News and Insights

CRA Updates Memorandum on Calculating Input Tax Credits

Tax Development Aug 25, 2014

The Canada Revenue Agency (“CRA”) has recently updated GST/HST Memorandum 8-3, “Calculating Input Tax Credits”.  While the general information on calculating input tax credits (“ITCs”) remains the same, apart from formatting changes to this document, the CRA has also added a section for “Method of determining extent”.

The legislation does not stipulate a method to allocate property or services acquired, brought into or used in a participating province by a registrant, partially in commercial activities and partly for other purposes.  Subsection 141.01(5) of the Excise Tax Act (“ETA”) does allow that the allocation method used be fair and reasonable, and used consistently throughout the registrant’s fiscal year.  However, the terms “fair” and “reasonable” are not defined in the ETA.

Based on the general definition of each term, the CRA has clarified that a method that leads to a higher ITC than the facts would support, would not be considered fair or reasonable.  The document includes three examples to illustrate fair and reasonable allocation methods.  Clients are advised to maintain proper documentation to validate assumptions and calculations.