Section 141.01

Subsection 141.01(1.1)

See Also

Gemeente Woerden (Municipality of Woerden) v. Staatsecretaris van Financiën (Secretary of State for Finance, Netherlands), C:2016:466 (European Court of Justice (10th Chamber) )

sale of a building at 10% of cost to an intermediary for 90% non-taxable use entitled the vendor to full ITCs

The Municipality of Woerden deducted virtually all of the VAT incurred by it in constructing two buildings, which it sold at 10% of its cost to a newly formed foundation (with board members appointed by it and educational institutions). The Foundation provided part of the buildings free of charge to the institutions, and rented the balance, with all of the rents VAT-exempt except for those used by a sports enterprise. The Regional Court of Appeal, Amsterdam held that the sale price invoiced to the Foundation related solely to the parts of the buildings that were leased on a taxable basis, so that the Municipality was acting as an entrepreneur only in respect of 10% of the buildings, and was entitled to deduct only 10% of the VAT charged to it.

The Supreme Court of the Netherlands referred the case for a preliminary ruling on the question, which was summarized (at para. 29) as being “in essence:”

[I]n circumstances…in which a taxable person has had a building constructed and has sold that building for a price less than the cost of constructing it, [is] that taxable person...entitled to deduct all of the VAT paid in respect of the construction of that building, or only a part of that tax in proportion to the parts of the building which its purchaser uses for economic activities.

In finding (at para. 39) that the Municipality was entitled to deduct full input tax regardless of the use made by the purchaser of the property, President Biltgen stated (at paras 36, 41-42):

[T]he VAT Directive does not subject the right to deduct to a condition related to the use of the goods and services at issue by the person who receives those goods and services from the taxable person, since that would imply that every transaction of a taxable person with a purchaser...who does not carry out an economic activity, such as private individuals, would limit the taxable person’s right to deduct input tax. …

[I]t follows from the case-law...that if the supply price is lower than the cost price, the deduction cannot be limited in proportion to the difference between the supply price and the cost price, even if the supply price is considerably lower than the cost price, unless it is purely symbolic… .

The fact that that purchaser allows parts of the building…to be used without charge is of no importance… .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) full ITC for sale at 10% of cost 149

British Columbia Transit v. The Queen, [2006] GSTC 103, 2006 TCC 437

lease consideration not nominal because of property tax obligation

After having incurred substantial GST in acquiring a transit system for exempt use, the appellant commenced to lease the system to another municipal transit entity for rent of $1 per year, but with the lessee being obligated to pay municipal taxes imposed on the leased premises (which amounted to around $2 million per year). In finding that this lease represented a supply of the system for consideration other than nominal consideration (so that there was a change of use under ss. 209(2) and 199(3) entitling the appellant to recover the basic tax content of this asset), C Miller J noted that if he accepted the appellant's position that "nominal is trifling or such an amount that it is immaterial whether or not it is paid, the answer is self-evident – several million dollars are not nominal [and] there is no evidence that [the lessee] ever intended not to pay the property taxes" (para. 55), and went on to state (at para. 56) that even "interpreting ‘nominal' on a relative basis, that payment of the property taxes…is not nominal."

Words and Phrases
nominal
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(3) lessor required to demonstrate taxable-supply-for-consideration purpose 140
Tax Topics - Excise Tax Act - Section 153 - Subsection 153(1) lease consideration not nominal because of property tax obligation 55
Tax Topics - Excise Tax Act - Section 306.1 - Subsection 306.1(1) additional reasons can be raised in Notice of Appeal 235

Subsection 141.01(2)

Cases

ONEnergy Inc. v. Canada, 2018 FCA 54

no direct tracing to taxable supplies was required

A company (“Look”) sold all the assets of its business and then successfully sued its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. Webb JA found that Look was entitled to input tax credits for the HST on its related legal fees as the litigation servicers were acquired “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a). In arriving at this characterization, he reasoned that the claim was essentially a claim for recovery of overpaid remuneration for services that had been rendered while Look was making taxable supplies.

Before so concluding, he noted (at para. 26) that s. 141.01(2) had not been referred to in the General Motors case (2009 FCA 114) (which he described, at para. 25, as finding that “amounts that are paid to persons who are managing investments of pension plans that will be used to fund pensions for employees when they retire are paid for services that are acquired for consumption in the course of commercial activities and are not personal in nature”), and then found (at para. 28) that such management fees also appeared to satisfy s. 141.01(2):

Since this Court found in General Motors that the services of the investment managers were acquired for consumption or use in the commercial activities of GMCL and since GMCL was in the business of making taxable supplies of cars and trucks, it would logically follow that the services of the investment manager were acquired for the purpose of making these taxable supplies. Without employees, GMCL could not make taxable supplies.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.1 - Subsection 141.1(3) - Paragraph 141.1(3)(a) litigation services to recover fraudulent bonuses following a business’ termination were acquired in connection with that business 446
Tax Topics - Statutory Interpretation - Specific v. General Provisions provision dealing with only certain situations was the more specific 45

London Life Insurance Co. v. Canada, [2000] GSTC 111 (FCA)

leasehold construction services were acquired for supply of leasehold improvements to landlord

The appellant, whose principal business was the provision of financial services, received tenant inducement allowances from its landlords, which were earmarked to fund the cost to it of making leasehold improvements. The appellant charged GST on the allowances and claimed input tax credits on the costs of the related leasehold improvement work.

