Words and Phrases - "first order supply rule"

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 … I find that subsection 145.01(5) has been superseded by the specific QI regime in section 141.02.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.