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Subscribe to this list via RSS Blog posts tagged in ITC Allocation

When faced with Notices of Assessment from CRA that run contrary to a particular tax practice, taxpayers often defend their practice on the basis that CRA had not previously taken issue with it.  For tax litigators it is common to hear from clients: “CRA did not take issue with our tax compliance procedures in the past, so they should not be able to now!” 

Unfortunately, this argument will not be successful in the Tax Court of Canada, as was the case in the recent case of Academy of Applied Pharmaceutical Sciences (2014 TCC 171) – which reinforces that there is really no substitute for proper professional advice when determining GST/HST compliance.

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The concept of claiming input tax credits (“ITC”) for private businesses that provide both taxable and exempt services has recently been explored by the TCC (see for example: Sun Life (2015 TCC 37) and BC Ferry Services (2014 TCC 305)).  For real property, those businesses must determine the extent to which its property is used in making taxable or exempt supplies, and claim ITCs in line with that amount.  Although the same general principles apply with respect to public service bodies (“PSB”), PSBs can generally only claim ITCs in respect of real property where 50% or more of its property is used in making taxable supplies.  However, PSBs can make an election to have the same general proportional allocation rules apply.  In the recent decision of University of Calgary (2015 TCC 321) (with an identical decision reached in University of Alberta (2015 TCC 336)), the TCC considered PSBs that made such an election.  

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Businesses (other than financial institutions) that provide a mix of both taxable and exempt supplies must utilize the allocation rules found in section 141.01(5) of the Excise Tax Act (ETA) to determine the proper amount of input tax credits (ITCs) to claim in their GST/HST return.  This generally requires that the taxpayer employ a fair and reasonable method to determine the extent to which its inputs are each used in making taxable or exempt supplies.   

The TCC decision in BC Ferry Services (2014 TCC 305) provides a good overview of various aspects of the ITC allocation rules for non-financial institutions. 

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Where a business provides both taxable and exempt services, claiming ITCs can become a thorny issue that generally requires an attribution of inputs between the business’ supply of exempt and taxable services.  Section 141.01 of the Excise Tax Act (“ETA”) creates a framework for allocating ITCs for non-financial institutions.  These rules require registrants to allocate ITCs in a manner that is “fair and reasonable”, which predictably leaves significant room for interpretation. 

In the recent decision in Sun Life Assurance Company v. The Queen (2015 TCC 37), the Tax Court of Canada considered whether ITC allocation in respect of leased office space was “fair and reasonable” under section 141.01(5).  The decision is notable for what it says regarding the concept of intention in allocating ITCs for the purposes of section 141.01(5). 

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