University of Calgary v. The Queen

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GST/HST & QST on dual-use expenses

Registrants who have a mix of commercial and exempt activities have to take into consideration the numerous rules governing apportionment of inputs to determine the portion of the GST and/or QST paid on their supplies that are used for this dual purpose (commercial and exempt) in order to claim the tax. A financial institution, a university, a college, a municipality, a hotel and a ferry operator are among typical registrants where these rules represent a major consideration.

General rules

GST/HST Memorandum 8.3 "Calculating Input Tax Credits", (February 2012), set out the requirement to apportion goods and services between commercial and non commercial activities and outlines method of doing so. This publication does not apply to financial institutions.

Financial Institutions

For financial institutions, 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", (August 2011), provides detailed information for the apportionment of inputs.

Court Decisions

1. University of Calgary - Real properties expenditures

The two cases cases University of Calgary v. The Queen and University of Alberta v. the Queen, 2015 TCC 336, almost identical, deal with the method of apportionment of input tax credits. At issue is whether the method that is used by the appellant is fair and reasonable for purpose of subsection 141.01(5) of the Excise Tax Act.

The universities real properties are used for both exempt activities such as courses leading to a degree as well as commercial activities such as parking. A first issue in dispute is the treatment of the external common areas. The second issue is more specifically, whether it is necessary to use a weighting index based on the replacement cost in method put forward by the Canada Revenue Agency (CRA).

To determine whether a method is fair and reasonable, under subsection 141.05(%) ETA, the Tax Court explains that it means having "sound judgement", be "sensible", "sane", and "not asking for too much".

As for the first issue, the Court decided that to consider that the external common areas were necessarily exempt did not comply with the provisions of the legislation. As for the second issue, the Court decided that the indexing factor was not useful and that any apportionment method should be based on the information that is in possession of the registrant without having to resort to hiring expensive third parties, such as valuators.

2. City of Calgary - Construction of a transit system

The question in this appeal to the Supreme Court of Canada (2012 SCC 20) is whether the acquisition and construction of the transit facilities constituted an exempt supply, or constituted instead a taxable supply. The court determined that work preparatory to, or in order to make a supply, does not become a separate service subject to GST. Here, the true nature of the City's transit facilities services was preparatory work to the supply of a municipal transit service. Accordingly, the City made only one supply: the exempt supply of a municipal transit system.

3. Reluxicorp - Hotel Franchise Fees

The The Reluxicorp Inc. v. The Queen (2011 TCC 105) case deals with GST assessment on some franchise fees paid to a US entity. The hotel is used both for taxable short-term stays, and exempt long-term stays of 30 days or more. The court ruled that some franchise fees were for both taxable and exempt purposes.

4. CIBC World Markets Inc. - change of apportionment method

In the CIBC World Markets Inc. vs. The Queen (2011 FCA 270) case, the Federal Court of Appeal reversed the decision rendered by the Tax Court of Canada ("TCC") (2010 TCC 460) on whether or not registrants can revisit retroactively their input tax credits (ITCs) apportionment method. The registrant, CIBC World Markets, did an apportionment of ITCs using an output based method and claimed ITCs at the rate of 6.79% and 6.05% for the years 1998 and 1999. Then, within its GST returns filed in 2000, the appellant claimed for the years 1998 and 1999 additional ITCs representing an apportionment of 25.09% and 24.52% based on an allocation method that was a mix of an input and output method, which is referred in the case as to the revised method.

There is no dispute between the parties that both the initial method and the revised method are fair and reasonable within the framework of the Excise Tax Act. The issue is whether an ITC can be claimed a second time on the same supply. The Tax Court of Canada ruled that CIBC was not entitled to claim the additional ITCs under its revised method due essentially to the limitation set under subsection 225(3) of the Excise Tax Act dealing with claiming again an ITC on a supply.

The Federal Court of Appeal reached a different conclusion in their judgment dated September 30^th, 2011. The FCA concluded that CIBC World Markets was entitled within the limitation period to change its method for the 1998 and 1999 taxation years and claim additional input tax credits. The FCA also clarified an aspect of apportionments rule that prevents registrants from using a method for one part of the year and another method for another part of the year, for example taking advantage of a seasonal fluctuation.

5. Bay Ferries Limited - the registrant's allocation method

The Bay Ferries Limited (2004 TCC 663) is one of the first important decision rendered by the TC on this issue and it is frequently cited even in foreign publications, for instance in Alan Schenk, Oliver Oldman, "Value Added Tax, A Comparative Approach" (Cambridge University Press, 2007). The registrant, who operates a ferry service between New Brunswick and Nova Scotia, used an input method to allocate ITCs between commercial and exempt activities. Under that input method using square footage, the appellant claimed 25% of ITCs. The CRA established an output method based on sales revenue of 1.2%.

The court ruled that the input method of 25% was fair and reasonable within the meaning of subsection 141.01(5) of the Excise Tax Act. It stated that the Minister cannot substitute its own allocation method only because it appears to be more representative of the situation. The court did not decide whether the CRA's method would be a better one.