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ITC ENTITLEMENT ON FINANCIAL SERVICES

THIRD TIME'S THE CHARM FOR NORTHBRIDGE?

Every so often, decisions from the Tax Court of Canada (the “TCC”) and the Federal Court of Appeal (the “FCA”) highlight the intricacies of the GST/HST regime – particularly for financial institutions.  The recent decision in Northbridge Commercial Insurance Corporation v. The King (2025 FCA 83) is a prime example.  The FCA has now referred the case back to the TCC for a third hearing, highlighting the complexity of input tax credit (“ITC”) entitlements related to insurance supplies.

Background

Northbridge Commercial Insurance Corporation (“Northbridge”) issued insurance policies to trucking companies operating in both Canada and the US.  The core issue to be decided by the courts was the extent to which Northbridge could claim ITCs for GST/HST paid on general head office and overhead costs.  This required categorizing its supplies under the Excise Tax Act (the “ETA”) as either “exempt supplies” or “zero-rated supplies.”

Financial services, and more specifically, insurance policies, are generally “exempt supplies” for the purposes of the ETA.  However, the ETA provides specific exceptions.  One such exception under paragraph 2(d) of Part IX of Schedule VI of the ETA applies when an insurance policy relates to “risks that are ordinarily situated outside Canada,” in which case the supply may be zero-rated.  Zero-rated supplies, unlike exempt supplies, do entitle the supplier to claim ITCs.

First Decision

In its initial decision (2020 TCC 132), the TCC interpreted “risks” in paragraph 2(d) of Part IX of Schedule VI of the ETA to refer to the insured objects—namely, the trucks: see para. 58.

The FCA disagreed. In 2023 FCA 211, it held that “risks” refer instead to “the risks of claims arising from an accident or other insurable event”: see para. 45.  Accordingly, the FCA sent the case back to the TCC to determine the allowable ITCs based on that interpretation.

Second Decision

Back before the TCC (2024 TCC 10), the issue became one of evidence.  The TCC dismissed Northbridge’s appeal, finding the taxpayer failed to provide sufficient information about its policies to determine whether they were zero-rated supplies.  Without sufficient evidence on each policy, the TCC found it couldn’t assess ITC eligibility: see para. 8. 

Northbridge again appealed, and the FCA again disagreed with the TCC.  In 2025 FCA 83, the FCA held it was not necessary to assess each policy individually to determine ITC entitlement: see para. 30.  Instead, the FCA explained, the correct approach lay in applying section 141.02 of the ETA, which provides a framework for allocating inputs (direct, exclusive, excluded, or non-attributable) for ITC calculations: see paras. 34 & 35.  In the result, the FCA referred the matter back to the TCC for a third time for further consideration of ITC entitlement using this framework.

Takeaways

These decisions are vivid reminders of the technical complexity of GST/HST rules, especially for financial institutions. Even the courts needed multiple rounds to potentially settle on the correct approach for determining ITCs tied to mixed supplies.

Businesses, particularly in the financial and insurance sectors, should ensure they have robust systems for tracking and categorizing inputs.  Proactive legal advice is strongly recommended to avoid protracted litigation and minimize uncertainty.

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