Section 141.02

Subsection 141.02(1)

Direct Attribution Method

Administrative Policy

GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

Hierarchy of methods

42. A meaningful ITC allocation method must be based:

  • first, on tracking to the extent possible
  • second, to the extent that the use of the business input cannot be tracked, on causal allocation to the extent possible
  • third, to the extent that the use of the business input cannot be allocated based on tracking or causal allocation, on input‑based allocation or output‑based allocation

Tracking method

44. Tracking is using a logical and systematic method to accurately record, to the extent possible, the purpose or purposes for which a financial institution acquired a business input or the actual use of a business input, including considering the context of the financial institution’s core business. …

Causal allocation

46. Causal allocation directly approximates the use of a particular business input using a logical and systematic approach and an appropriate allocation base.

47. An allocation base (for example, square footage or number of employees) is used to link a particular business input to the making of a particular supply or supplies by the financial institution. The use of the input should have a correlation to the allocation base. …

Example of causal allocation (exam cost allocated based on where hires went)

Example 10

Financial Institution J had 100 applicants who went through a general process to qualify to be considered for a position with Financial Institution J, and it hired 5 new employees as a result of this process: 1 employee to work in Department A to make taxable supplies for consideration and 4 employees to work in Department B to make exempt supplies. All of the 100 applicants, regardless of which department they would be working for, went through the same hiring process. Financial Institution J paid for the cost of a standardized exam and allocated it to Department A and Department B based on the number of employees that were hired in each department (that is, 20% for the purpose of making taxable supplies for consideration and 80% for the purpose of making exempt supplies).

Input-based allocation

49. An input-based allocation uses a calculation based on the procurative extent of other business inputs. …

51. Input‑based allocation is only meaningful if it is calculated using exclusive and direct inputs that have either been tracked or allocated through the use of causal allocation. …

52. Furthermore, input‑based allocation can only be used if a substantial portion of the financial institution’s business inputs (other than excluded inputs) that relate to the financial institution’s business or relevant part of the business are exclusive and direct inputs that have been tracked or allocated through the use of causal allocation.

Output-based allocation

54. Output-based allocation uses a calculation based on an output measure (for example, revenue or number of transactions) to allocate the consumption or use of a business input.

56. An allocation based on revenue is not appropriate where the amount of revenue generated from making particular supplies is not indicative of the cost of taxable inputs used in making those supplies. In this case, a revenue‑based allocation will not provide a reasonable approximation of the extent to which the consumption or use of the business input is for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. For example, inputs should be used in the same proportion in making the supplies included in the calculation. Further, in order for a revenue‑based allocation to be appropriate, the average profit margin for the supplies included in the calculation should be the same because having different profit margins for different products may result in a particular type of supply being allocated a proportion of inputs that does not reflect the true proportion of inputs used in making that supply.

57. Further, other distorting factors must be excluded from the ITC calculations in a revenue‑based method … .

Cost pools

70. The legislation provides that the categorization and allocation of business inputs must be done on an input‑by‑input basis, and not based on a group of business inputs. Therefore, cost pools are only appropriate and may only be used where the use of grouping or pooling of business inputs has the same ITC allocation result as would be arrived at if each business input was allocated without the use of pooling.

Change of use reflected in specified method applied to computer use

  • Example (Example 13) of application of s. 206(3) so that a financial institution claims an ITC based on the commercial use of a computer increasing from 3% to 15% based on the number of employees, using dedicated portions of the computer, increasing due to chanted product lines.

Most direct inputs will be allocated through tracking or causally

93. Generally, a substantial portion of a financial institution’s direct inputs can be tracked or allocated through causal allocation. As a result, few, if any, direct inputs will be allocated using either an input-based allocation or an output-based allocation.

Allocation of vacant and common ares in rented space was not a direct attribution method

Example 17

  • The FI rents an office building 25% of which it subleases at less than cost to independent contractors who do work for it and 35% of which is used by employees engaged in making exempt supplies. CRA indicated that allocating all of the 20% of the building that was vacant as being for commercial use (on the basis that it was available for taxable rentals) and allocating the 20% of the space that was common space as being 75% for commercial use, did not qualify as a direct attribution method (noting inter alia that these allocations did reflect the context of the FI’s core business.)

Direct Input

Cases

Northbridge Commercial Insurance Corporation v. Canada (the King), 2025 FCA 83

whether head office rent was a direct input or non-attributable input was under dispute/ classification of inputs in hands of Tax Court

Northbridge issued around 5,000 insurance policies each year to trucking companies operating in Canada and the US and claimed ITCs for 1/3 of the GST/HST paid by it on its general head office and overhead costs on the basis that a portion of its insurance supplies were zero-rated under s. VI-IX-2. However, the Tax Court had completely denied its ITC claims on the basis that Northbridge had not determined the extent to which each of its policies was zero-rated, and instead only had “global evidence.”

Webb JA rejected this approach and referred the matter back to the Tax Court to determine the amount of ITCs to which Northbridge was entitled for such GST/HST costs in accordance with s. 141.02. He made the following general comments in relation to s. 141.02 (at paras. 34-35):

Section 141.02 of the ETA applies to financial institutions. There are four types of inputs for the purposes of section 141.02 — direct inputs, excluded inputs, exclusive inputs and non-attributable inputs — informing the appropriate allocation method that is to be used by a financial institution in calculating its ITCs. In this appeal, the parties do not agree on the classification of the general head office and overhead costs. In particular, the Crown submits that rent is a direct input, but Northbridge submits that it is a non-attributable input.

The classification of the property or service acquired by Northbridge as part of its general head office and overhead costs as direct inputs, excluded inputs, exclusive inputs or non-attributable inputs is an important step in applying section 141.02 of the ETA. Since the Tax Court Judge did not consider section 141.02 of the ETA, there is no decision with respect to the classification of the various property and services acquired by Northbridge as direct inputs, excluded inputs, exclusive inputs or non-attributable inputs. This classification is a matter for the Tax Court to determine in considering the entitlement of Northbridge to ITCs under the ETA. Once this classification is done, the provisions of section 141.02 of the ETA that prescribe the methodology to be used to determine the extent to which the various inputs are consumed or used in making taxable supplies can be applied.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) it is appropriate to determine ITCs on the basis of global evidence rather than on a supply-by-supply basis 299
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part IX - Section 2 zero-rating of insurance supplies under s. VI-IX-2 could be determined on a global basis for ITC purposes 218

See Also

Royal Bank of Canada v. The King, 2024 TCC 125

expenses of redeeming credit card loyalty points were inextricably linked to the issuer’s extension of credit, and only remotely linked to its earning zero-rated interchange fees

When cardholders of credit cards issued by the appellant (RBC) used their cards for purchases from a foreign merchant, RBC would earn an “interchange fee” from the foreign bank (or other “merchant acquirer”) of the foreign merchant for accepting the charge. Upon such acceptance, the cardholder discharged their purchase obligation to the merchant, RBC advanced the amount charged (less its interchange fee) to the merchant acquirer for crediting to the merchant’s account, and RBC would then request payment of the balance from the cardholder at the end of the applicable billing cycle. RBC submitted that it offered loyalty reward points to its cardholders to entice them to use their cards and increase the volume of interchange fee revenues, so that the costs to it of honouring loyalty points when redeemed were a direct input to generating the interchange fee revenues which, in part (regarding cardholder purchases from foreign merchants) were zero-rated.