Before concluding that full ITCs were available under s. 169(1)(c) because the appellant was supplying the leasehold improvements to the landlords for the leasehold improvement allowances, which was a commercial activity, Rothstein JA stated (at para. 25):

[S]ubsection 141.01(2) assist London Life. ... The endeavour here is the supplying of leasehold improvements to the landlords, i.e. the making of a supply of real property. London Life acquired the construction inputs for the purpose of providing taxable supplies, i.e. leasehold improvements to its landlords for consideration, i.e. the tenant improvement allowances. London Life is therefore deemed to have acquired the construction inputs for the leasehold improvements for use in the course of a commercial activity.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Improvement 100
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) leasehold construction services were acquired for supply of leasehold improvements to landlord 206
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc. 50

See Also

Ryanair Ltd. v. Revenue Commissioners, [2018] EUECJ C-249/17 (European Court of Justice (First Chamber))

takeover expenses incurred in order to earn management fees from the target would generate VAT deductions

Ryanair launched a takeover bid for all the shares of another airline and thereby incurred expenses for consultancy and other services. It was not possible to acquire all the shares for competition law reasons. Ryanair requested the deduction of input VAT paid on those expenditures on the basis that its intention, after gaining control of the target company, had been to provide management services subject to VAT. Article 4 of the Sixth Directive defined a taxable person as “any person who independently carries out in any place any economic activity,” and Article 17(2)(a) provided a deduction for VAT due or paid respecting goods and services used for the purposes of the taxable person’s taxable transactions.

The Court concluded (at para. 32):

Articles 4 and 17 of the Sixth Directive must be interpreted as conferring on a company, such as that at issue in the main proceedings, which intends to acquire all the shares of another company in order to pursue an economic activity consisting in the provision of management services subject to VAT to that other company, the right to deduct, in full, input VAT paid on expenditure relating to consultancy services provided in the context of a takeover bid, even if ultimately that economic activity was not carried out, provided that the exclusive reason for that expenditure is to be found in the intended economic activity.

Before so concluding, the Court stated (at para. 30) that “In the event that the expenditure is attributed in part also to an exempt or non-economic activity, VAT paid on that expenditure may only be deducted in part.”), and (at para. 25):

[T]he right to deduct, once it has arisen, is retained even if the intended economic activity was not carried out and, therefore, did not give rise to taxed transactions … . Any other interpretation would be contrary to the principle that VAT should be neutral as regards the tax burden on a business. It would be liable to create, as regards the tax treatment of the same investment activities, unjustified differences between businesses already carrying out taxable transactions and other businesses seeking by investment to commence activities which will in future be a source of taxable transactions.

Stewardship Ontario v. The Queen, 2018 TCC 59

statutory object of avoiding tax cascading

Stewardship Ontario (“SO”) was a not-for-profit corporation that operated, as part of a regime governed by the Waste Diversion Act, 2002 (Ontario), an Ontario program for recycling various types of waste such as paints, solvents, batteries, empty propane tanks and antifreeze. It collected the waste and paid for its processing or disposal. “Stewards,” being persons who had a commercial connection with such waste, were statutorily responsible for paying fees to SO to reflect their reasonable share of the associated costs.

Before making more detailed findings that SO was making taxable supplies for consideration to the stewards, D’Arcy J found that SO was entitled to full input tax credits for the HST on its costs (including “administrative” charges from an oversight body), stating (at paras 75, 76, 77, 81 and 82):

As discussed in my reasons in the University of Calgary ... the purpose of section 141.01 is to clarify the application of subsection 169(1) to GST paid on property or services that are not used directly in the making of a specific supply in a situation where the person is making both taxable and exempt supplies. …

I would not expect section 141.01 to deny the input tax credits otherwise determined under subsection 169(1) in the situation where a person is only engaged in commercial activities.

…[P]aragraph 141.01(2)(a) deems property and services to have been acquired for consumption or use in the course of a commercial activity of the person, if the property and services were acquired by the person for the purpose of making taxable supplies for consideration. Paragraph 141.01(3)(a) contains identical rules, except that it applies to the actual consumption or use of the property or service.

In my view, these sections apply to the fact situation before me, since all of the property and services acquired by the Appellant from the Third Party Service Providers either were acquired for the purpose of making taxable supplies for consideration or were consumed or used in the making of taxable supplies for consideration.

He also noted (at para 121) that the interpretation advanced by the Crown:

would defeat two of the primary objectives of the GST Act, which are to “prevent the cascading of GST, and to allow the obligation to pay GST to flow through to the ultimate consumer.”

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply performance of a statutory duty can nonetheless by a supply 252
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Consideration statutorily-mandated waste recycling charges were consideration for a taxable supply 264
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Service "service" has broad meaning 181
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Recipient those subject to statutory user charges were "recipients" 189

Director of the ‘Appeals and Tax and Social Insurance Practice’ Directorate of Sofia v. Iberdrola Inmobiliaria Real Estate Investments, C-132/16, ECLI:EU:C:2017:683 (European Court of Justice (First Chamber))

direct link between input acquired to make free supply to a municipality and the developer's project

A developer (Iberdrola) contracted with a Bulgarian municipality to reconstruct, for free, a waste-water pumping station serving a holiday village at which it was building apartment buildings. At issue was whether Iberdrola was entitled to deduct the VAT borne by it on the pumping-station reconstruction work in accordance with a European VAT provision, which provided such a deduction for inputs to “goods and services [that] are used for the purposes of the taxed transactions of a taxable person.” In the context of answering a referral respecting this question, the First Chamber of the European Court of Justice stated:

It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the [apartment] buildings …to that pump station, with the result that that reconstruction was essential for completing that [apartment] project… .

Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality … and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .

The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(4) a developer was entitled to VAT credits for reconstructing a sewage plant for free, as this advanced its own project 585

Thimo v. The Queen, 2017 TCC 164

no ITCs respecting services of criminal counsel which permitted an individual to resume a business

The registrant was the sole proprietor, owner and operator of a swimming school which offered private swimming lessons. In 2013, the registrant was criminally charged with misconduct respecting a 15-year old female instructor, was acquitted of all charges in 2015, and incurred legal fees totalling $176,000. However, the laying of the charges (which were publicized, resulted in termination as a “training partner” of the Canadian Red Cross and substantially reduced enrolments) resulted in operations at the school being suspended in the autumn of 2013.

