Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-063

Date of Issue

February 25, 1993

Subject

Output Based Method for Input Tax Credit Allocation

Legislative Reference(s)

Sections 147 and 169 of the Excise Tax Act

National Coding System File Number(s)

11585-12 ,11650-2

Effective Date

January 1, 1991

Text

This statement of interpretive policy will discuss the output based method for input tax credit allocation. It is recognized that in some circumstances allocation methods, for purposes of claiming input tax credits, that are based on inputs may not be reasonably possible. Input-based allocation methods include direct allocation, e.g. allocation based on square footage, time or some other directly measurable factor, or the use of an input-based formula to allocate those remaining inputs that cannot be directly allocated, e.g. the ratio of inputs directly allocated to taxable activities to total inputs.

In these limited cases, an output-based method is acceptable for the allocation of certain property and services by a registrant where it can be shown to be fair and reasonable in the circumstances.

The Excise Tax Act does not specify any method or formula that must be used to apportion property or services that have been acquired or imported for use partly in the commercial activities of the registrant.

The legislative criterion for determining an apportionment method under section 147 provides that the method chosen "shall be fair and reasonable in the circumstances and shall be used consistently throughout the year".

It is a question of fact whether a particular method used by a registrant for the purposes of section 169 is "fair and reasonable". It is the Department's position that the method or methods used should, as much as possible, link the property or service on which the input tax was paid to its use in commercial and other activities.

An allocation method based on outputs, i.e. revenues, may be acceptable for determining the extent to which property or services are used, consumed or supplied or intended to be used, consumed or supplied in the course of commercial activities if the method:

(a) reasonably reflects the use or intended use of the property or service;

(b) is fair and reasonable in the circumstances.

An output-based method implies that the revenue generated by an activity will give a reasonable approximation of the use of inputs in that activity. There are many factors that affect revenue that could result in this ratio being inappropriate. Some of the factors to be considered would include:

(a) where different profit margins exist for different products, adjustments should be made to minimize the distorting effect of these differences;

(b) any revenue that reflects inputs used in a prior period should be backed out of the formula, e.g. recovery of a bad debt from a prior period;

(c) any amount received or receivable for the supply of capital goods should be excluded from the formula;

(d) the value of the sale of the business as a going concern should be excluded from the formula.

Once an output-based method has been adopted by a registrant, it must be used consistently throughout the year. It may also be used in conjunction with an input-based method, i.e. it is not necessary to use one method to allocate all inputs.

The use of any allocation method is at the option of the registrant. Any method used must be supportable by the registrant, i.e. sufficient documentation to show that it is fair and reasonable in the registrant's particular circumstances. The supporting documentation should address why the output-based method is appropriate and deal with possible distorting factors such as those mentioned above.

The following example is provided to illustrate an output-based method used by a registrant in its particular circumstances.

EXAMPLE- OUTPUT-BASED METHOD

Registrant A is a utility company owned 100% by a municipality. It makes supplies of property and services to both the public and to the municipality.

When these supplies are made to the public, they are taxable. When the same supplies are made to the municipality that owns the utility, they are exempt. The same price is charged whether the supply is made to the public or the municipality. The mark-up on the supplies is the same for every customer.

Registrant A is a de minimis financial institution since it revenues from interest exceeds $10,000,000.

Since the status of the supply as taxable or exempt depends on the customer and the inputs used are not identified by type of customer, it is not reasonably possible to determine directly the extent to which the individual inputs are devoted to any one customer.

Given that the profit margins are the same for each type of customer, Registrant A uses a revenue based method to determined its input tax credit entitlement as it feels that such a measure reflects the use of the inputs.

Registrant A has determined the following amounts:

The inputs used to earn interest revenue can be directly attributed and are therefore carved out of the formula used to allocate the non-attributable inputs.

Registrant A determines its input tax credit entitlement as follows:

(Taxable Revenue / (Total Revenue - Interest Revenue)) x GST Paid

($125,000,000 / $140,000,000) x $3,500,000

.89 x $3,500,000 = $3,115,000