In rejecting this position, so that RBC had no input tax credit (ITC) entitlement regarding its GST/HST incurred in honouring points redemptions, Smith J stated (at paras. 107-109):

If the Appellant’s only motivation was to entice cardholders to use their credit cards to generate interchange fees, there would be no need to impose limits or restrictions for the redemption of loyalty reward points.

… [T]he loyalty reward points might not be redeemed for months or even years after the transaction with the non-resident merchant. In addition, there is a geographical consideration in that the Foreign Interchange Service was provided to a non-resident merchant acquirer while expenses to redeem the points are incurred by RBC in Canada.

… [E]xpenses incurred by RBC in the redemption of loyalty reward points were inextricably linked and an integral component of the Appellant’s agreement to extend credit pursuant to the Cardholder Agreement. Although the presentation of the RBC Reward Card triggered the Appellant’s entitlement to the interchange fees, I find that this connection is not sufficient for me to conclude that expenses incurred in the redemption of loyalty reward points earned from transactions involving non-resident merchant–acquirers were part of a taxable or zero-rated supply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1.11) issue should be stated "reasonably" 131
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(21) pre-approval of method for allocating inputs between foreign and domestic supplies did not stop CRA from assessing to deny zero-rating of the foreign supplies 202
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(31) - Paragraph 141.02(31)(f) s. 141.02(31)(f) is merely confirmatory of normal taxpayer onus 98
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part IX - Section 1 - Paragraph 1(a) foreign interchange fees generated by Canadian credit card issuer related to the granting of credit rather than the making of a loan by it, and were not excluded under s. 1(a)(ii) 445
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) expenses of redeeming credit card loyalty points were an integral component of the issuer’s extension of credit, and not sufficiently connected to earning interchange fees 181
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Recipient merchant acquirer was the recipient of credit card interchange services even though it was a conduit to the merchant 156
Tax Topics - Statutory Interpretation - Exclusionary provisions exclusionary provisions should be narrowly construed 267
Tax Topics - Excise Tax Act - Section 301 - Subsection 301(1.2) - Paragraph 301(1.2)(a) taxpayer not precluded from raising an argument that the Minister was bound by an ITC method that it had described in detail in its pleadings 175

Administrative Policy

GST/HST Memorandum 17-13 [17.13] "Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions" 23 July 2021

Overhead expense is a direct input if it can be attributed even in part to making of particular supplies

26. A business input that might be considered an indirect input for cost allocation purposes (for example, certain overhead expenses) is a direct input for purposes of section 141.02 if the business input is not an excluded or exclusive input and can be attributed in whole or in part to the making of a particular supply or supplies.

GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

Direct input where FI partially leases out office building rather than using in its financial business

Example 5

Financial Institution E makes taxable supplies for consideration and exempt supplies. Financial Institution E enters into a lease agreement with a landlord for the lease of space in a downtown office building. The leased space is not capital property of Financial Institution E. Financial Institution E uses 10% of the space it leases in making taxable supplies for consideration and 90% of the space it leases in making exempt supplies.

The leased space in the building is a direct input because it is not an excluded or an exclusive input and because the use of the space can be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).

Direct input where website indirectly promotes the FI’s business

Example 7

Financial Institution G makes both taxable supplies for consideration and exempt supplies. Financial Institution G pays a monthly fee for the maintenance of a website which provides information about its involvement in the communities surrounding its offices (for example, sponsoring local children’s sports teams), as well as information about the various services it provides.

Although the maintenance of the website is a business input that relates, in part, to Financial Institution G’s community involvement, the website maintenance service is not a non‑attributable input but is a direct input of Financial Institution G. This is because it is not an excluded input or an exclusive input and it can, at least in part, be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).

Various overhead expenses were direct inputs

Example 16

  • Office space, heating costs, electricity, equipment repair and office supplies of a financial institution making both exempt and taxable supplies were direct inputs.

B-106 Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act 26 August 2011

Data entry for supplies made to insurance company clients are direct inputs

Example 29

Insurance Company H requires data entry services in respect of the information provided by clients on its various forms. Some forms relate to taxable supplies for consideration and some forms relate to exempt supplies. Insurance Company H purchases these data entry services from an unrelated company. This is a direct input rather than a non-attributable input because it can be attributed to the making of particular supplies.

Excluded Input

Exclusive Input

Administrative Policy

GST/HST Memorandum 17-13 [17.13] "Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions" 23 July 2021

Appraisal received by bank regarding proposed mortgage loan is an exclusive input

Example 3

Bank C provides a mortgage loan to an individual who is purchasing a house. Bank C acquires an appraisal service regarding the value of the house. Bank C does not charge the individual a fee for the appraisal. Bank C uses the appraisal service directly and exclusively to provide an exempt financial service of issuing a mortgage loan to a homebuyer in Canada (that is, the service is in no way used to provide a taxable supply for consideration).

The supply of the appraisal service is an exclusive input of Bank C because it is not an excluded input and it is acquired by Bank C for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration (that is, for making exempt supplies of financial services).

GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

S. 150(1) election renders inputs to services rendered by electing FI to another group FI exclusive inputs

Example 4

Financial Institution D is a financial institution as a result of an election under subsection 150(1). The only supplies that Financial Institution D makes are supplies of services to Financial Institution E, which are deemed to be financial services as a result of the election under subsection 150(1). The financial services supplied to Financial Institution E are exempt. Financial Institution D acquires a consulting service from a third party as an input into the services it supplies to Financial Institution E.

The third party’s supply of the consulting service to Financial Institution D is an exclusive input of Financial Institution D because it is not an excluded input and it is acquired by Financial Institution D for consumption or use directly and exclusively for purposes other than making taxable supplies for consideration (that is, to make exempt supplies of financial services).

Non-Attributable Input

Administrative Policy

GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

FIs have few non-attributable inputs

27. A financial institution generally has very few non-attributable inputs.

Example of (rare) non-attributable inputs

Example 6

Financial Institution F makes taxable supplies for consideration and exempt supplies. Financial Institution F purchases pamphlets that demonstrate ergonomic principles and illustrate various stretching techniques for its office staff. These pamphlets are left in a central location where employees can take one if they wish.