In finding that the registrant was not entitled to input tax credits for HST incurred in 2014 on legal fees, Favreau J stated (at paras 28, 30):

… I do not see …the link between the legal fees incurred to defend the Appellant’s reputation and the earning ability of his swimming school and the commercial activities per se carried out in 2014 by the swimming school.

Although the Appellant did not close his business and still had the intention to restart it as a sole proprietorship, he has not established a connection, direct or indirect, between the legal services sought and any ongoing supply of taxable services.

After citing Haggart and Doiron, he then concluded (at para 33):

… The Appellant did not meet his burden to demonstrate that a direct and clear connection existed between the charges that were laid against the Appellant and the activities he engaged in for the purpose of earning income.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) criminal defence fees incurred to protect reputation rather than re suspended business 98

Associated Newspapers Ltd v HM Revenue & Customs, [2017] EWCA Civ 54, [2017] BVC 10

acquisition made for free on-supply was part of overhead of a commercial activity

A UK newspaper (ANL) paid VAT on its purchase of vouchers from Marks & Spencer and an intermediary ("Hut"), which it then provided free to those readers subscribing to its Sunday editions for the promotional period. HMRC argued that ANL was not entitled to recover any input tax on the vouchers because it had acquired the vouchers for on-supply at no consideration. Patten LJ found that the vouchers were part of the cost of promoting the taxable supply of ANL newspapers, so that any input tax was recoverable. He stated (at para. 48):

[I]n economic terms, the cost of purchasing the vouchers was…part of ANL's overall expenditure in the production and sale of its newspapers which the vouchers were intended to promote. The fact that the vouchers were provided free to buyers of the newspapers merely serves to confirm that they were cost components of the business rather than the onward supply of the vouchers.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(1) - Procurative Extent purchases made for promotional free on-supplies were part of the VAT-creditable overheads of a taxable business 382

Norseman Gold plc v Revenue and Customs Commissioners, [2016] BVC 504, [2016] UKUT 0069 (TCC)

failure to charge for management services negated credits

Norseman was a UK holding company which had subsidiaries operating mines in Australia, with the day-to-day management taking place in Australia. It registered for VAT as a “management consultancy” on the basis of a representation that it would recover all its costs through charges to the subsidiaries. However, it did not make any charges to the subsidiaries until after the periods in question because the subsidiaries were incurring losses, so that no output tax was declared.

Before finding that Norseman was not entitled to credits for the input tax on its costs (e.g., professional fees and web design), and after having noted at (para. 52) that credits would have been available if there instead were only an undertaking for the future making of taxable supplies, Warren J stated (at para. 124):

Noreseman needs to establish that, when it incurred input tax in the relevant period, it had either already made supplies for a consideration (the first question) or that it had the intention of making at some time in the future supplies for a consideration (the second question).

Respecting the first question, the supplies were made gratuitously (at para. 121). Respecting the second question, there was an insufficient link to future supplies (paras. 123 & 124):

[A]n intention merely to make supplies is not a sufficient basis on which to recover input tax…

… What needs to be established is a direct and immediate link between the services supplied and the charges levied or to be levied.

He added (at para. 126) that “if the intention had been to charge a nominal amount of, say £100 per annum, that would be unlikely to satisfy the EU law necessary to establish consideration.”

University of Calgary v. The Queen, 2016 DTC 1006 [at 2522], 2015 TCC 321

s. 141.01(2) required allocation of indirect (common area) costs between taxable and exempt use

The appellant (U of C), which was a public service body, made a s. 211 election in 2006. The methodology which it used in calculating the input tax credits to which it was entitled for the GST payable on this self-supply was to determine the relative proportions of the space in its buildings used directly in making taxable supplies (e.g., third-party rentals) and exempt supplies (e.g., classroom use) and to apply these same relative proportions to common areas inside buildings (e.g., stairwells) as well as to those outside the buildings (such as lawns and walkways). The Minister arrived at a higher percentage of exempt use (and, therefore, lower ITCs) by treating the “External Common Areas” as being acquired only for exempt use and by weighting different building areas by factors reflecting their relative replacement cost (whereas the appellant had simply used relative square footages of floor space).

After finding (at para. 93) that “the Appellant carried on a single business, namely, the operation of a university, and that it carried on all of its activities in the course of this business,” D’Arcy J stated (at para. 106):

[I]f a corporation incurs an expense in the course of its business (endeavour), then the expense will always be incurred for the purpose of making one or more supplies. The purpose of the business is to earn revenue, i.e., to make supplies. Therefore, the result of subsection 141.01 (2) is that all costs incurred by a person in the course of the person’s business must be traced to a specific supply or multiple supplies in respect of which the costs were incurred.

In accepting the appellant’s methodology, he stated (at para. 148) that “the Appellant’s purpose when acquiring the External Common Areas on February 1, 2006 was no different than its purpose when acquiring, at the same time, the remaining portions of the U of C Properties: to use them for the purpose of making both taxable and exempt supplies” and, respecting the Minister’s indexing factor approach, “the CRA cannot simply substitute its method for that of the GST registrant” (para. 183), this method ignored that the appellant constructed several of the buildings prior to the introduction of the GST (para. 186) and such approach would require retaining valuators whereas “a GST registrant should be entitled to determine its input tax credits on the basis of information in its possession."

As the parties accepted that there was no subsequent significant change in use, the same percentages applied to determining ITCs for subsequent improvements (paras. 197-198).

