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GST Allocation Methods: What is "Fair & Reasonable"?

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Businesses engaged exclusively in commercial activities get full input tax credits (“ITCs”) enabling them to recover all the GST/HST they pay in the course of their business activities.  Organizations engaged exclusively in “exempt” activities (financial services, healthcare, educational-related institutions) get no ITCs, meaning that GST/HST is a hard cost in their business. 

In between the two are businesses that carry on BOTH commercial and exempt activities, and in order to determine the ITCs these businesses are eligible to claim, a “fair and reasonable” allocation method has to be used.  A recent decision of the Tax Court of Canada (the “TCC”) in Marine Atlantic Inc. v. The King (2023 TCC 95) explores what that really means.

 Marine Atlantic

Marine Atlantic is a federal Crown corporation providing ferry service between Nova Scotia and Newfoundland, providing largely exempt supplies under section 1 of Part VIII of Schedule V of the Excise Tax Act (the “ETA”).  However, Marine Atlantic also offered certain taxable supplies, like upgraded amenities, private cabins, restaurants, vending machines, and retail stores. 

Since claiming ITCs under subsection 123(1) of the ETA is dependent on the intended or actual use of the property in commercial activities, Marine Atlantic was faced with the task of allocating its operation costs between exempt and taxable supplies. Under subsection 141.01(5) of the ETA, where a taxpayer is providing both taxable and exempt supplies, the taxpayer is required to develop an allocation methodology for calculating its ITCs, which must be “fair and reasonable”. To that end, Marine Atlantic developed an allocation methodology based on “space”.  That is, it categorized every space on each of its vessels as a taxable area, an exempt area, or a common area depending on function. Based on that categorization, Marine Atlantic allocated between taxable and exempt supplies, which were then used to claim ITCs.

CRA assessed on the basis of its position that Marine Atlantic out to have further supported its calculations by hiring experts and engineers.  An additional $7 million in GST/HST was at issue.

TCC Decision

The TCC ultimately rejected CRA’s position finding that asking taxpayers to incur excessive costs to support ITC claims frustrated the “fair and reasonable” requirements under subsection 141.1(5) of the ETA.  The TCC confirmed that a “fair and reasonable” methodology:

  1.       Should be based on the facts and supported by evidence;
  2.       Should accurately reflect the economic realities of the business; and
  3.       Should focus on the activities that consume or use the taxable inputs to make supplies


Businesses caught in this Netherland of exempt and commercial activities really need a solid basis for their GST/HST allocation methodologies. Advice in this area often allows for GST/HST savings or, at minimum, a reduction, changes to avoid CRA audits and assessments where established allocation methods are deemed unacceptable.

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