The pamphlets are non‑attributable inputs of Financial Institution F because they are not excluded or exclusive inputs and cannot be attributed, even in part, to the making of any particular supply.

Direct input where website indirectly promotes the FI’s business

Example 7

Financial Institution G makes both taxable supplies for consideration and exempt supplies. Financial Institution G pays a monthly fee for the maintenance of a website which provides information about its involvement in the communities surrounding its offices (for example, sponsoring local children’s sports teams), as well as information about the various services it provides.

Although the maintenance of the website is a business input that relates, in part, to Financial Institution G’s community involvement, the website maintenance service is not a non‑attributable input but is a direct input of Financial Institution G. This is because it is not an excluded input or an exclusive input and it can, at least in part, be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).

Allocation of non-attributable input of FI based on allocation of its exclusive and direct inputs

Example 18

  • A financial institution pays a fee to an external provider of employee assistance services related to the mental health and welfare of its employees, on which it pays the GST, without receiving information about which employees by name or department use the service, so that it categorizes such services as a non-attributable input. The value of all of the FI’s business inputs other than non-attributable inputs are properly allocated between the taxable and exempt supplies made by it as follows:
Inputs for taxable supplies Inputs for exempt supplies
Exclusive inputs $31,000 $1,282,500
Direct inputs that are tracked $500,000 $4,471,200
Direct inputs allocated using causal allocation where tracking was not possible $171,800 $1,811,600
Total $702,800 $7,565,300
Excluded inputs $150,000 $525,500
Total including excluded inputs $852,800 $8,090,800
  • The FI calculates that 8.5% [$702,800 ÷ ($702,800 + $7,565,300)] of the services is for the purpose of making taxable supplies for consideration, and claims 8.5% of the GST on the invoice of the service provider as an ITC. CRA indicated that this was a specified method.

B-106 Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act 26 August 2011

Employee surveys re environmental practices, or employee assistance programs, are non-attributable inputs

Example 27

Financial Institution G makes both taxable supplies for consideration and exempt supplies. Financial Institution G has an in-house sustainable development program to encourage employees to make more environmentally sustainable choices in their home and work lives. As part of this program, Financial Institution G hires an external consulting firm to conduct anonymous electronic surveys to determine how the employees feel about the current sustainable development program and to provide ideas on how the program could be improved. The supply of conducting the electronic surveys that Financial Institution G receives is a non-attributable input because it is not an excluded input or an exclusive input, and it cannot be attributed to the making of any particular supply.

Example 28

Financial Institution P makes both taxable and exempt supplies. It hires an external contractor (a corporation that provides employee assistance program (EAP) services) to provide taxable EAP services. Financial Institution P receives a monthly bill from its EAP provider, which includes the number of employees who received services that month, but for confidentiality purposes, Financial Institution P does not receive the names of the employees who used the EAP services or the name of department where they work. As a result, it is not possible to attribute the EAP services to the making of any particular supply. The supply of EAP services that Financial Institution P receives is a non-attributable input because it is not an excluded input or an exclusive input, and it cannot be attributed to the making of any particular supply.

Procurative Extent

See Also

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

purchases made for promotional free on-supplies were part of the VAT-creditable overheads of a taxable business

The appellant (“ANL”) promoted circulation of its Sunday newspapers by first purchasing vouchers from retailers such as Marks & Spencer and from an intermediary ("Hut"), and providing such vouchers to readers, who purchased the newspaper during the promotional period, who then could redeem the vouchers with the retailer against the purchase of goods. (The purchases of vouchers from Marks & Spencer were found later in the judgment to not be subject to VAT.) Patten LJ noted (at para. 30) that in order for ANL to be entitled to recover any input tax on its purchases of the vouchers, the applicable legislation required that ANL establish either a direct and immediate link between the purchased vouchers (which were deemed to be for services) and relevant taxable transactions of ANL or that the cost of the vouchers were part of the ANL overheads and, therefore, cost components of the its taxable activities – but that if its purchases of the vouchers should be treated as directly (and exclusively) linked to the free supply of the vouchers to its customers, any input tax would be irrecoverable.

In addressing this issue, Patten LJ discussed at length the Sveda case (ECLI:EU:C:2015:712), [2015] BVC 36), which found input tax to be recoverable on goods purchased in constructing a 'Baltic mythology recreational/discovery path,' which was subsidised by the Lithuanian government on the basis that there would be free public access to it, but with Sveda intending to sell food or souvenirs. Patten LJ then stated, in connection with finding that ANL was entitled to input tax under the Sveda principle (at paras 48, 51):

[I]n economic terms, the cost of purchasing the vouchers was also 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.

… [A] simple causative test of whether the newspapers could have been produced and sold without the benefit of the vouchers does not answer the question of whether the cost of the vouchers was economically a cost component of those supplies and that business when the vouchers were acquired in order to sell the papers.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) acquisition made for free on-supply was part of overhead of a commercial activity 162

Qualifying Institution

Administrative Policy

GST/HST Memorandum 17-11 [17.11] Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02 23 July 2021

Must be a bank, insurer or securities dealer

10. If a financial institution is not of a prescribed class at any time in a particular fiscal year, it does not meet the requirements of paragraph (a) of the definition of qualifying institution and is not a qualifying institution for that particular fiscal year. …

Mortgage broker as example of non-qualifying institution

Example 4

Insurance Broker D is an insurance broker during its fiscal year ending December 31, 2019. In that year, it is not a bank or an authorized foreign bank within the meaning of section 2 of the Bank Act. Insurance Broker D is not licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business during its fiscal year ending December 31, 2019. Further, Insurance Broker D is not a trader or a dealer in, or a broker or salesperson of, securities in that fiscal year (insurance policies are not securities). As a result, Insurance Broker D is not a financial institution of a prescribed class and is not a qualifying institution for its fiscal year ending December 31, 2019.

Overview of adjusted tax credit amount test

11. Subparagraph (b)(i) of the definition of qualifying institution in subsection 141.02(1) requires a financial institution to have two fiscal years immediately preceding the particular fiscal year and for each of these preceding fiscal years to have an adjusted tax credit amount equal to or exceeding the prescribed amount for the prescribed class of financial institution for that particular fiscal year. As a result, if a financial institution (other than certain new corporations formed as the result of a merger or amalgamation) did not exist for two years prior to the particular fiscal year, the financial institution would not be a qualifying institution for that particular fiscal year. …

12. The adjusted tax credit amount of a financial institution for a fiscal year is computed by multiplying the tax credit amount of the financial institution for the fiscal year by the fraction 365/number of days in the fiscal year. ...

19. If a financial institution does not have an adjusted tax credit amount ... equal to or exceeding the prescribed amount [of $500,000] for the prescribed class of the financial institution for each of the two fiscal years immediately preceding the fiscal year for which qualifying institution status is being determined, the financial institution does not meet the conditions in subparagraph (b)(i) of the definition of qualifying institution and is not a qualifying institution.