The appeal was allowed.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(5) method based on actual use of traceable inputs was appropriately appplied to indirect inputs 161
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Business all of university operation comprised one business 113

Sun Life Assurance Company of Canada v. The Queen, 2015 TCC 37

vacant office space was used for future taxable supplies

The holding of vacant office space held by a GST-exempt business ("Sun Life") for potential future taxable rentals to independent contractors (being financial advisors engaged in the sale of its financial products) qualified for ITC purposes as commercial activity. Owen J also stated (at para. 54) that "the amount of vacant space that is required for rental to Advisers is a business judgment that is best left to Sun Life absent a sham or window dressing or similar vitiating circumstances." See summary under s. 141.01(5).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(5) holding of vacant office space by a GST-exempt business for potential future taxable rentals qualified for ITC purposes as commercial activity/first order intended supply of vancant space was for rentals 321

Perfection Dairy Group Limited v. The Queen, 2008 TCC 342 (Informal Procedure)

fees were incurred in relation to claim of bankrupt subsidiary rather than to earn consulting fees

A subsidiary (“PFL”) of the appellant went into receivership in 1991, and in 1996 PFL and its shareholders launched an action against various parties claiming damages of $60 million on behalf of themselves and the bankrupt PFL. The appellant claimed $23,700 of input tax credits for GST on related legal fees incurred by it.

Webb J found that the appellant was entitled to such ITCs under s. 186(1) given his findings (at para 36) that “[t]he professional fees incurred in 1998 were in relation to the Legal Action, which, if successful, would result in PFL resuming its dairy product business and result in a significant increase in the value of the shares of PFL and the value of the indebtedness of PFL to the Appellant” and (at paras. 37-8) that in 1998 PFL continued to hold “some office furniture, pictures, and other miscellaneous assets… that had been acquired by PFL when it was carrying on the dairy products business.”

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(1) nominal residual assets of a bankrupt sub had been acquired in its active business/186 prevailed over 141.01(2) 194

Richter & Associates Inc v. The Queen, 2005 TCC 92

allocation between costs incurred by trustee in bankruptcy for bankrupt financial institution to provide litigation services to creditors, and costs incurred in connection with its action qua trustee

The trustee in bankruptcy ("Richter") for Castor Holdings Ltd. (whose audited financial statements had disclosed $1.8 billion in assets and who essentially only invested in high-yield loans) was only able to recover $25 million when the liquidation of the Castor estate was largely completed in 1994. In addition to suing - in its capacity of trustee in bankruptcy for the Castor estate (the "Estate") - the former Castor auditors ("C&L") for $40 million in damages sounding in contract, Richter began a "litigation support business" of providing assistance to the creditors (including hiring professionals and experts) in connection with their action sounding in negligence against C&L for $800 million in damages. The creditors lent money to Richter on a non-interest-bearing basis to fund the related costs of Richter (mostly fees of professionals and experts). It was understood that to the extent that, on settlement of the litigation, Richter was not able to recover its costs out of the proceeds of an award made to it on its own claim, Richter at such time would invoice the creditors for its remaining unrecovered costs, to be paid by set-off against the loans. Most of the Richter costs were incurred respecting a test case brought by one of the creditors ("Widdington"), which at the time of this GST case was still on-going.

In finding that it was reasonable for Richer to treat the bulk of its related GST costs as being creditable, Archambault J stated (at para. 38):

Given that Castor's main activities involved making exempt supplies, the activities of the Trustee would be deemed [by s. 141.1(3)(b)] not to be carried on in the course of commercial activities. Therefore, the costs of the litigation support services that the Estate enjoyed in prosecuting its own claim against C&L would not qualify for ITCs. … However, the portion of the services and properties in question that was acquired for the purpose of prosecuting the claims of the Participating Creditors would be considered to have been acquired in the course of commercial activities. … The allocation by the Estate of the use of its inputs between its taxable supplies and its other activities (exempt supplies) appears to me to be a fair and reasonable one and it complies with subsection 141.01(5)... .

See summary under s. 123(1) - business.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Business litigation support services provided by trustee for bankrupt financial institution were an "undertaking" 269
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(5) allocation between own suit and litigation support 68
Tax Topics - Excise Tax Act - Section 141.1 - Subsection 141.1(3) - Paragraph 141.1(3)(b) action brought by trustee for bankrupt financial institution deemed to be not in course of commercial activity 184
Tax Topics - Excise Tax Act - Section 265 - Subsection 265(1) - Paragraph 265(1)(f) trustee's own suit and litigation support activity were related 278
Tax Topics - General Concepts - Illegality Act applied to what has occurred irrespective of legality 134
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business litigation support services provided by trustee for bankrupt financial institution were an "undertaking" 270

BJ Services Co. Canada v. The Queen, [2002] GSTC 124 (TCC)

s. 141.01 was apportionment provision not applying where registrant only making taxable supplies

A Canadian public company ("Nowsco") that was engaged in the provision of oil field services incurred significant fees for services rendered by financial advisors and a law firm in connection with seeking a "white knight" following the commencement of a takeover bid for its shares, as a result of which it was able to secure a higher price for its shares from the original bidder.

