2020 FC, 2020 FC 1014

Date: 20201126 Docket: T-901-19 Citation: 2020 FC 1014 Ottawa, Ontario, November 26, 2020 PRESENT: Madam Justice Walker BETWEEN: BANK OF MONTREAL Applicant and ATTORNEY GENERAL OF CANADA Respondent AMENDED PUBLIC JUDGMENT AND REASONS (Confidential Judgment and Reasons issued on October 29, 2020) [ 1 ] This application centres on the method of computation of input tax credits (ITCs) to be used by the Bank of Montreal (the Bank or BMO) in the calculation of its net Goods and Services Tax ( GST)/ Harmonized Sales Tax ( HST) owing for its November 1, 2017 - October 31, 2018 fiscal year (FY 2018).

The Bank applied to the Minister of National Revenue (Minister) to use a particular allocation method to compute its ITCs for FY 2018 pursuant to subsection 141.02(18) of the Excise Tax Act , RSC 1985, c E-15 ( ETA ). The Minister denied the Bank’s application in a letter dated April 30, 2019 (Decision) and the Bank requests the Court’s review of the Decision. [ 2 ] The Bank argues that the Minister exceeded the scope of her authority in denying its FY 2018 application (2018 Application).

BMO also argues that the Decision was either incorrect or unreasonable principally because the Minister erred in (1) departing from her authorization of the same or a similar ITC computation method for the Bank’s prior fiscal years; and (2) her substantive rationale for the denial. The Respondent submits that the Decision was within the Minister’s authority to approve the Bank’s proposed computation method under

section 141.02 of the ETA and that the Decision was reasonable. The Respondent states that the Minister’s conclusions regarding the distortion of BMO’s ITC claim resulting from the proposed method were fully explained in the Decision and supported by the evidence in the record. [ 3 ] For the reasons that follow, the Bank’s application for judicial review of the Decision is dismissed. Very briefly, I have found that:

(1) The standard for the Court’s review of the Decision is reasonableness;

(2) The Minister’s denial of the Bank’s 2018 Application falls within the scope of her authority pursuant to subsection 141.02(20) of the ETA ; and

(3) The Decision was reasonable.

The Minister provided reasons for her denial in accordance with subsection 141.02(22) and those reasons were justified in light of the evidence in the record, the statutory scheme governing her approval authority in the ETA , and the parties’ submissions. [ 4 ] By way of preliminary matter and with the consent of the parties, the style of cause in this matter is amended to reflect the proper respondent, the Attorney General of Canada, in accordance with Rule 303(3) of the Federal Courts Rules , SOR/98-106 ( Rules ). [ 5 ] Certain commercially sensitive evidence filed in this Application is subject to a Confidentiality Order dated November 14, 2019.

A confidential Judgment was sent to the parties on October 29, 2020 to allow them to propose any redactions required for the public issuance of the Judgment. The Bank proposed redactions on November 18 , 2020. I have reviewed the redactions proposed. I am satisfied that they appropriately balance the interest of protecting confidential information and the public interest in open and accessible court proceedings. I. Introduction [ 6 ] ITCs are a fundamental principle of the Canadian GST/HST regime.

In lay terms, they are a deduction from the amount of GST/HST ( " “GST” " for purposes of this judgment) a business is required to pay to the government in each reporting period. An enterprise’s ITC claim can be straightforward where it conducts one business in Canada engaged solely in selling GST taxable goods and services to Canadian residents but the Bank’s ITC claim is not straightforward. The Bank’s business has a number of facets and is not confined to Canada. In addition, the provision of ‘financial services’ by the Bank, its primary business, is subject to complex GST and ITC computation rules.

Those rules, when coupled with the difficulty inherent in identifying the Bank’s income (based on interest rate spreads) and the fact that money is fungible, lead to the issues in this application. [ 7 ] A fulsome discussion of the ITC scheme, the relevant

definitions contained in the ETA , the Bank’s business, and its 2018 Application follows in this judgment. However, central to the Bank’s proposed computation method is the concept of an allocation of its ITCs among its operating groups as one step of the calculation of its net GST payable. The Minister described the purpose of an allocation in the Decision: An allocation is a means of attributing an input to a particular supply or supplies. Attribution methods must accurately

reflect […] the actual extent to which a particular input was acquired, imported or brought into a participating province for consumption or use, or was consumed or used (“acquired or used”) for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. [ 8 ] The Bank’s 2018 Application is based on a tiered allocation and computation of its ITC entitlement. Significant tiers or elements of the Bank’s 2018 computation method were accepted by the Minister and are not in dispute.

