Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions

From: Canada Revenue Agency

GST/HST Technical Information Bulletin B-099
August 2011

NOTE: This version replaces the earlier version dated September 2007.

The information in this bulletin does not replace the law found in the Excise Tax Act (the Act) and its regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact a Canada Revenue Agency (CRA) GST/HST rulings office for more information. A ruling should be requested for certainty in respect of any particular GST/HST matter. Pamphlet RC4405, GST/HST Rulings – Experts in GST/HST Legislation explains how to obtain a ruling and lists the GST/HST rulings offices. If you wish to make a technical enquiry on the GST/HST by telephone, please call 1-800-959-8287.

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick, and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, you may refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province.

If you are located in Quebec and wish to make a technical enquiry or obtain a ruling related to the GST/HST, please contact Revenu Québec at 1-800-567-4692. You may also visit their Web site at www.revenu.gouv.qc.ca to obtain general information.

Note: Legislative references in this bulletin refer to the Excise Tax Act (the Act) or proposed amendments to the Act unless otherwise specified.

Introduction

Section 141.02 provides specific input tax credit (ITC) allocation rules that are to be used by financial institutions [including both listed and de minimis financial institutions as described in subsection 149(1)] when calculating ITCs for the GST/HST paid or payable on their inputs. Section 141.02 generally applies for the purpose of determining a financial institution’s net tax for any of its fiscal years beginning after March 2007.

This bulletin provides information on the allocation rules applicable to financial institutions that are not qualifying institutions, in addition to those explained in GST/HST Technical Information Bulletin B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act. It includes an explanation of the election that is available to a financial institution of a prescribed class that is not a qualifying institution and that meets certain conditions and the requirements to be a designated qualifying institution.

To determine if a particular financial institution is a qualifying institution or a financial institution of a prescribed class, refer to GST/HST Technical Information Bulletin B-097, Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02.

If a financial institution is a qualifying institution, refer to GST/HST Technical Information Bulletin B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions, for information on the allocation rules applicable to financial institutions that are qualifying institutions.

Electing to use a prescribed percentage for residual inputs

A financial institution of a prescribed class (i.e., banks, insurers and securities dealers as defined in the Input Tax Credit Allocation Methods (GST/HST) Regulations (the Regulations)) that is not a qualifying institution, but meets certain conditions, may elect to use the prescribed percentage for the prescribed class of financial institutions of the person (i.e., 12% for banks, 10% for insurers and 15% for securities dealers) to determine the extent to which each of its residual inputs is acquired, imported or brought into a participating province, or consumed or used, for purposes of making taxable supplies for consideration.

A financial institution that is not a qualifying institution is eligible to make an election under subsection 141.02(9) if it is, at any time in that particular fiscal year, a financial institution of a prescribed class and if its tax credit rate for each of its two fiscal years immediately preceding the particular fiscal year equals or exceeds the prescribed percentage for the prescribed class of financial institutions of the person (the particular prescribed percentage) for the particular fiscal year [i.e., if it is a person that would meet the definition of qualifying institution except that the person does not meet the condition in paragraph (b) of that definition relating to its tax credit amount as described in GST/HST Technical Information Bulletin B-097, Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02].

To determine whether a particular person is a financial institution of a prescribed class or has a “tax credit rate” equal to or exceeding the particular prescribed percentage, refer to GST/HST Technical Information Bulletin B-097.

An election under subsection 141.02(9) in respect of a fiscal year of a person:

  • must be made in prescribed form and contain prescribed information; and
  • the form must be filed by the person with the Minister in prescribed manner on or before the day on or before which the person must file a return under Division V for the first reporting period of the fiscal year in respect of which the election is made (or any later day that the Minister may allow on application by the person).

To make or revoke an election under subsection 141.02(9), use Form GST118, Election or Revocation of an Election for a Financial Institution to Use the Prescribed Percentage.