Overview of tax credit rate test

24. If a financial institution does not have a tax credit rate equal to or exceeding the prescribed percentage for the prescribed class of the financial institution [of 12% (banks), 10% (insurers) and 15% (securities dealers)] for each of the two fiscal years immediately preceding the particular fiscal year, the financial institution does not meet the conditions in subparagraph (b)(ii) of the definition of qualifying institution and is not a qualifying institution.

Residual Input Tax Amount

Specified Method

Administrative Policy

B-106 Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act 26 August 2011

Causal allocation

Causal allocation directly approximates to the extent possible the use of a particular input using a systematic approach and an appropriate allocation base. An allocation base is a factor used to link a particular input to a particular output or outputs where there is a link between the allocation base and the output or outputs, which is logical and where the use of the particular input has a correlation to the allocation base (an example of a correlation would be where the input is used equally over the allocation base). For example, the number of employees making taxable supplies for consideration or exempt supplies might be used as an allocation base for a particular input where it is logical that the input be used equally by the relevant employees. Where an increase in the allocation base (e.g., square footage) leads to an increase in input costs (i.e., a cause and effect relationship exists between an allocation base and an output), it would generally be appropriate to use this allocation base.

Required homogeneity of cost pools

Appropriate costs pools

… If direct inputs are grouped together for ITC allocation purposes, all the direct inputs within the cost pool must:

  • be for use to the same extent for the purpose of making taxable supplies for consideration if the inputs in the pool are tracked (e.g., a pool of inputs that are tracked cannot include an input that is used 2% for the purpose of making taxable supplies for consideration with an input that is used 30% for the purpose of making taxable supplies for consideration);
  • be allocated using the same, appropriate, allocation base if the inputs in the pool are allocated using causal allocation;
  • apply to the same portion of the business if the input is allocated using input-based allocation; and
  • apply to the same portion of the business and use the same appropriate output measures (e.g., revenue) if the input is allocated using output-based allocation.

Example of inappropriate use of output based method where zero-rated revenue increases do not affect inputs

Example 32

Financial Institution N uses an output-based method (a ratio of foreign, zero-rated interchange transactions to total interchange transactions) to allocate all its inputs (e.g., capital property and inputs that can be attributed to particular supplies) for its credit card division. Most of Financial Institution N's revenue from its credit card division is from interest income from cardholders and annual credit card fees. There is no proportionate increase in interchange transactions with an increase in inputs on which GST/HST is paid. Not all of Financial Institution N's inputs are non-attributable inputs (e.g., some are excluded inputs and some are direct inputs). As a result, tracking and causal allocation would apply to many inputs, and it would not be appropriate to use an output-based method for all the inputs. The method used by Financial Institution N would not be a specified method for a non-attributable input.

Tax Credit Amount

Administrative Policy

GST/HST Memorandum 17-11 [17.11] Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02 23 July 2021

Purpose of paras. (a) and (b), and (c), of the definition

14. Paragraphs (a) and (b) of the definition of tax credit amount generally apply when a financial institution is determining its ITC entitlement for residual inputs using the prescribed percentage for the prescribed class of financial institution. Where these paragraphs apply, a financial institution’s tax credit amount is the amount that would be a tax credit amount of the financial institution if it was required to determine its ITC entitlement in respect of residual input tax amounts for that year using the provisions of subsections 141.02(10) to (13), (16) and (17). These provisions are explained in GST/HST Memorandum 17-12 and include the use of direct attribution methods for direct inputs and specified methods for non-attributable inputs that meet the criteria, rules, terms and conditions specified by the Minister.

15. Paragraph (c) of the definition of tax credit amount applies in cases where paragraphs (a) and (b) do not apply. Paragraph (c) provides that the financial institution’s tax credit amount for the fiscal year is the total of all amounts each of which is an ITC in respect of a residual input tax amount that the financial institution would have been entitled to claim in the fiscal year. This would apply to a financial institution that is not a qualifying institution that used subsections 141.02(10) to (13), subsection 141.02(32) or subsection 141.02(21) (if it is a designated qualifying institution) to determine its ITCs or to a qualifying institution that has made an election under subsection 141.02(27) or has been authorized under subsection 141.02(21) to use particular methods.

Subsection 141.02(4)

Administrative Policy

GST/HST Memorandum 17-11 [17.11] Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02 23 July 2021

Use of ss. 141.02(4) and (5)

41. Subsections 141.02(4) and (5) apply for the purpose of determining the tax credit amount and the tax credit rate of a corporation that is formed by the merger or amalgamation of two or more predecessor corporations, or a corporation (the parent corporation) that has wound up another corporation where the parent corporation had owned 90% or more of the issued shares of each class of the capital stock of the other corporation. These provisions are used in determining whether the new corporation or the parent corporation, as the case may be, may be a qualifying institution or may be eligible to make an election under subsection 141.02(9).

Must determine the adjusted tax credit amounts for prior years on 365-day year basis

45. The tax credit amount of the new corporation for the fiscal year immediately preceding the first fiscal year of the new corporation (the prior year of the new corporation) is deemed to be equal to the total of all amounts each of which is the adjusted tax credit amount of a predecessor corporation for the prior year of the predecessor corporation. The prior year of a predecessor corporation means the last full fiscal year that is generally a 365-day year ending before the merger or amalgamation and not any stub fiscal year of the predecessor that was less than a full year and that ended at the time of the merger or amalgamation.

46. Similarly, the tax credit amount of the new corporation for the fiscal year of the new corporation immediately preceding the prior year of the new corporation (the second prior year of the new corporation) is deemed to be equal to the total of all amounts each of which is the adjusted tax credit amount of a predecessor corporation for the fiscal year, if any, of the predecessor immediately preceding the prior year of the predecessor (the second prior year of the predecessor).

