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.
As a PSB and by virtue of section 209 of the ETA, the University of Calgary (“UC”) campus (“Campus”) was treated as capital personal property, which meant that UC could only claim ITCs in respect of the Campus and additions or improvements thereto if the Campus was acquired for use primarily (i.e. 50%) in UC’s commercial activities (i.e. for use primarily in making taxable supplies). Although the Campus was used to provide some taxable services, it was used primarily to make GST-exempt educational supplies, meaning that it could not claim ITCs with respect to the Campus.
On February 1, 2006, UC made a section 211 election, which deemed UC to have received a taxable supply of the Campus by way of sale and to have paid GST on same (for which it could claim a proportional offsetting ITC by virtue of section 193) and triggered section 206 of the ETA, which entitles a PSB to ITCs equal to the degree to which the Campus was acquired for use in its commercial activity. This is important because it allowed UC to claim at least some ITCs in respect of the Campus, pursuant to a calculation methodology that was “fair and reasonable”.
Whether UC’s allocation methodology for claiming ITCs was fair and reasonable was the main issue in the case. UC’s methodology categorized the space on the Campus into: (1) space used directly in making exempt supplies; (2) space used directly in making taxable supplies; and (3) space used indirectly in making supplies. UC assumed that the percentage resulting from comparing the space used directly in making exempt supplies (i.e. (1)) with the space used directly in making of taxable and exempt supplies (i.e. (1) + (2)) reasonably reflected the extent to which all of the land comprising the Campus was acquired for use in the course of UC’s commercial activities. In doing so, UC considered both internal and external common areas as space used indirectly in making supplies. In other words, UC assumed that it used both the internal and external common areas for both taxable and exempt activities in the same relative proportion as it used the space within the structures directly in the making of taxable supplies for consideration and directly in the making of exempt supplies.
Although the Minister did not take issue with UC’s characterization of the internal common areas, it contended that the external common areas should be deemed to be used in exempt activities on the basis that they were not used directly to make taxable supplies. The TCC rejected this approach, noting that it appears to be an “arbitrary administrative decision rather than a decision based on applying the provisions of the [ETA]…”
The TCC also rejected the Minister’s contention that an additional indexing factor should be applied based on the replacement value of the Campus, noting that the indexing factor had no bearing on the purpose of the acquisition of the Campus and that it would place an unreasonable financial burden on UC because it would require UC to hire a valuator to determine entitlement to ITCs.
In our view the TCC’s conclusion is sound. The Minister’s proposed treatment of the external common areas was completely inconsistent with its accepted treatment of the internal common areas, seemingly without any rationale for such a distinction.
The decision does not suggest that the Minister focused on whether UC’s methodology was fair and reasonable; but rather focused on why the Minister’s methodology was to be preferred. This is frustrating for the taxpayer who is forced to defend their methodology at trial, where it seems as though the Minister has not truly considered whether the taxpayer’s approach is fair and reasonable – a considerably lower standard than that of a standard requiring the best or perfectly accurate allocation methodology. To the extent that the Minister continues to do so, we expect such cases to consistently and unnecessarily proceed to trial.
This case is perhaps most interesting for PSBs that are in similar circumstances as UC, insofar as less than 50% of its real property was acquired for use in making taxable supplies. In order to avoid application of the all-or-nothing ITC allocation rule in section 209, which would completely rule out ITCs, such PSBs ought to consider making a section 211 election to trigger the proportionate allocation methodology in section 206. In this case, the election appears to have benefitted UC significantly, notwithstanding the fact that it had to proceed to trial to defend its allocation methodology.
A version of this article was published in the February 2016 edition of Canadian Tax Highlights and in CBA's Sales Tax.