After quoting (at para. 55) a Finance Press Release stating that s. 141.01 was "designed to clarify the requirement to apportion GST paid on indirect inputs for registrants, such as financial institutions, who make both taxable and exempt supplies of goods or services," C Miller T.C.J. found that as s. 141.01 was intended as an apportionment provision to allocate inputs between taxable supplies and non-taxable supplies, it did not apply to Nowsco, which was engaged exclusively in making taxable supplies. Consequently, "the stringent purpose test contained in s. 141.01 is not applicable to Nowsco's case and, therefore, does not alter a finding that the fees were incurred in the course of commercial activity" (para. 62).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) white knight costs 140

Administrative Policy

2016 Ruling 2015-0612931R3 - Variation of trust indenture

CRA income tax ruling describes a structure for MFT trailer fees to be funded out of increased management fees to an indirect real estate subsidiary LP of the MFT

CRA provided income tax rulings respecting the creation of an additional class of “Class A” units of a mutual fund trust (the “Trust”) - which would essentially have identical attributes to those of the existing units except that they would indirectly bear all of the trailer fees paid to securities dealers, who would only sell the Class A units to further subscribers and not the existing units.

The trailer fees respecting the Class A were to be funded out of additional management fees charged by the general partner of an indirect real estate subsidiary LP of the Trust to that LP, with the resulting reduction in distributions paid by that LP up the chain to the Trust being tracked so as to result in a pro tanto reduction in the distributions paid on the Class A units relative to the existing units. CRA did not comment on any GST/HST aspects of this planning.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition creation of new MFT units to indirectly bear trailer fees 408

23 November 2016 Interpretation 165129

expenses incurred respecting a subsidiary unit trust are ineligible for ITCs unless incurred as management-services inputs

A corporation (“Parent”) holds units of subsidiary trusts and has argued that it incurred GST/HST to supply management services to those unit trusts. Although it has provided sample invoices, it has not provided management services agreements.

CRA indicated “the nature of any management services provided by the Parent would have to be clarified to determine how any particular property or service could be considered to be an input into those services, before determining the extent that the property or service was acquired for the Parent’s commercial activities.” Furthermore, legal or consulting services acquired by Parent to purchase trust units would not be considered to be acquired in the course of commercial activity, and that properties or services acquired in retaliation to commercial activities of another person, such as flights in traveling for their benefit or obtaining advice on growth of the trusts, would not qualify as being acquired for consumption or use in relation to Parent’s commercial activities.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(1) inapplicable to subsidiary unit trust 156

GST/HST Memorandum 13.5 Non-creditable Tax Charged January 2017

Overview of application to public service body (PSB)

75. ... [U]nder subsection 141.01(2), the PSB is deemed to have acquired property or a service for consumption or use in commercial activities only to the extent that the property or service is acquired for the purpose of making taxable supplies for consideration in the course of an endeavour of the PSB. To the extent that the property or service is acquired for the purpose of making supplies in the course of an endeavour that are not taxable supplies made for consideration or for a purpose other than making supplies, the PSB is deemed to have acquired the property or service for consumption or use otherwise than in commercial activities.

May 2016 Alberta CPA Roundtable, GST Q.15

CRA could challenge similar ITC methodologies to U of Calgary

University of Calgary found that UC's method was fair and reasonable even though equal weight was given to: building space (with all of its infrastructure); and a parking lot space. Has CRA updated its position? CRA responded:

Although the CRA did not appeal…, in subsequent cases with similar types of entities we will be taking a close look… keeping in mind that, an ITC allocation method must reasonably reflect the actual use of the inputs and the manner in which the person conducts its business generally. For example, a university whose predominant purpose is education and research would generally not acquire its main campus over 40% for the purpose of making taxable supplies for consideration.

1 May 2015 Ruling 164658 [non-creditable legal services in obtaining compensation for lost business income]

non-creditable legal services in obtaining compensation for lost business income

The registrant, who operated a taxi business, ceased to earn income from that business for two years as a result of an accident sustained while operating the taxi. Is the registrant entitled to ITCs for the HST on the account of a law firm who acted on his action and were successful in obtaining a settlement? In ruling that no ITC was available, CRA stated:

[S]ubsection 141.01(2) provides that a person is deemed to have acquired property or a service for consumption or use in commercial activities only to the extent that the property or service is acquired for the purpose of making taxable supplies for consideration (e.g., fees or charges) in the course of an endeavour (e.g., a business) of the person. …

The settlement amount paid to you was compensatory. As the Law Firm's services were acquired by you for consumption or use otherwise than in making taxable supplies for consideration, the conditions of subsection 169(1) are not met.

Memorandum 8-1 "General Eligibility Rules" 10 May 2005

27. Where property or a service is consumed or used partly in the course of a person's commercial activities and partly in its non-commercial activities (less than 90%, but more than 10% in its commercial activities), the person must apportion the GST/HST for the property or service between these two activities. Specifically, the person may be eligible to claim an ITC for the portion of the GST/HST paid or payable for the property or service that relates to its consumption or use in its commercial activities as long as all the other ITC criteria are satisfied. As noted below, this apportionment is based on the extent to which the property or service is used to make taxable supplies for consideration (which in this context does not include nominal consideration). ...

34. The rule regarding the purpose of making taxable supplies in subsections 141.01(2) and 141.01(3) is identical except that the former applies to intended consumption and use and the latter applies to actual consumption and use. The rule in subsection 141.01(3) is pertinent to those provisions (e.g., change-in-use rules for capital property) that depend on whether, and to what extent, properties and services are, at any particular time, consumed or used in commercial activities.

9 July 2004 Interpretation 41811

full allocation of leasehold improvement costs to leasehold improvements allowance to the extent thereof

A tenant receives a leasehold improvements allowance from its landlord that is in excess of the leasehold allowance to be provided by the landlord. GST is charged on the leasehold allowance.

CRA found that the tenant was entitled to full input tax credits to the extent of the amount of its improvement costs equal to the allowance, and that the balance was to be allocated based on its commercial and exempt use of the premises.

26 March 2001 T.I. 32764

inapplicable to on-supplies

The provisions for determining extent of use in ss.141 and 141.01(2) and (3) apply only to inputs that are used or consumed or acquired to be used or consumed and not to inputs that are acquired for a supply (e.g., acquired for supply by way of sale).

