26 August 1998 GST/HST Interpretation HQR0001250 - Output Based Method for Input Tax Credit Allocation

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of July 14, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Interpretation Requested

In your letter you state that it is your understanding that a grant or subsidy, that is not consideration for a supply, may be excluded from an output based method for input tax credit (ITC) allocation because it does not specifically relate either to exempt supplies or taxable supplies. You wish to confirm that it is reasonable to exclude certain grants and subsidies when using an output based method for (ITC) allocation.

Interpretation Given

Section 169 of the Excise Tax Act (ETA) provides that a registrant may claim an ITC in respect of GST incurred on an input to the extent that the input is acquired for consumption, use or supply in the course of commercial activities. Section 141.01 of the ETA, sets out rules for determining the extent to which an input is acquired for this purpose.

An input will be considered to have been acquired for consumption use or supply in the course of commercial activities to the extent that the input is acquired for the purpose of making a taxable supply. To the extent that an input is acquired for the purpose of making an exempt supply, or for a purpose other than making a supply, the input is not acquired for consumption use or supply in the course of commercial activities and an ITC is not available.

Where a person is involved in activities which include the making of taxable supplies, exempt supplies, and activities which do not involve the making of supplies, the inputs to these various activities must be attributed accordingly. To the extent that inputs are directly attributable to one of these activities, these inputs should be identified as either eligible for full ITCs, or for no ITCs, as the case may be. Where inputs are acquired for multiple use, that is, the inputs relate to more than one of the above activities, a reasonable allocation based on actual consumption or use of the input should be made. There may be instances where a direct allocation method is not possible. An output based method for ITC allocation may be appropriate provided it is fair and reasonable in the circumstances, and it is used consistently throughout the year.

A revenue based output method for ITC allocation which uses a ratio derived from taxable revenues to total revenues (taxable and exempt revenues) may be used in some circumstances. The use of a revenue based method should reasonably reflect the actual use of property and services. Particular attention should be paid to sources of revenue, as inclusion of revenue from some sources may distort the resulting apportionment. In this regard, government grants and subsidies that do not relate to either exempt supplies or taxable supplies and which distort the resulting apportionment should be excluded from the ratio.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, 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 section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4206.

Yours truly,

Dwayne Moore
Charities and Non-profit organizations Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

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