The Minister denied the 2018 Application because, in her view, the structure of BMO’s proposed method to determine its ITC claim for its residual pool of GST costs did not provide a reasonable approximation of the goods and services (inputs) the Bank used for the purpose of making taxable supplies.

Although the issue before me can be stated simply, its resolution is far from simple due to the nature of the GST regime and the calculation of ITCs by a financial institution, the structure of sections 141.01 and 141.02 of the ETA , the complexity of the Bank’s proposed method, and the parties’ multi-layered arguments. II.

Overview of the GST and ITC regime [ 9 ] I will begin with an overview of the relevant concepts and provisions of the GST and ITC regime to provide context for the factual background to the Bank’s 2018 Application and the issues raised by the Bank in this application for judicial review. [ 10 ] The GST is a value-added sales tax (VAT) applied to a taxable supply of property or services for consideration (subs. 165(1) of the ETA ). As a VAT, the GST is intended to be paid by the final consumer of the goods or services purchased.

A business in the supply chain bears only the GST it collects on the value it adds to a property or service. The mechanism for ensuring the GST is a VAT is the ITC. Each business in the supply chain is entitled to claim ITCs to recover the GST paid to its suppliers (GST Cost) on purchases related to its taxable commercial activities. Using an example from the Bank’s submissions, if a bookshop buys a book from a supplier for $80.00, the bookshop pays $4.00 in GST to the supplier.

The bookshop then sells the book for $100.00 to a final consumer in Canada, adding $20.00 in value and charging $5.00 in GST to the consumer. The bookshop is entitled to an ITC of $4.00 (its recoverable GST Cost) and is required to remit to the government $1.00. [ 11 ] Under the ETA , a " “supply” " is the sale, lease or other provision of a property or service and is either a taxable supply or an exempt supply. Taxable supplies are taxed at differing rates and a supply that is subject to a zero rate of GST (zero-rated supply) is nonetheless a taxable supply. These terms are defined in

section 123 of the ETA . The term " “financial service” " is also defined in

section 123 and includes deposit taking and lending services. The supply of financial services to a resident of Canada is an exempt supply (Schedule V to the ETA ), while certain financial services provided to non-residents are zero-rated (taxable) supplies (Schedule VI to the ETA ). [ 12 ] The distinction between taxable supplies and exempt supplies is critical in the ITC regime and in this application. A business is entitled to claim ITCs in respect of the goods and services, or inputs, it uses in making taxable supplies to its customers and clients.

If a business engages solely in the provision of taxable supplies to its customers, its ITC claim is typically straightforward (e.g. the for-profit bookshop that only sells books to Canadians). [ 13 ] In the present context, if the Bank provided financial services to Canadian clients only (exempt supplies), those clients would not pay GST to the Bank for those services and the Bank would not be permitted to claim ITCs for the GST it paid to acquire all the inputs (desks, purchased or leased premises, etc.) required to carry on its business.

In reality, BMO provides financial services to both Canadian clients and non-resident clients. In GST language, it makes exempt and taxable supplies.

Even though the Bank collects no GST from its non-resident clients in respect of its financial services because those supplies are zero-rated, it is entitled to collect ITCs in respect of the inputs used to make those supplies. [ 14 ] The ETA does not require a specific allocation method or the use of specific accounting systems that would separate each property or service that a business uses in its provision of taxable and exempt supplies ( Magog (City of) v Canada , 2001 FCA 210 at para 17 ( Ville de Magog )).

Rather, most businesses are permitted to select an ITC computation method, subject to the requirement in subsection 141.01(5) of the ETA that the business’s method be fair and reasonable and be used by the business throughout the fiscal year. [ 15 ] Generally, a business required to pay GST is subject to a self-reporting and self-assessment regime. The business calculates the net amount of GST it is required to submit to the Canada Revenue Agency (CRA) for each reporting period based on its selected ITC computation method. The business’s GST return and remittance is subject to audit.