Where an election under subsection 141.02(9) is in effect for a particular fiscal year, for GST/HST purposes, the extent to which a residual input of a financial institution is acquired, imported or brought into a participating province or consumed or used for the purpose of making taxable supplies for consideration is deemed to be the particular prescribed percentage (i.e., 12% for banks, 10% for insurers and 15% for securities dealers). Where an eligible person makes the election under subsection 141.02(9) in respect of a particular fiscal year of the person, subsections 141.02(10), (11), (12) and (13) do not apply to the person in respect of that fiscal year. As well, if the election is in effect, the following rules apply in respect of each residual input of the person:

  • the extent to which the consumption or use of the residual input is for the purpose of making taxable supplies for consideration is deemed to be equal to the particular prescribed percentage;
  • the extent to which the consumption or use of the residual input is for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the particular prescribed percentage (that difference being 88% for banks, 90% for insurers and 85% for securities dealers);
  • the extent to which the residual input is acquired, imported or brought into a participating province by the person for the purpose of making taxable supplies for consideration is deemed to be equal to the particular prescribed percentage;
  • the extent to which the residual input is acquired, imported or brought into a participating province by the person for purposes other than making taxable supplies for consideration is deemed to be equal to the difference between 100% and the particular prescribed percentage; and
  • for the purpose of determining an ITC in respect of the residual input, the description of B in the formula in subsection 169(1) is deemed to be equal to the particular prescribed percentage.

Example 1

Securities Dealer Y is a securities dealer for the purposes of section 141.02. Securities Dealer Y is a monthly filer and its tax credit rate for each of its fiscal years ending December 31, 2008 and December 31, 2009 exceeds 15% (the prescribed percentage for securities dealers), but its tax credit amount is below the prescribed tax credit amount of $500,000 for at least one of those years. As a result, Securities Dealer Y is not a qualifying institution.

Securities Dealer Y makes an election under subsection 141.02(9) for its fiscal year ending December 31, 2010 by completing and filing Form GST118 on February 15, 2010 (before the date on which it must file its return for the first reporting period in the January 1 to December 31, 2010 fiscal year). As a result, the extent to which each of Securities Dealer Y’s residual inputs is acquired, imported or brought into a participating province or consumed or used for the purpose of making taxable supplies for consideration is deemed to be 15% and the extent to which each of Securities Dealer Y’s residual inputs is acquired, imported or brought into a participating province or consumed or used for purposes other than making taxable supplies for consideration is deemed to be 85%. Additionally, for the purpose of determining an ITC in respect of each residual input, the description of B in the formula in subsection 169(1) is deemed to be 15%.

This election in respect of a fiscal year of a person ceases to have effect on the first day of the fiscal year, and is deemed never to have been made if:

  • a notice of revocation of the election in prescribed form (Form GST118) is filed in prescribed manner with the Minister on or before the day on or before which the return under Division V is required to be filed for the first reporting period of the fiscal year;
  • the person is not a financial institution of a prescribed class at any time in the fiscal year; or
  • the tax credit rate of the person for each of the two fiscal years immediately preceding the fiscal year does not equal or exceed the prescribed percentage for the prescribed class of financial institution of the person for the fiscal year.

Example 2

Insurer Z is an insurer for the purposes of section 141.02, but is not a qualifying institution. Insurer Z is an annual filer with a year ending December 31. Insurer Z made an election under subsection 141.02(9) for its year ending December 31, 2010. Insurer Z later decided to revoke the election and filed Form GST118 including all required information on January 12, 2011 (before the date on which it must file its return for its January 1 to December 31, 2010 fiscal year). The revocation is effective January 1, 2010.

Designated qualifying institutions

Subsection 141.02(24) provides that a person may apply to the Minister, in prescribed form containing prescribed information, to be designated as a qualifying institution for a particular fiscal year of the person if:

  • the person is, or is reasonably expected to be, a financial institution of a prescribed class throughout the particular fiscal year; and
  • it is the case that:
    • the person has two fiscal years immediately preceding the particular fiscal year and, for each of those two fiscal years, the adjusted tax credit amount of the person equals or exceeds, or is reasonably expected to equal or exceed, the prescribed amount for that class for the particular fiscal year; or
    • an authorization to use pre-approved methods for the particular fiscal year has ceased to have effect only because of the application of paragraph 141.02(23)(c) (i.e., because the person is not a qualifying institution for the particular fiscal year).