Subsection 141.02(6)

Administrative Policy

26 September 2018 Interpretation 167875

tracking of inputs preferred/cost pool use cannot change results
  • Most inputs are likely to be allocable as “exclusive” or “direct” inputs rather than being “non-attributable” inputs.
  • Direct tracking of inputs should be used where possible rather than “causal allocation,” i.e., using a systematic methodology to approximate the use of inputs.
  • Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on “cost pools” of business inputs. The latter “are only appropriate where the use of grouping or pooling of business inputs results in the same ITC allocation result as would be arrived at if each business input was allocated without the use.
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(12) use of tracking, causal allocations and cost pools in ITC determinations 411

Subsection 141.02(8)

Administrative Policy

GST/HST Memorandum 17-13 [17.13] "Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions" 23 July 2021

Paraphrase of s. 141.02(8)

48. … [U]nder subsection 141.02(8), the following rules apply:

  • the extent to which the consumption or use of the residual input is for the purpose of making taxable supplies for consideration is deemed to be equal to the prescribed percentage for the prescribed class of financial institution
  • the extent to which the consumption or use of the residual input is for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
  • the extent to which the residual input is acquired by the qualifying institution for the purpose of making taxable supplies for consideration is deemed to be equal to the prescribed percentage for the prescribed class of financial institution
  • the extent to which the residual input is acquired by the qualifying institution for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
  • for the purpose of determining an ITC in respect of the residual input of the qualifying institution, the description of Element B of the formula in subsection 169(1) is deemed to be equal to the prescribed percentage for the prescribed class of financial institution

Required to follow the usual rules for exclusive and excluded inputs

A qualifying institution will still generally be required to follow the rules in subsection 141.02(6) in respect of each exclusive input and use a specified method pursuant to subsection 141.02(14) for each excluded input. For information on the rules in subsection 141.02(6), refer to paragraphs 31 to 33 of this memorandum. For information on a specified method for an excluded input, refer to GST/HST Memorandum 17-12.

Example of application of s. 141.02(8) to insurer

Example 7

Insurer G is a qualifying institution that was not authorized under subsection 141.02(20) to use particular ITC allocation methods for determining the procurative and operative extent of each business input for its fiscal year ending December 31, 2021. Subsection 141.02(8) applies to Insurer G for its fiscal year ending December 31, 2021. As a result, the extent to which each of Insurer G’s direct and non-attributable inputs is acquired, imported or brought into a participating province, or consumed or used, for the purpose of making taxable supplies for consideration is 10% (that is, the prescribed percentage for insurers) and the extent to which each of Insurer G’s direct and non-attributable inputs is acquired, imported or brought into a participating province, or consumed or used, for purposes other than making taxable supplies for consideration is 90%. Additionally, for the purpose of determining an ITC in respect of each direct and non-attributable input, the description of element B of the formula in subsection 169(1) is deemed to be 10%.

Subsection 141.02(9)

Administrative Policy

GST/HST Memorandum 17-11 [17.11] Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02 23 July 2021

Overview of election

27. A financial institution that is not a qualifying institution may be eligible to make an election under subsection 141.02(9) to use a prescribed percentage for its residual inputs (that is, direct inputs and non-attributable inputs) for a particular fiscal year. A financial institution may make this election where both of these conditions are met:

  • the financial institution is, at any time in that particular fiscal year, a financial institution of a prescribed class (that is a bank, an insurer, or a security dealer as defined in the Regulations)
  • its tax credit rate for each of its two fiscal years immediately preceding the particular fiscal year equals or exceeds the prescribed percentage for the prescribed class of the financial institution (that is, 12% for banks, 10% for insurers and 15% for security dealers) for the particular fiscal year

28. A financial institution eligible to make this election is one that would meet the definition of qualifying institution except that the financial institution does not meet the condition in paragraph (b) of that definition relating to its adjusted tax credit amount (as described in paragraphs 11 and 12 of this memorandum).

29. Where an election under subsection 141.02(9) is in effect for a particular fiscal year for a financial institution, the extent to which a residual input of the financial institution is acquired or consumed or used for the purpose of making taxable supplies for consideration is deemed to be the particular prescribed percentage for the prescribed class of the financial institution (that is, 12% for banks, 10% for insurers and 15% for securities dealers).

30. Where an eligible financial institution makes the election under subsection 141.02(9) in respect of a particular fiscal year of the financial institution, subsections 141.02(10), (11), (12) and (13) do not apply to the financial institution in respect of that fiscal year (that is, generally the requirement to use a direct attribution method for a direct input and a specified method for a non-attributable input). As well, if the election is in effect, the following rules apply in respect of each residual input of the financial institution:

  • the extent to which the residual input is acquired by the financial institution or is consumed or used for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
  • for the purpose of determining an ITC in respect of the residual input, the description of B in the formula in subsection 169(1) is deemed to be equal to the prescribed percentage for the prescribed class of financial institution

32. To make an election under subsection 141.02(9), use Form GST118, Election or Revocation of an Election for a Financial Institution to Use the Prescribed Percentage.

Example showing ability to revoke for same year that election made

Example 9

Insurer H is an insurer for the purposes of section 141.02 but is not a qualifying institution. Insurer H is an annual filer with a fiscal year ending December 31. Insurer H made an election under subsection 141.02(9) for its fiscal year ending December 31, 2020. Insurer H later decided to revoke the election and filed Form GST118, including all required information, on January 12, 2021, (before June 30, 2021, which is the due date of its return for its January 1 to December 31, 2020, fiscal year). The revocation is effective January 1, 2020.

GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

Implications of s. 141.02(9) election

100. Where an election under subsection 141.02(9) is in effect for a particular fiscal year for a financial institution, the extent to which a residual input of the financial institution is acquired, or consumed or used, for the purpose of making taxable supplies for consideration is deemed to be the particular prescribed percentage for the prescribed class of the financial institution (that is, 12% for banks, 10% for insurers and 15% for securities dealers).

101. Where an eligible financial institution makes the election under subsection 141.02(9) in respect of a particular fiscal year of the financial institution, subsections 141.02(10), (11), (12) and (13) do not apply to the financial institution in respect of that fiscal year (that is, generally the requirement to use a direct attribution method for a direct input and the requirement to use a specified method for a non-attributable input). As well, if the election is in effect, the following rules apply in respect of each residual input of the financial institution:

  • the extent to which the residual input is acquired by the financial institution or is consumed or used for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the prescribed percentage for the prescribed class of financial institution (that difference being 88% for banks, 90% for insurers and 85% for securities dealers)
  • for the purpose of determining an ITC in respect of the residual input, the description of B in the formula in subsection 169(1) is deemed to be equal to the prescribed percentage for the prescribed class of financial institution …

103. To make an election under subsection 141.02(9), use Form GST118 … .

Subsection 141.02(12)

Administrative Policy

17 August 2020 GST/HST Interpretation 194307 - Eligibility for ITCs […] [by the Financial Institution] on inputs used by […][the subcontractors]

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 (the “Financial Institution”) that was not a qualifying institution acquired technology inputs for its own use and also for making taxable supplies (being the provision of network services for access to the Financial Institution’s on-line computer data and computer networks and the (sub)leasing of computer, office and other equipment) to subcontractors who sold its financial products. Its charges to them were based on a percentage of the amount determined as the actual cost of the technology package (apparently representing a discount to that cost).

Originally, when the Financial Institution filed its GST/HST returns for its fiscal years 1, 2 and 3, it claimed ITCs related to the technology inputs based on the amount of GST/HST it collected from the subcontractors on its resupply to them of those inputs.