13 December 2000 Ruling 31635

fees incurred to enhance shareholder value ineligible

Respecting the fee paid by a corporation to a financial advisor regarding strategic alternatives for the enhancement of shareholder value including a potential sale of its shares or assets, the CCRA stated:

From the letter of engagement, the costs do not meet the above criteria to be entitled to ITCs as they were not acquired for the purpose of making taxable supplies for consideration in the course of that endeavour. XXXXX acquired certain inputs in order to provide advice to the Board and Special Committee with the purpose of enhancing shareholder value.

As no separate fee was charged for providing a fairness opinion, no ITC was available for any portion of the amount paid.

14 July 1999 Memorandum HQR0001244

target circular costs eligble

"Property or services acquired ... by a corporation in fulfilling obligations under a securities or corporations Act in producing circulars for shareholders concerning takeover bids, would generally be considered to have been incurred for the purpose of making supplies for consideration in the course of the corporation's endeavour ... . Please note ... it is widespread business practice to retain professional advice in the event of a take-over bid and this will generally be treated by the courts as a normal cost of doing business."

16 February 1994 Headquarters Letter 940216

mere allocation provision

A Canadian limited partnership which had raised capital to acquire units in a U.S. limited partnership and which sourced film rights to be purchased by the U.S. limited partnership was, in respect of that activity, engaged in a commercial activity. However, it would "have difficulty establishing a connection between the activity of seeking out and recommending films to invest in and the financial services provided to Canadian investors and the U.S. limited partnership with respect to the raising and investing of funds".

It was further noted that section 141.01 "does not say anything about what it constitutes a commercial activity but merely reinforces the requirement to allocate inputs between taxable and exempt supplies".

Subsection 141.01(3)

See Also

British Columbia Transit v. The Queen, [2006] GSTC 103, 2006 TCC 437

lessor required to demonstrate taxable-supply-for-consideration purpose

After having incurred substantial GST in acquiring a transit system for exempt use, the appellant commenced to lease the system to another municipal transit entity for rent of $1 per year, but with the lessee being obligated to pay municipal taxes imposed on the leased premises. Before going on to find that this lease represented a supply of the system for non-nominal consideration (so that there was a change of use under ss. 209(2) and 199(3) entitling the appellant to recover the basic tax content of this asset), C Miller J accepted that s. 141.01 required the appellant to establish that its use of the system was for the purpose of making taxable supplies for consideration, stating "if a registrant is in the unique position of only making taxable supplies without consideration, then section 141.01 should apply to deny the ITCs."

See summary under s. 141.01(1.1).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(1.1) lease consideration not nominal because of property tax obligation 172
Tax Topics - Excise Tax Act - Section 153 - Subsection 153(1) lease consideration not nominal because of property tax obligation 55
Tax Topics - Excise Tax Act - Section 306.1 - Subsection 306.1(1) additional reasons can be raised in Notice of Appeal 235

Subsection 141.01(4)

See Also

Director of the ‘Appeals and Tax and Social Insurance Practice’ Directorate of Sofia v. Iberdrola Inmobiliaria Real Estate Investments, C-132/16, ECLI:EU:C:2017:683 (European Court of Justice (First Chamber))

a developer was entitled to VAT credits for reconstructing a sewage plant for free, as this advanced its own project

The Municipality of Tsarevo (Bulgaria), acting as a developer, obtained a building permit in order to reconstruct a waste-water pumping station serving a holiday village. Iberdrola was a private investor that purchased land in that village in order to construct apartments for seasonal use. Iberdrola entered into a contract with the municipality for the reconstruction of the pumping station and subcontracted with a third party to perform that work. The Solfia Administrative Court found that Iberdrola was entitled to deduct input tax respecting the supply from the subcontractor on the basis that the related expenditure formed part of Iberdrola’s general costs of its services irrespective that the work carried out related to a property belonging to the municipality. After an appeal, the Administrative Supreme Court, Bulgaria referred to the Court of Justice the question which the latter (at para. 24) summarized as being in essence:

[W]hether Article 168(a) of Directive 2006/112 must be interpreted as meaning that a taxable person has the right to deduct input VAT in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity.

Article 168(a) provided:

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: … the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

The Court stated (at paras 33-35):

It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the buildings …to that pump station, with the result that that reconstruction was essential for completing that project and that, consequently, in the absence of such reconstruction, Iberdrola would not have been able to carry out its economic activity.

Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality of Tsarevo and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .

The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .

The Court concluded (at para 41):

… Article 168(a) … must be interpreted as meaning that a taxable person has the right to deduct input value added tax in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity, in so far as those services do not exceed that which is necessary to allow that taxable person to carry out the taxable output transactions and where their cost is included in the price of those transactions.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) direct link between input acquired to make free supply to a municipality and the developer's project 229

Administrative Policy

26 February 2015 CBA Roundtable, Q. 34

ITCs unlikely where dividends/interest from free supply recipient
(full text available with membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources)

54669 dated November 29, 2004 indicated that a holding corporation that made free supplies of management services to related corporations with operating businesses could claim ITCs to recover the GST/HST that it paid on expenses incurred in providing the free supplies. However, in, for example, 2010 CBA Roundtable, Q. 20, CRA indicated that the “free supply” rule does not allow a registrant to claim ITCs in situations where it receives dividend income from the corporation receiving the benefit of the free supply. When does s. 141.01(4) allow a registrant to claim ITCs on expenses that are incurred for the direct benefit of another person where it also earns interest, dividends or partnership distributions from that person? CRA responded:

It is a question of fact whether subsection 141.01(4)…would apply in a particular circumstance. However, where a person provides property or a service to a person for no consideration but receives interest or dividend revenue from that person it is unlikely that ITCs would be available as a result of the application of subsection 141.01(4).