As part of the audit, the Minister has the right to determine whether the computation method chosen by the business is fair and reasonable. If not, the Minister reassesses the return and denies some or all of the ITCs claimed by the business, and issues an assessment. The business then has the right to object to the assessment and appeal the assessment to the Tax Court of Canada (TCC). III. The Pre-approval regime:

Section 141.02 of the ETA [ 16 ] Parliament amended the ITC regime for Canadian financial institutions in 2008 by enacting what is now

section 141.02 of the ETA . The

section creates two categories of financial institutions. Qualifying institutions (QIs) consist of large Canadian banks, insurers and securities dealers, including the Bank. Non-qualifying institutions are smaller financial institutions and are not subject to the pre- approval regime set out in

section 141.02. [ 17 ] An additional set of subsection 141.02(1)

definitions is necessary to understanding the dispute between the parties. The subsection requires financial institutions to categorize the inputs used in their businesses as: (1) " “excluded inputs” " , which are typically capital expenditures; (2) " “exclusive inputs” " , which can be traced exclusively to use in the provision of either taxable or exempt supplies; and (3) " “residual inputs” " , which are all remaining inputs. In an allocation of residual inputs, the " “operative extent” " and " “procurative extent” " of a property or service must be determined.

The operative or procurative extent of a property or service is the extent to which the particular property or service is consumed or used (operative extent), or acquired or purchased (procurative extent), for the purpose of making taxable supplies for consideration or for a purpose other than making taxable supplies for consideration. The

question posed is what are the various assets and services purchased by the Bank being used for: the making of taxable supplies (the provision of financial services to non-residents of Canada) or the making of exempt supplies (the provision of financial services to Canadian residents)? [ 18 ] Under the

section 141.02 regime, QIs are subject to a distinct scheme for the computation of their eligible ITCs. Pursuant to subsection 141.02(18), a QI may apply to the Minister in advance of each fiscal year for approval of their proposed ITC computation method for the year. The Minister may approve or deny the use of the method (subs. 141.02(20)). The Minister’s decision is separate from the audit process and is not subject to appeal to the TCC. If the Minister authorizes the method, that method must be used by the QI to prepare its GST return for the particular fiscal year (subs. 141.02(21)).

Any audit of that return is limited to determining whether the approved method was used consistently through the year and applied correctly. [ 19 ] If the Minister denies the application, she must provide reasons for the denial (subs. 141.02(22)) and her decision is subject to review by this Court. The QI cannot use its proposed allocation method and is deemed to have used residual inputs for the purpose of making taxable supplies at a prescribed rate of 12% (subs. 141.02(8)).

In its submissions, the Bank highlights the impact to it of the application of the prescribed rate of recovery for residual inputs, stating that it normally recovers a materially higher percentage of its residual GST Costs through ITCs. IV. Factual background [ 20 ] The Bank is one of Canada’s largest financial services institutions, providing a broad range of personal and commercial banking, wealth management and investment banking products to more than 12 million customers globally. BMO carries on business in Canada and through foreign branches, and owns an array of subsidiaries and other entities.

As noted above, the Bank is a QI for purposes of

section 141.02 of the ETA . [ 21 ] The Bank engages in the provision of financial services, primarily deposit taking, borrowing and lending. The financial services BMO provides to its Canadian clients are exempt supplies. As a result, the Bank is not entitled to claim ITCs for the GST it pays to obtain inputs used to provide those services.

Conversely, the financial services BMO provides to non-residents of Canada are generally taxable, zero-rated supplies and the Bank is entitled to claim ITCs for the GST it incurs on inputs used to provide those financial services. [ 22 ] The Bank operates through five operating groups, three of which are customer-facing: Personal and Commercial Banking (P&C), Wealth Management and Capital Markets.

The primary activity of the largest customer-facing operating group, P&C, is the provision of banking services (deposit taking and lending) to Canadians, mainly through BMO’s many Canadian branches. [ 23 ] The remaining two groups are Corporate, which includes the Bank’s Treasury group, and Technology & Operations (T&O). Corporate and T&O centralize certain management functions of the Bank for the customer-facing operating groups. As its name suggests, T&O is responsible for BMO’s physical and technological infrastructure.

The Corporate group centralizes the Bank’s legal, tax, accounting and regulatory operations. The Treasury group within Corporate is responsible for the Bank’s liquidity requirements. It raises funding for the Bank, including funding required by the three customer-facing operating groups, to ensure the Bank has available sufficient liquid assets to satisfy its financial commitments at all times.