However, when it filed its return for its fiscal year 4, it filed for additional ITCs for the technology inputs it acquired in the three preceding years based on a new ITC allocation method, resulting in significantly higher claims than the amount of GST/HST collected by it on its supplies of those inputs.

CRA indicated that the technology inputs were direct inputs because they could be “attributed to the making of particular supplies - the supply of the technology package to [the subcontractors] and supplies of financial services related to [the Financial Institution]’s products.” After finding that the change to the ITC method applied in the earlier years violated s. 141.02(16), CRA went on to find that the new method could also not be used in year 4, as it was not a direct attribution method, stating:

Therefore, an ITC allocation method that considers the use by […][subcontractors or employees] to be the only use of a technology input is not comprehensive, does not reflect all of the uses of the input, and does not meet [the criteria, rules, terms and conditions specified by the Minister].

A more qualitative approach may need to be employed to reflect the fact that the principal purpose of [the Financial Institution] in acquiring the technology inputs was the furtherance of its […][sales of financial products] and that acquisition was carried out in connection with the business of making exempt supplies of financial services. […].

In addition, [the Financial Institution]’s new method does not provide an accurate reflection of the use of the inputs because of the use of inappropriate cost pools. [The Financial Institution] pools [certain inputs] together, and then uses the same method to allocate between the use by [subcontractors] and employees for [other inputs]. However, the extent of the use by [the Financial Institution] of each of these inputs appears to be different.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(17) s. 141.02(17) precludes retroactive return amendments 278

9 November 2020 GST/HST Interpretation 210124 - Appropriateness of proposed ITC allocation method

overheads may be direct rather than non-attributable inputs to financial institutions/ employee time cannot be used for causal allocation if the input is not used equally by the employees

In the context of comments on whether a new ITC allocation method proposed by a financial institution for claiming its excluded, direct and non-attributable inputs would qualify as a specified method, CRA stated, as a general matter:

[T]he financial institution … must first categorize its inputs (whether excluded, exclusive, non-attributable or direct) and then apply the appropriate ITC allocation method … .

When the same method and rate is applied across all categories of inputs we do not believe that a person can say that they have met this condition.

Note that an input that might be considered an indirect input for cost allocation purposes (for example, certain overhead expenses) is a direct input for purposes of section 141.02 if the business input is not an excluded or exclusive input and can be attributed in whole or in part to the making of a particular supply or supplies.

Regarding the use of cost accounting systems, CRA stated:

If a person has a cost accounting system that meets […][the criteria, rules, terms and conditions specified by the Minister], for example, if it tracks the extent to which certain inputs are used in making taxable supplies for consideration on an input-by-input basis, and the method of tracking is logical and systematic, then the person must use its cost accounting allocation method for these particular inputs. If [the financial institution] can use causal allocation for a particular input (because its use cannot be tracked), and it is logical that the input be used equally by the relevant employees, then using an allocation base of the relevant employees’ time may be appropriate and could reflect the use of the input; however, an allocation base of employees time may not be used for an input unless the input is used equally amongst all employees included in that base. […].

The method should only use appropriate cost pools:

An ITC allocation method should not include inputs from more than one input category in the same cost pool (that is, its direct, non-attributable and excluded inputs can’t be in the same pool), as different inputs included in that pool may be used to different extents for making taxable supplies for consideration and otherwise. … [A]ll the inputs within a cost pool must be included in a single business input category and must be acquired to the same extent for the purpose of making taxable supplies for consideration or other purposes. Any use of pooling must result in the same ITC allocation result as would be arrived at if each individual input was allocated without the use of pooling. […].

26 September 2018 Interpretation 167875

use of tracking, causal allocations and cost pools in ITC determinations

Financial institution X, a publicly traded listed financial institution under s. 149(1)(a), is engaged both in making taxable supplies of and in making exempt supplies of financial services including the issuance, sale, and purchase of financial instruments. It has categorized the inputs at issue either as type 1 expenses, meaning those inputs which are related to certain financial instruments, or “overhead” expenses, meaning those inputs not related to certain financial instruments.

In commenting on the application of s. 141.02, CRA indicated that “in general, a substantial portion of a financial institution’s inputs that are not excluded inputs will be allocated through the rules for exclusive inputs or the direct attribution method for direct inputs, and will not be non-attributable inputs,” whereas here, there appeared to be exclusive inputs included in both the “overhead” pool and type 1 pool that were not so categorized.

After noting that, as financial institution X had not made an s. 141.02(9) election, it was required to use a direct attribution method, in determining the operative and procurative extent of each direct input, and that conformed to the criteria, rules, terms and conditions specified by the Minister in B-106, it indicated that as “tracking the use of a particular input is more direct than approximating the use of the input through causal allocation or input-based or output-based allocation,” tracking should be used “to the extent possible,” and that:

To the extent that tracking is not possible, [financial institution X] must use causal allocation to the extent possible. Causal allocation directly approximates to the extent possible the use of a particular input using a systematic approach and an appropriate allocation base which provides a reasonable approximation of the use or intended use of a business input.

CRA went on to note that the following principle had not been adhered to:

Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on a group of business inputs. If cost pools are used, all the business inputs within a cost pool must be included in a single business input category (for example, be included in the direct input category) and must be acquired, or be consumed or used, to the same extent for the purpose of making taxable supplies for consideration or other purposes.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(6) tracking of inputs preferred/cost pool use cannot change results 110

Subsection 141.02(17)

Administrative Policy

17 August 2020 GST/HST Interpretation 194307 - Eligibility for ITCs […] [by the Financial Institution] on inputs used by […][the subcontractors]

s. 141.02(17) precludes retroactive return amendments

A listed financial institution (the “Financial Institution”) that was not a qualifying institution acquired technology inputs for its own use and also for making taxable supplies (being the provision of network services for access to the Financial Institution’s on-line computer data and computer networks and the (sub)leasing of computer, office and other equipment) to subcontractors who sold its financial products. Its charges to them were based on a percentage of the amount determined as the actual cost of the technology package (apparently representing a discount to that cost).

Originally, when the Financial Institution filed its GST/HST returns for its fiscal years 1, 2 and 3, it claimed ITCs related to the technology inputs based on the amount of GST/HST it collected from the subcontractors on its resupply to them of those inputs.

However, when it filed its return for its fiscal year 4, it filed for additional ITCs for the technology inputs it acquired in the three preceding years based on a new ITC allocation method, resulting in significantly higher claims than the amount of GST/HST collected by it on its supplies of those inputs.

After referencing ss. 141.02(16) and (17), and stating that “it is clear that the intention of the legislation is not to allow a retroactive ITC claim by a financial institution,” CRA stated:

[T]he facts show that there is a change in methodology for claiming ITCs on the technology inputs, […], and this was done without the consent of the Minister, past the deadline provided in subsection 141.02(17). Consequently, the provisions of subsection 141.02(17) will apply to [deny] the additional ITCs for [year 2 and year 3].