4 March 2010 CBA Roundtable, Q. 20

free suply of admin services to operating company assimilated to exempt dividend income
(full text available with membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources)

A venture capital corporation which is not a financial institution invests in the securities of corporations engaged exclusively in commercial activities and provides management or advisory services to them for no consideration in order to further their commercial activities. Can it rely on the free-supply rule to claim ITCs for expenses incurred for in providing such services? In finding that no ITCs would be available, CRA stated:

In the above example, the venture capital corporation is making supplies of management or advisory services for no consideration to the companies whose securities it acquires. It therefore appears that the venture capital corporation’s purpose in making those supplies of management or advisory services for no consideration is to facilitate or further the making of supplies of financial services, such as increasing its income from interest, dividends, or capital gains earned on the subsequent sales of the shares of the companies in which it has invested.

Since the supply of a financial service is generally exempt of GST/HST, the venture capital corporation appears to be making supplies of management or advisory services for no consideration in the course of activities that are other than commercial activities.

29 November 2004 Interpretation 54669

Holdco eligible for ITCs on inputs used by it to make free supplies to Opco

In responding to a question on the application of s. 186(1) to inputs used by a holding company partially for making supplies of administrative services for consideration to related corporations whose debt or shares are held by it, CRA stated:

Since such supplies are generally taxable, the holding company would generally be eligible to claim ITCs on taxable inputs of property or services that it consumed or used in making such supplies, assuming that the holding company is a registrant. If the holding company makes free supplies of administrative services, subsection 141.01(4) of the ETA would deem the holding company's inputs that it used or consumed in making those supplies, for purposes of subsection 141.01(2) of the ETA, to have been acquired, imported or brought into a participating province in order to facilitate the endeavour of the operating company. Consequently, the holding company would still be eligible to claim ITCs on such costs, to the extent that the operating company is engaged in commercial activities. If a holding company consumes or uses property or a service partially for a purpose other than making taxable supplies for consideration and other than with respect to an investment in the shares or indebtedness of a related company, no ITC would be available with respect to that portion of the inputs.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(1) Holdco required to allocate inputs but eligible for ITCs on inputs in free supplies to Opco 214

Subsection 141.01(5)

Cases

CIBC World Markets Inc. v. Canada, 2011 FCA 270

no implied irrevocability of choice of method

The registrant used one methodology for computing its input tax credit claims in its 1998 and 1999 GST returns for those years, then in its 2000 GST return claimed additional input tax credits in respect of costs incurred in 1999 and 1998 based on a revised methodology (which was also acknowledged by the Minister to be fair and reasonable).

In finding that the additional ITC claims of the registrant were permitted, and rejecting the Minister's submission that selecting one methodology should preclude the registrant from later switching to another methodology in respect of the same taxation year, Stratas J.A. stated (at para. 42):

When an election is to be made and when it is irrevocable, Parliament's practice is to use express words in the GST provisions of the Act. There are no express words of irrevocable election concerning the taxpayer's choice of method.

Moreover, s. 225(3) contemplated "that more than one claim for a taxation year may be made at different times as long as the same amount is not claimed twice" (para. 33).

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) subsequent provision illustrates the missing words in current provision 106
Tax Topics - Statutory Interpretation - Inserting Words no implied irrevocability of election 22

See Also

University of Calgary v. The Queen, 2016 DTC 1006 [at 2522], 2015 TCC 321

method based on actual use of traceable inputs was appropriately appplied to indirect inputs

Before finding that it was fair and reasonable for the University of Calgary to allocate (for input tax credit purposes) its GST costs for its grounds using the same split between taxable and exempt use as was applicable to the floor space of its buildings which was directly used for one (third-party rentals) or the other (e.g., classroom) use, D’Arcy J stated (at paras. 132, 183):

[A] methodology based on the actual use of space that involves a detailed review of the use of thousands of rooms comprising approximately 898,000 square meters of space, is a fair and reasonable method to determine the extent to which the Appellant acquired the U of C Properties for use in its commercial activities.

As…noted in Sun Life [2015 TCC 37], the CRA cannot simply substitute its method for that of the GST registrant. A GST registrant is entitled to use any method that is fair and reasonable provided it complies with the provisions of the Act.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) s. 141.01(2) required allocation of indirect (common area) costs between taxable and exempt use 425
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Business all of university operation comprised one business 113

Sun Life Assurance Company of Canada v. The Queen, 2015 TCC 37

holding of vacant office space by a GST-exempt business for potential future taxable rentals qualified for ITC purposes as commercial activity/first order intended supply of vancant space was for rentals

The appellant ("Sun Life"), whose principal business was the sale of financial products, subleased space in its various office buildings to independent contractors who also sold Sun Life financial products, at rents that also were intended to capture costs of the building common areas. The floor space of a building set aside for use of such "advisers" (including unoccupied space that was allocated for future recruits) was grossed up for a pro rata share of common areas (principally, jointly used spaces such as meeting rooms, internal corridors and hallways, and building common areas attributed to Sun Life by the building owner), and the total so allocated to the advisers was divided by the total area under lease to determine the proportion of the rents paid by Sun Life on which it claimed ITCs.

Owen J allowed Sun Life's ITC claims in full, finding its allocation method to be fair and reasonable (noting, at para. 40, that "there may be more than one method that is fair and reasonable.") The Minister argued that, even to the extent that the common spaces (such as meeting rooms) were being used by the advisers, they were being used in furtherance of the appellant's provision of financial services. Owen J stated (at para. 48) that "this argument fails to recognize that the Advisers are independent contractors and that their use of the subleased space is in furtherance of their own business objectives," noted (at para. 49) "that the Advisers cannot use the subleased space without also using the common-use space," and (at para. 50) that "the direct purpose of the available space was to rent the space to Advisers" was relevant rather than "the indirect (or ultimate) purpose of having space available …to facilitate the sale of Financial Products."

