Canada: Input Tax Credit Allocation: In Defence Of ‘Fair And Reasonable'

Last Updated: November 1 2016
Article by Daryl Hooley

Recent decisions of the Tax Court of Canada (TCC) in University of Calgary v. R. and University of Alberta v. R., (the university cases)1 have provided some clarity for determining input tax credit (ITC) entitlements in respect of land and buildings, or improvements to such property, that are acquired for use partly to make taxable supplies and partly to make exempt supplies.

What is clear

The methods used by all persons (other than financial institutions) to determine the extent to which properties or services are acquired, for the purpose of making taxable supplies for consideration or for other purposes in a fiscal year, must be fair and reasonable and used consistently throughout the year. Beyond that, GST/HST rules do not prescribe a particular method for ITC allocation.

What is not so clear

It is not clear, however, whether a particular method in particular circumstances meets the requirements of being fair and reasonable. This remains an area of frequent dispute between GST/HST registrants and the Canada Revenue Agency (CRA), particularly regarding the allocation of indirect inputs, such as common area space or support area space.  

Prior court decisions

Prior to the recent decisions of the TCC in the university cases, an established body of case law2 had clarified that, in a given circumstance, there is likely to be more than one allocation method that is fair and reasonable. As a result, the issue is not whether the registrant chose the best or most appropriate method but whether the registrant's chosen method was in fact fair and reasonable for the registrant's particular endeavor. In other words, under the GST/HST rules the registrant is entitled to choose any method of calculation that is fair, reasonable and consistent, even if another method might be "better."

Recent court decisions

In the university cases, the registrant and the CRA were able to agree on the allocation of space within the buildings that was used directly or indirectly in the making of either taxable supplies for consideration or exempt supplies. Indeed, it seems that the two parties would have arrived at the same ITC amounts for the use of space within the buildings if not for the CRA's use of a weighting index, which attempted to take into account the relative replacement cost of the various improvements on the university campuses.

However, where the universities and the CRA parted ways was in their respective ITC allocation methodologies applied to those campus areas external to the buildings – referred to as the External Common Areas.    

The universities' methodology

The universities assumed that all areas of the university land and buildings were acquired in the course of their business of making either taxable or exempt supplies. The universities determined the extent to which the External common areas and Internal Common Areas were used in commercial activities by basing its determination upon the extent to which space within all the buildings was used directly to make taxable supplies for consideration.

The CRA's methodology

Despite accepting that Internal Common Areas were used for the making of both taxable and exempt supplies, the CRA treated the External Common Areas as being used only in exempt activities.

The decision

Justice D'Arcy of the TCC took issue with the CRA's approach to the External Common Areas, which assumes that the universities did not acquire External Common Areas for use in making taxable supplies for consideration. Justice D'Arcy stated, "In my view, a methodology that treats differently two areas that a registrant uses in the same manner (i.e., External Common Areas and Internal Common Areas) does not satisfy the subsection 141.01(5) fair and reasonable test." [para. 164] 3

The CRA's assumption that the universities did not acquire the External Common Areas for use in making taxable supplies for consideration had the effect of deeming the External Common Areas to be used in "exempt" activities. Justice D'Arcy stated, "I have a difficult time understanding the factual and/or statutory
basis for this position." [para. 165]

The key takeaways

There are several key points to draw from these decisions:

  • An endeavor, like a business, almost always exists to provide some sort of outputs or, in GST/HST parlance, to make supplies.
  • In businesses where there are no supplies made for nil or nominal consideration, ITC allocation rules require that all inputs – both direct and indirect – acquired in the course of a business be allocated to the making of either taxable supplies for consideration or exempt supplies.
  • It is often not possible or practical to determine the extent to which a registrant uses indirect inputs (such as common area space or support area space) directly in the making of taxable or exempt supplies. (Perhaps that is why they are called "indirect inputs.")
  • The ITC allocation rules require that the registrant develop a methodology to apportion the use of the various components of common area space and support area space (both internal and external to buildings), between their use in making taxable supplies for consideration and their use in making exempt supplies. [para. 154]

Factors to consider going forward

This remains a highly complex area in which there is considerable risk of the CRA disallowing significant ITC claims on the basis that the methods used were, in the CRA's opinion, unfair or unreasonable.

With these new developments, we all move forward into a new world of ITC allocation where our old measuring sticks may no longer give us the information we need to optimize ITC claims, not only for land and buildings but for indirect overhead expenses as well.

These ITC allocation rules may be applicable to numerous types of organizations that make both taxable and exempt supplies, including non-profit organizations, charities, municipalities, school authorities, hospital authorities, public colleges, and universities.

Contact your Collins Barrow advisor to discuss whether your ITC claim methods are causing you to lose out on considerable tax recovery.


1. University of Calgary v. R., 2015 TCC 321; University of Alberta v. R., 2015 TCC 336
2. Magog (Ville) c. R., 2001 FCA 210; Bay Ferries Ltd. v. R., 2004 TCC 663; 
3. All paragraph references are to the University of Calgary decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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