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(12) 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 459

GST/HST Memorandum 17-12 [17.12] "Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02" 23 July 2021

FI precluded from using a different (causal) method in subsequent year

Example 15

Financial Institution O has allocated the cost of consulting services between exempt and taxable supplies made by it based on the breakdown appearing in the consulting firm’s invoices.

The next year, Financial Institution O wants to also claim an additional ITC for the prior year on the consulting services paid to the accounting firm based on a calculation using causal allocation instead of tracking. Financial Institution O has not received written consent from the Minister to use this altered method.

Financial Institution O is not eligible to alter or substitute its method for the prior year because the new method is not the most direct method, the new method does not use tracking although tracking is possible and Financial Institution O does not have written consent from the Minister pursuant to subsection 141.02(17).

Subsection 141.02(18)

Cases

Bank of Montreal v. Canada (Attorney General), 2021 FCA 189

reasons of Walker J regarding application of reasonableness standard adopted as those of the FCA

In affirming the decision of Walker J below, Noël CJ stated (at para. 6):

[T]he Federal Court identified the correct standard of review and applied it properly. In order to explain why we come to this view, we can do no better than adopt as our own the reasons of the Federal Court.

Bank of Montreal v. Canada (Attorney General), 2020 FC 1014, aff'd 2021 FCA 189

Minister's rejection of bank's proposed methodology based on perceived distortions, was reasonable

The Minister rejected (under s. 141.02(20)) the request of the registrant (the “Bank”) for approval of an “output method formula” ITC allocation method (“OMF”) on the basis inter alia that “the Bank’s OMF did not result in a reasonable approximation of the inputs it used to provide zero-rated financial services to non-residents of Canada” (para. 33) and, in particular, had three primary concerns:

  1. The Bank’s allocation of the Bank’s Treasury group’s interest expense and revenue amounts to the Bank’s three customer-facing operating groups permitted the Bank to recover a portion of the GST costs of those groups even though the operations of those groups were substantially confined to the provision of financial services to making Canadian exempt supplies – and, in particular, that approach violated the “first order supply rule” that “a business cannot recover GST incurred on inputs acquired to make exempt supplies, even when those exempt supplies enable the business to make other taxable supplies.”
  2. Although it was conceded by the Minister that the making of domestic intra-bank loans of the Bank’s capital was not a supply, the Bank’s method, by taking into account cross-border branch loans and excluding domestic intra-bank loans, effectively ignored that the latter activity also “represent[ed] real activities” (para. 136) that consumed inputs in a largely exempt activity.
  3. The Bank’s method failed to recognized that the “the Treasury group focuse[d] on fewer, larger transactions requiring much less physical infrastructure and incurring less GST Costs” (para. 145) than other units.

Before finding that the Minister’s decision to reject was reasonable (which relevantly was all that was required), Walker J stated (at para. 107):

I have considered the Bank’s … argument that the Minister must approve a proposed methodology if it is fair and reasonable. I do not agree. … I find that subsection 145.01(5) has been superseded by the specific QI regime in section 141.02. The structure of the section and Parliament’s intentional use of the fair and reasonable standard in subsections other than subsection 141.02(20) are strong evidence of a contrary decision by the legislature. The amendment to subsection 141.01(5) to render its application subject to the specific provisions of section 141.02 bolster this conclusion.

She also stated (at paras. 61-62):

I agree with the Bank’s submission that the effect of section 141.02 is to strip QIs of the right to appeal to the TCC the question of whether their ITC computation methods are fair and reasonable. ...

The Bank also argues that section 141.02 strips its right to appeal questions relating to its actual use of business inputs in a fiscal period to the TCC but here I disagree. Such questions are the subject of discussion on audit and a subsequent appeal to the TCC remains available.

Words and Phrases
first order supply rule
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(5) flexibility in choice of ITC allocation method for non-FIs 116
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (d) borrowing and paying interest is the supply of a financial service 144
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part IX - Section 1 interest expense of Canadian bank on foreign borrowings was a proxy for zero-rated supplies by it 62

Subsection 141.02(19)

Paragraph 141.02(19)(b)

Subparagraph 141.02(19)(b)(ii)

Cases

Bank of America v. Canada (Attorney General), 2025 FCA 9

it was reasonable to not extend under s. 141.02(19)(b)(ii) where the taxpayer failed to show due diligence

The Bank, which had decided to outsource all its Canadian tax department to EY, was told by the last departing tax employee that its relevant tax credit amounts had not been at a level sufficient to be a qualifying institution. After discovering that this was incorrect, it filed late applications pursuant to ETA s. 141.02(19)(b)(ii) to be permitted to use a method for computing its input tax credits (ITCs) for its four most recent fiscal years that would result in ITCs that exceeded the minimum otherwise applicable under s. 141.02(8)(d) of 12% of its GST on its residual inputs.

In denying the applications, the CRA delegate considered that a high degree of care and diligence was to be expected given the sophistication of the Bank and EY, and that this had not been demonstrated in the circumstances. In dismissing the Bank’s appeal from a finding of the Federal Court that this decision was fair and reasonable, Mactavish JA found, regarding the Minister’s finding that the Bank had failed to exercise the requisite degree of care respecting its filing obligations, that “the Bank has not shown any reversible error with respect to this factually suffused finding” (para. 12).

Mactavish JA also rejected the Bank’s submission (summarized at para. 10) that “the Minister should have applied the four-part test applicable to extensions of time under section 18.1(2) of the Federal Courts Act”, i.e., “whether the Bank had a continuing intention to pursue its application, whether the application had some merit, whether there was any prejudice to the respondent as a result of the Bank’s delay and whether the Bank had a reasonable explanation for its delay: Canada v. Hennelly, [1999] F.C.J. No. 846, 244 N.R. 399”. She stated (at para. 11) that “this Court has already determined that it is reasonable for the Minister to have regard to the diligence of a taxpayer in circumstances such as this: Denso Manufacturing 2021 FCA 236” and that “even if … the Minister applied the wrong test in denying its applications for late filing, [the Bank] was still required to provide a reasonable explanation for its delay under the Hennelly test, which it failed to do.”