Likewise, Owen J found (at para. 54) that, absent a sham, "the amount of vacant space that is required for rental to Advisers is a business judgment best left to Sun Life... ."

Words and Phrases
reasonable
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) vacant office space was used for future taxable supplies 83

Chew Estate v. The Queen, [2013] GSTC 52, 2013 TCC 89 (Informal Procedure)

The registrant, who had a quarterly GST reporting period, had acquired a property for personal use, but converted it to commercial use (for short-term rentals) in the second quarter of 2005. VA Miller J agreed with the Minister's position that the four-year limitations period in s. 225(4)(b) had commenced on 1 July 2005 (i.e. the day after the end of the second quarter), and had thus expired before the registrant claimed an input tax credit at the end of 2009 in respect of the conversion.

The registrant had taken the position that s. 141.01(5) supported the contention that the conversion of the property from personal to commercial use had to be considered at the end of the "fiscal year" based on its use of "throughout the year." VA Miller J disagreed. She stated (at para. 11):

Rather subsection 141.01(5) allows a taxpayer to adopt a general allocation method to determine the amount of ITCs that can be claimed when that taxpayer has both taxable and exempt supplies: CIBC World Markets Inc. v. R., 2011 FCA 270.

Richter & Associates Inc v. The Queen, 2005 TCC 92

allocation between own suit and litigation support

The allocation of substantially all the litigation-related costs of a trustee in bankruptcy to its "litigation support business" of supporting of a negligence suit for $800 million brought by the bankrupt company's creditors against the company's former auditors rather than to its action on behalf of the estate for $40 million for breach of contract, was found to be "fair and reasonable" in compliance with s. 141.01(5).

See summary under s. 141.01 (2).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Business litigation support services provided by trustee for bankrupt financial institution were an "undertaking" 269
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) allocation between costs incurred by trustee in bankruptcy for bankrupt financial institution to provide litigation services to creditors, and costs incurred in connection with its action qua trustee 375
Tax Topics - Excise Tax Act - Section 141.1 - Subsection 141.1(3) - Paragraph 141.1(3)(b) action brought by trustee for bankrupt financial institution deemed to be not in course of commercial activity 184
Tax Topics - Excise Tax Act - Section 265 - Subsection 265(1) - Paragraph 265(1)(f) trustee's own suit and litigation support activity were related 278
Tax Topics - General Concepts - Illegality Act applied to what has occurred irrespective of legality 134
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business litigation support services provided by trustee for bankrupt financial institution were an "undertaking" 270

Royal Canadian Legion, Vincent Massey Branch No. 164 v. The Queen, [1996] GSTC 98 (TCC)

A hall included in the registrant's premises was used partly for making taxable supplies (rentals) and partly for making exempt supplies (bingo sessions and meetings of the members or its executives). The registrant's method of claiming input tax credits and overhead costs effectively assumed that the premises were used in commercial activity except when they are actually used for the exempt activities. Beaubier TCJ. found that this method of allocation was unreasonable, and accepted the Minister's method of allocation which was based on the registrant's history of purchases of supplies for exempt and non-exempt purposes.

Administrative Policy

Memorandum (New Series) 8-3 "Calculating Input Tax Credits" August 2014

46. … If a particular method accurately reflects the purpose for which the property or service was acquired, the method would be fair and reasonable.

Example 1

A public institution has a mandate to provide exempt supplies. The public institution's revenues are as follows:

  • 95% government funding (that is not consideration for a supply) to assist in its mandate;
  • 0.5% consideration charged to persons who receive exempt supplies; and
  • 4.5% consideration for taxable supplies which are made to provide additional funding to support its mandate.

The public institution used a revenue-based ITC allocation method (i.e., an output-based method) which did not include the amount of government funding in the calculation and claimed ITCs equal to 90% (4.5%/5%) of the GST/HST paid or payable on taxable inputs.

If the public institution claimed ITCs based on the purpose for which it acquired its inputs it would claim ITCs equivalent to 2.18% (2% + 0.18%) of the tax paid or payable on all taxable inputs based on:

  • 2% of taxable inputs are for use exclusively for the purpose of making taxable supplies for consideration;
  • 88% of taxable inputs are for use exclusively for the purpose of making exempt supplies; and
  • 10% of taxable inputs are for use both for the purpose of making taxable supplies for consideration and for either the purpose of making exempt supplies or for a purpose other than making supplies:
    • 85% of the mixed-use inputs are for use less than 10% in commercial activities and are not eligible for ITCs;
    • 15% of the mixed-use inputs are for use 12% for the purpose of making taxable supplies for consideration and 88% for the purpose of making exempt supplies and for purposes other than making supplies.

...If a revenue-based ITC allocation method is appropriate in the circumstances, excluding the government funding revenue from the denominator in the calculation would not be fair and reasonable because government funding may be the greatest source of revenue for the public institution and that revenue is used to purchase inputs, including taxable inputs that are used in making exempt supplies. In this example, as 88% of taxable inputs are used exclusively for the purpose of making exempt supplies, a method that results in the public institution claiming 90% of the GST/HST paid or payable on those inputs as ITCs is not a fair and reasonable allocation method for those inputs.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) 436

Subsection 141.01(7)

Administrative Policy

Excise and GST/HST News - No. 93 16 October 2014

Although a public sector body that is a GST/HST registrant is not required to collect tax on sponsorship funds that meet the above conditions for section 135 to apply, this does not affect the public sector body's eligibility to claim an ITC on related expenses.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 135 63