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ITC Allocation Challenge Fails at FCA

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The FCA has ruled against the Bank of Montreal (“BMO”) (2021 FCA 189) in its challenge of the Minister’s decision to deny BMO’s input tax credit (“ITC”) allocation methodology under section 141.02(18) of the Excise Tax Act. This will likely be bad news for certain institutions that elect to use their own methods for allocating ITCs within complex corporate groups.


The dispute originated in a judicial review brought at the Federal Court by BMO (see 2020 FC 1014|CanLII), and stemmed from the CRA’s refusal to approve BMO’s revised ITC allocation methodology in 2018, despite having approved it for the previous fiscal year.

Section 141.02 of the ETA provides that certain “qualifying institutions” (“QIs”) (which includes BMO) are prescribed a specific allocation rate (12%) at which they are deemed to have used their “residual inputs” in the course of their commercial activities. This thereby entitles these QI’s to at least some ITCs on that portion of “residual inputs”. ‘Residual inputs’ are basically non-attributable business inputs that cannot be directly traced to a specific supply of the business (e.g., overhead, as well as other non-capital inputs).

Despite the prescribed allocation rate, certain QIs are also permitted to submit their own proposed allocation methodology for a given fiscal year. If the CRA were to accept that methodology, the QI would be required to use that methodology consistently for that particular fiscal year: see ETA 141.02(21). If the CRA does not approve the application — which was the case in BMO’s situation — the QI is stuck with the deeming rule but can seek judicial review of the decision.

BMO’s Situation

BMO had been applying annually under this rule for years, and its initial proposed approach (the “Initial Method”) had always been accepted without issue. In 2017, BMO revised the Initial Method to reflect changes in its business (the “Revised Method”) and applied for approval — which it also received. The Revised Method worked to allocate ITC entitlements between each of BMO’s five operating groups rather than a single entity.

The issue came to a head in 2018, when BMO applied to have the Revised Method approved again for the 2018 fiscal year, and the CRA denied the application. The CRA’s position was that the Revised Method did not provide a “reasonable approximation” of the inputs used to provide zero-rated financial services, with the CRA of the view that, among other issues, BMO had improperly excluded certain ‘domestic intracorporate revenues’ (i.e., interest earned on intra-bank transactions within Canada) from its total revenue calculations, which had materially “distorted” the allocation rate for taxable supplies.

Facing either the prescribed rate of 12% for its residual inputs (which would significantly shortchange it on ITCs), or a fight in the Federal Court, BMO chose the latter.

Federal Court and FCA Appeal

On review, the Federal Court ruled that the CRA had the authority to determine whether the methodology was a “reasonable approximation” of the actual inputs used and concluded that the CRA’s decision was “reasonable”. Since each application was separate and evaluated on its own merits, the CRA’s reversal of its 2017 position was not an issue. On appeal, the FCA was even more frank, concluding that it could “do no better than adopt… the reasons of the Federal Court.”


The BMO case confirms that the Minister has wide latitude to decide whether a QI’s ITC calculation methodology “reasonably approximates” the “actual use” of a QI’s residual inputs. At a more general level of analysis, when CRA is given the discretion to make a decision, the Courts will show a degree of deference, and will be wary to overturn it.  

Unfortunately, that is bad news for financial institutions attempting to better their ITC allocation methodologies.

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