CRA finds that an input to a financial institution that was on-supplied by it on a GST-taxable basis at a loss should also be treated as acquired as a financial services input

A listed financial institution acquired technology inputs for its own use and also for making taxable supplies of network services and related equipment to subcontractors to assist them in selling its financial products. However, such taxable charges to them were less than its pro rata cost of the technology package that was being on-supplied to them.

It had been filing its annual GST/HST returns on the basis of claiming ITCs respecting this on-supply equal to the GST/HST it collected from the subcontractors. It later changed its mind and started claiming a pro rata portion of the HST on its technology inputs as an ITC so that it, in effect, was asking CRA to share in the loss it took on that on-supply.

CRA first indicated that going back to change to the ITC method applied in the earlier years violated ETA s. 141.02(17), stating in this regard that “it is clear that the intention of the legislation is not to allow a retroactive ITC claim by a financial institution.” Furthermore, it did not consider the changed method to be acceptable even on a prospective basis, stating that it could be considered that the financial institution:

recognized that a portion of the technology package provided to [subcontractors] was related to its own business when it agreed to share the costs with [the subcontractors] instead of fully billing [the subcontractors] for the cost of the technology inputs. [The Financial Institution] would only incur such a loss on a continuing basis if its real purpose in acquiring the technology inputs was not to earn revenue from supplying the technology package but to earn revenue from the sale of its financial products that must be sold using the technology inputs.

In other words, the discounted pricing to the subcontractors reflected the reality that some of the pro rata cost of the technology inputs was being incurred by the financial institution for the purposes of its own financial services business, so that the previous method had properly capped the amount of the ITC claims.

CRA did not discuss whether this interpretive approach was consistent with the London Life decision (where the fact that an input was on-supplied on a taxable basis trumped the fact that such taxable supply indirected supported a financial services business).

Neal Armstrong. Summaries of 17 August 2020 GST/HST Interpretation 194307 under ETA s. 141.02(17) and ETA s. 141.02(12).