Bank of America v. Canada (Attorney General), 2023 FC 1496

it was fair and reasonable for CRA to deny relief from a mistake attributed to outsourcing all of a tax department

The appellant (“BANA”), a Canadian subsidiary of Bank of America Corporation, reduced its Canadian tax department from four to one employee in 2018 as it entered into a tax outsourcing arrangement with Ernst & Young (EY). That remaining employee, who left in July 2018, told BANA and EY that its adjusted tax credit amounts (ATCAs) had never exceeded $500,000 in any two consecutive fiscal years, so that it was not expected to be a qualifying institution (QI). In June 2019, BANA realized its ATCA had exceeded $500,000 in 2017 and 2018, meaning that it was a QI for its 2019 fiscal year. A year later, it filed late applications pursuant to ETA s. 141.02(19)(b)(ii) to be permitted to use a method for computing its input tax credits (ITCs) for its 2019 and 2020 taxation year that would result in ITCs that exceeded the minimum otherwise applicable under s. 141.02(8)(d) of 12% of its GST on its residual inputs. When CRA then informed BANA that it may have been a QI as early as 2017, BANA then filed similar applications for its 2017 and 2018 fiscal years in December 2020.

In denying the applications, the CRA delegate recognized BANA and EY as highly sophisticated entities and considered that a high degree of care and diligence was to be expected, and that this had not been demonstrated by merely accepting a statement from a departing employee that the adjusted tax credit amount was not greater than $500,000 in 2017 when the ITCs claimed for 2017 were in excess of this amount, yet no analysis had been performed in this regard.

In dismissing the BANA appeal, Elliott J found this decision to be fair and reasonable. In this regard she noted inter alia that she could not agree that the delegate’s “emphasis on due diligence was misplaced” (para. 31) and indicated that the downsizing and outsourcing of the BANA tax department “were not extenuating circumstances beyond their control” (para. 36).

Subsection 141.02(21)

See Also

Royal Bank of Canada v. The King, 2024 TCC 125

pre-approval of method for allocating inputs between foreign and domestic supplies did not stop CRA from assessing to deny zero-rating of the foreign supplies

RBC was a qualifying institution which for its 2012 and some prior fiscal years had followed a method, which had been pre-approved pursuant to s. 141.02(20), of claiming input tax credits, in respect of pools of costs which varied in proportion to the levels of credit card interchange fees generated by it, on the basis of the ratio of its foreign interchange revenues (treated by it as zero-rated) to its total (foreign and domestic) interchange revenues. In finding that CRA’s acceptance of this ITC methodology did not preclude it from now denying ITC claims made by RBC in accordance with this method on the basis that such foreign revenues in fact were not zero-rated, Smith J stated (at paras. 44, 48):

[T]he pre-approval process does not involve a determination of the tax status of an input nor preclude the Minister from later concluding that an activity involves an exempt, and not a zero-rated supply. …

Consistent with the statutory scheme, the Minister reserved the right to conduct an audit of the claimed ITCs to determine whether they related to an exempt or zero-rated supply, and to reassess accordingly.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1.11) issue should be stated "reasonably" 131
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(31) - Paragraph 141.02(31)(f) s. 141.02(31)(f) is merely confirmatory of normal taxpayer onus 98
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part IX - Section 1 - Paragraph 1(a) foreign interchange fees generated by Canadian credit card issuer related to the granting of credit rather than the making of a loan by it, and were not excluded under s. 1(a)(ii) 445
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(1) - Direct Input expenses of redeeming credit card loyalty points were inextricably linked to the issuer’s extension of credit, and only remotely linked to its earning zero-rated interchange fees 368
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) expenses of redeeming credit card loyalty points were an integral component of the issuer’s extension of credit, and not sufficiently connected to earning interchange fees 181
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Recipient merchant acquirer was the recipient of credit card interchange services even though it was a conduit to the merchant 156
Tax Topics - Statutory Interpretation - Exclusionary provisions exclusionary provisions should be narrowly construed 267
Tax Topics - Excise Tax Act - Section 301 - Subsection 301(1.2) - Paragraph 301(1.2)(a) taxpayer not precluded from raising an argument that the Minister was bound by an ITC method that it had described in detail in its pleadings 175

Subsection 141.02(24)

Subsection 141.02(31)

Paragraph 141.02(31)(f)

See Also

Royal Bank of Canada v. The King, 2024 TCC 125

s. 141.02(31)(f) is merely confirmatory of normal taxpayer onus

Before going on to find that the Minister’s pre-approval of an ITC calculation methodology under s. 141.02(20) did not preclude subsequent reassessments to deny the zero-rated status of supplies which had been assumed under such methodology, Smith J stated (at para. 45):

I find that paragraph 141.02(31)(f) merely confirms that a financial institution has the onus of establishing that the “particular methods (…) were used consistently” during the fiscal year at issue. This creates an evidentiary burden that would likely have existed in any event given the nature of tax litigation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1.11) issue should be stated "reasonably" 131
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(21) pre-approval of method for allocating inputs between foreign and domestic supplies did not stop CRA from assessing to deny zero-rating of the foreign supplies 202
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part IX - Section 1 - Paragraph 1(a) foreign interchange fees generated by Canadian credit card issuer related to the granting of credit rather than the making of a loan by it, and were not excluded under s. 1(a)(ii) 445
Tax Topics - Excise Tax Act - Section 141.02 - Subsection 141.02(1) - Direct Input expenses of redeeming credit card loyalty points were inextricably linked to the issuer’s extension of credit, and only remotely linked to its earning zero-rated interchange fees 368
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) expenses of redeeming credit card loyalty points were an integral component of the issuer’s extension of credit, and not sufficiently connected to earning interchange fees 181
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Recipient merchant acquirer was the recipient of credit card interchange services even though it was a conduit to the merchant 156
Tax Topics - Statutory Interpretation - Exclusionary provisions exclusionary provisions should be narrowly construed 267
Tax Topics - Excise Tax Act - Section 301 - Subsection 301(1.2) - Paragraph 301(1.2)(a) taxpayer not precluded from raising an argument that the Minister was bound by an ITC method that it had described in detail in its pleadings 175

Subsection 141.02(32)

Administrative Policy

GST/HST Memorandum 17-13 [17.13] "Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions" 23 July 2021

Minister required to establish that changed method is fair and reasonable

40. Under subsection 141.02(32), the Minister may, by notice in writing, direct a financial institution to use a particular method that is fair and reasonable for determining the procurative and operative extent of a business input for a particular fiscal year and any subsequent fiscal year of the financial institution, rather than the method used by the financial institution under subsection 141.02(14) or (15) for that year. There is no requirement that the Minister prove that the Minister’s method is more fair and reasonable than the method used by the financial institution, only that it be fair and reasonable.

41. If a financial institution appeals an assessment in respect of an issue relating to the application of subsection 141.02(32), where the Minister directed the financial institution to use a method for a particular business input for a particular fiscal year and the Minister assessed the net tax of the financial institution for a reporting period included in the fiscal year, then subsection 141.02(33) applies. In that case, pursuant to subsection 141.02(33), the Minister is required to establish, on a balance of probabilities, that the method is fair and reasonable. Further, if the final determination by the courts is that the method is not fair and reasonable, the Minister may not direct the financial institution under subsection 141.02(32) to use another method for the fiscal year in respect of the particular business input.