, as well as all rebate applications, will be assessed and a notice of assessment will be issued. The only exception is for nil returns, which will not be assessed.
Interpretation Requested
You have posed the following questions in connection with the application of proposed subsection 141.02(7):
1. Criteria for permitting late-filed transitional year elections: What criteria will the Minister use in permitting, under proposed subsection 141.02(23) ifootnote 1, late-filed transitional year elections under proposed subsection 141.02(7)?
2. Inappropriateness in respect of allocation methods: How will the term "inappropriateness" referred to in proposed subsection 141.02(7) be interpreted?
3. Method accepted by Courts to be considered appropriate: Is it correct that an approach that has been accepted by the Courts will not be viewed as inappropriate for purposes of proposed subsection 141.02(7), even if an auditor disagrees?
4. If Appeals Branch disagrees with assessment: Where an assessment reflects inappropriateness relating to methods used by a QFI to determine ITCs, but the Appeals Branch, at a later date, disagrees with the assessment, can the methods still be used to form the basis of the transitional year election under proposed subsection 141.02(7)?
5. Methodology entirely or partially inappropriate: Where some but not all of the methodologies/allocations/calculations used by a QFI to determine ITCs are regarded as inappropriate, would the entire methodology be regarded as inappropriate?
6. Methods found inappropriate, assessment appealed by QFI: If a QFI has appealed an assessment that reflects inappropriateness relating to methods used to determine ITCs, can the methods still be used to form the basis of the transitional year election under proposed subsection 141.02(7)?
7. Filing a transitional year election based on a method agreed upon on audit: Where a QFI has been assessed, the assessment reveals inappropriateness with respect to methods used to determine ITCs, the QFI agrees with the assessment and changes its method to an acceptable method (the new method) on a going forward basis, can this new method form the basis of a transitional year election under proposed subsection 141.02(7)?
8. Revenu Québec: Will the Canada Revenue Agency (CRA) be able to require Revenu Québec (MRQ) to complete an audit on a timely basis for the purposes of making the transitional year election?
9. Communication with Compliance Programs Branch and Department of Finance: Will we give assurance that we will communicate with our colleagues in Compliance Programs Branch regarding the timely progress of audits in relation to the time available for the transitional year election, and to notify the Department of Finance if audits are not being completed in the appropriate time frame?
Interpretations Given
1. Criteria for permitting late-filed transitional year elections
The Minister will allow late-filed transitional year elections, as permitted under proposed subsection 141.02(23) on a case-by-case basis. The CRA has not published formal criteria in this regard. Nevertheless, the reason for the late filing and the compliance history would normally be taken into consideration. A request to late file the transitional year election should be sent to the Assistant Director of Audit of the tax services office for the QFI's head office and include a completed Form GST 117, Transitional Year Election or Revocation of an Election for a Qualifying Institution to Determine Input Tax Credits on Residual Inputs and an explanation as to why the transitional year election is being filed late.
2. Inappropriateness in respect of allocation methods
The term "inappropriateness" as used in subsection 141.02(7) in relation to previously assessed methods used by a QFI for the purpose of determining ITCs in respect of residual inputs is not defined in the ETA. Nevertheless, this term has an established meaning under case law interpreting various statutes. Accordingly, the issue of whether or not an assessment reflects any inappropriateness in respect of methods used by a QFI for the purpose of determining ITCs will be determined by CRA on a case-by-case basis, in accordance with the established meaning of this term under the case law.
3. Method accepted by Courts to be considered appropriate
An ITC allocation method that has been accepted by the Courts based on the current legislation (i.e., not based on proposed section 141.02), may still be found on an assessment of a QFI, to reflect inappropriateness and/or to otherwise not meet the requirements set out in proposed subsection 141.02(7) with respect to that QFI, so that it could not form the basis of a transitional year election under that subsection. Accordingly, the issue of whether or not a QFI may elect to use a method or methods for determining the operative extent and procurative extent of its residual inputs pursuant to proposed subsection 141.02(7) must be determined on a case-by-case basis, and the fact that such a method may have been found to be acceptable by a court, in the past, would not necessarily be determinative of this issue.
4. If Appeals Branch disagrees with assessment
Where the Appeals Branch disagrees with a notice of assessment, and a notice of subsequent assessment or reassessment in respect of the reporting period is issued, which does not indicate any inappropriateness in the method(s) used by a QFI to calculate ITCs for its residual inputs, the QFI could then use this reporting period as its chosen reporting period provided the other criteria in proposed subsection 141.02(7) are met.
5. Some but not all methodologies inappropriate
If, in a notice of assessment, subsequent assessment or reassessment in respect of a given reporting period, some of the methods used for determining ITCs in respect of residual inputs are found to be inappropriate, even if others are appropriate, the methods used in that reporting period cannot form the basis for a transitional year election under proposed subsection 141.02(7). The provision does not allow for some but not all of the residual inputs to be covered by appropriate ITC allocation methods.
On the other hand, where there is an error, for example in arithmetic or calculation, in applying a methodology, and this is raised in a notice of assessment, this would not necessarily constitute "inappropriateness" with respect to the allocation method or methods used by the QFI for the purpose of determining ITCs in respect of all of its residual inputs. This would depend on the particular facts of the case.
We cannot provide more specific guidance without more specific information regarding methods or calculations and the nature of the issues raised in an assessment.
6. Methods found inappropriate appealed by QFI
If a QFI has appealed an assessment that reflects inappropriateness relating to allocation methods, it would not meet the requirement under proposed subsection 141.02(7) that the notice of assessment, subsequent assessment or reassessment in respect of the chosen reporting period not reflect any inappropriateness. Thus, the QFI could not file the transitional year election based on the method that was determined to be inappropriate, pending the outcome of the appeal.
7. Filing a transitional year election based on a method agreed upon on audit
If the inappropriateness with respect to a method is addressed, and a notice of reassessment or subsequent assessment is issued in respect of the reporting period(s) that does not reflect any inappropriateness with respect to the ITC allocation methods, then the QFI could then use these ITC allocation methods to form the basis of the transitional year election.
8. Revenu Québec
The Federal Government and the Government of Quebec co-operate in the administration of the GST and are in close communication in connection with the administration of the proposed ITC allocation rules to ensure that they are administered consistently.
9. Communication with Compliance Programs Branch and Department of Finance:
Various branches of the CRA and officials at the Department of Finance are all working closely together to ensure that the proposed rules are implemented appropriately.
The foregoing comments represent our general views with respect to the proposed amendments to the Excise Tax Act as they relate to the subject matter of your request. Any change to the wording of these proposed amendments or any future proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9210.
Yours truly,
M. Dawn Weisberg
Manager, Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
i 1. Proposed under s. 2(1) of Legislative Proposals Relating to the Excise Tax Act, January 26, 2007; all subsequent references to sec. 141.02 refer to the proposals set out in this announcement.
---------------
------------------------------------------------------------
---------------
------------------------------------------------------------
UNCLASSIFIED
Email this Content