Feds to streamline collection of GST input tax credits

Department of Finance Canada has introduced several new measures to streamline the application of the Goods and Services Tax (GST), including allowing insurance companies and other financial institutions to use their own proposed methods to allocate input tax credits (ITCs) under certain circumstances.
The GST applies not only to domestic purchases but also to imports of goods and services. In the case of imported services and intangible personal property (i.e. the cross-border dealings between foreign and Canadian branches of a non-resident insurance company), tax collection at the border would be impractical.
As a result, the Excise Tax Act required recipients of such imports to pay tax on a self-assessment basis.
Financial institutions are entitled to claim ITCs to recover GST on inputs used to make taxable supplies (generally supplies on which they are required to charge GST).
Companies cannot, however, claim ITCs to recover GST paid on inputs used to make supplies that are exempt from the GST.
The question arises, therefore, how to claim ITCs on inputs used to make both taxable and GST-exempt supplies.
In 2007, the government required insurers to use a prescribed allocation percentage for claiming ITCs on these taxable/exempt inputs, or obtain pre-approval from Customs and Revenue Agency (CRA) to use their own allocation formula.
The amendments introduced on Sept. 23 would allow insurance companies to use their own ITC allocation methods, provided they can establish the methods have “met all documentary requirements set out in these proposals for pre-approval of its method.”
In other words, CRA pre-approval would not be required for a financial institution to use its own ITC allocation method, so long as the institution’s method is “objectively fair and reasonable,” and that any proposed CRA changes to the method would “not be objectively fair and reasonable.”