This allows a person that is not a qualifying institution and meets the above requirements to apply to be authorized to use particular methods. For additional information regarding pre-approved methods, refer to GST/HST Technical Information Bulletin B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions.

To make or revoke a request to be designated as a qualifying institution, use Form RC4521, Application for a Financial Institution of a Prescribed Class to be Designated as a Qualifying Institution or Revocation of a Previously Granted Designation.

Approval

On receipt of an application to be designated as a qualifying institution, the Minister shall, with all due dispatch, consider the application and notify the person in writing of the decision. If the Minister makes the designation, the person is deemed for the purposes of subsection 141.02(18) and paragraph 141.02(23)(c) to be a qualifying institution for the fiscal year.

Revocation

This designation in respect of a fiscal year of a person ceases to have effect on the first day of the fiscal year and is deemed to have never been granted if, on or before the day that is 60 days before the first day of the fiscal year:

  • the Minister revokes the designation and sends a notice of revocation to the person; or
  • the person files in prescribed manner with the Minister a notice of revocation of the designation in prescribed form (Form RC4521) containing prescribed information.

Appeals

Under subsection 141.02(31), if a financial institution appeals an assessment under Part IX for a reporting period in a fiscal year of the financial institution in respect of an issue relating to the determination of the operative extent or the procurative extent of an input under any of subsections 141.02(10) to (15), the financial institution must establish on the balance of probabilities in any court proceeding relating to the assessment that:

  • in the case of the determination, under subsection 141.02(10) or (14), of the operative extent or the procurative extent of the non-attributable input or excluded input:
    • the financial institution used a specified method consistently throughout the fiscal year;
  • in the case of the determination, under subsection 141.02(11) or (15), of the operative extent or the procurative extent of the non-attributable input or excluded input:
    • no specified method applied to the input and the other attribution method the financial institution used to determine the extent was fair and reasonable and used consistently by the financial institution throughout the year;
  • in the case of the determination, under subsection 141.02(12), of the operative extent or the procurative extent of the direct input:
    • it used a direct attribution method consistently throughout the fiscal year; and
  • in the case of the determination, under subsection 141.02(13), of the operative extent or the procurative extent of the direct input:
    • no direct attribution method applied to the input and the other attribution method that the financial institution used to determine the extent was fair and reasonable and used consistently throughout the year.

For additional information regarding these allocation methods, refer to GST/HST Technical Information Bulletin B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02of the Excise Tax Act.

Special circumstances

There are circumstances where neither a specified method nor another method chosen by a financial institution will apply to determine the procurative extent or the operative extent of an excluded input or a non-attributable input. There are also circumstances where neither a direct attribution method nor another method chosen by a financial institution will apply to determine the procurative extent or the operative extent of a direct input. This is the case where a financial institution has used a method for purposes of any of subsections 141.02(10) to (15) for a particular fiscal year, but the Minister determines that the financial institution should use another method that is fair and reasonable in the circumstances for the purpose of the subsection in question. Under subsection 141.02(32), the Minister may, by notice in writing, direct the financial institution to use the Minister’s method for the purposes of determining the operative extent and the procurative extent of each residual input or excluded input referred to in any of subsections 141.02(10) to (15) throughout the particular fiscal year and/or throughout any subsequent fiscal year of the financial institution.

If the Minister makes such a direction that is in effect for a particular reporting period in respect of a particular non-attributable input, direct input or excluded input, the requirements in subsection 141.02(31) which are discussed above under the heading “Appeals” will not apply in an appeal respecting an assessment for that particular reporting period in respect of a matter relating to the determination of an operative extent or a procurative extent of the particular input. As a result, when this determination is the subject of a ministerial direction, the burden of proof shifts from the financial institution to the Minister in order to establish that the directed method is fair and reasonable in the circumstances.

Enquiries by telephone

Technical enquiries on the GST/HST: 1-800-959-8287

General enquiries on the GST/HST: 1-800-959-5525 (Business Enquiries)

If you are located in Quebec: 1-800-567-4692 (Revenu Québec)

All technical publications related to the GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech.

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