A material part of the Treasury group’s liquidity operations involves the borrowing of funds in foreign markets (the supply of financial services, via the issuance of a debt security, to a non-resident of Canada). [ 24 ] Following the introduction of

section 141.02 of the ETA , the Bank applied to the Minister for authorization to use a particular ITC allocation method (Initial Method) in respect of each of its 2009-2016 fiscal years. The Minister authorized BMO to use the Initial Method for each such fiscal year. [ 25 ] The Bank revised the Initial Method (Revised Method) for its FY 2017. BMO submitted its application to use the Revised Method to the Minister on August 3 and 4, 2016. After a long period of discussion and consultation, the Minister authorized the Bank’s use of the Revised Method with modifications (2017 Approved Method) on January 29, 2018.

In the authorization letter, the Minister stated that the remaining outstanding issues under discussion would be addressed during a future audit of the fiscal year. [ 26 ] On February 28, 2018, the Bank submitted the 2018 Application requesting the Minister’s approval to use the 2017 Approved Method for FY 2018. There was no significant change in the Bank’s business operations between FY 2017 and FY 2018.

Again, a lengthy period of discussions, meetings, consultation and negotiation between the parties ensued. [ 27 ] Despite many attempts by the parties to explain their respective positions and to resolve their disagreements, the Minister denied the Bank’s 2018 Application on April 30, 2019. V. The Bank’s proposed ITC computation method [ 28 ] The Bank’s proposed method for computing its ITC entitlement for FY 2018 (2018 Method) relies on its financial reporting system and has two main phases.

The Bank first calculates the total amount of GST paid by the Bank during the year and allocates that total GST Cost to each of the five operating groups. Second, a three-tiered allocation of the GST Costs incurred by the Bank is undertaken:

(1) Cost Allocation Formula (Technical Services Agreements (TSAs)) . || |||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| This step of the 2018 Method is not in dispute.

(2) Specific use formula . |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||

Again, this step of the 2018 Method is not in dispute.

(3) Output method formula (OMF) . The Bank’s 2018 ITC Claim in respect of its residual pool of GST Costs is calculated using a revenue-based OMF, which itself involves three steps. The focus of the OMF calculation is the Bank’s interest revenues (or ‘Outputs’ using the Respondent’s terminology): interest amounts that are the consideration for the supply of financial services (the borrowing and lending of money) for GST purposes. The Minister did not accept the Bank’s OMF methodology and denied the 2018 Application.

It is certain aspects of this step of the 2018 Method that remain in dispute. [ 29 ] Before describing the three steps of the OMF, it is first necessary to understand the two components of the Bank’s interest revenues derived from the supply of financial services to its customers. For GST purposes, BMO makes a supply of a financial service both when it borrows money (because it supplies a debt security and pays interest) and when it lends money (because it supplies funds and receives interest).

Therefore, interest paid and interest received by the Bank are included in the OMF calculation. [ 30 ] The OMF, as proposed, functions as follows: (

A) the Bank calculates its aggregate interest revenues by adding |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| (collectively, Interest Amounts); (

B) the OMF allocates the Interest Amounts from Corporate, including the Treasury group, among the three customer-facing operating groups |||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||| (Treasury Allocations); and (

C) a ratio (OMF ratio) is applied to the aggregated Interest Amounts in each customer-facing operating group to arrive at the proportion or percentage of the aggregated Interest Amounts derived from transactions in which the counterparty to the Bank was a non-resident of Canada (i.e. zero-rated transactions). The resulting percentage (Recovery Rate) is applied to each operating group’s co-mingled residual GST Cost pool to determine ITC eligibility. VI. Decision under review [ 31 ] The Decision consists of a Decision letter and detailed attachment. It is supported by a lengthy Decision Report.

The Minister identified a number of concerns with the 2018 Method in the Decision but the parties agree that the Minister’s denial of the Application was in fact based on (1) the allocation through the OMF of the Interest Amounts of the Treasury group to the three customer-facing operating groups (OMF/Allocation Issue); and (2) the components of the formula itself and the use of the aggregated Interest Amounts to arrive at the Recovery Rate for determining ITC eligibility in each operating group (OMF/Recovery Rate Issues). [ 32 ] The Minister used the Decision letter to set out the framework for her analysis of the OMF.

She identified two guiding GST principles: 1 . The Minister acknowledged that the Treasury Allocations to the customer-facing operating groups may align with the Bank’s general allocation policies designed to meet its regulatory requirements but distinguished the GST regime.

She stated that an allocation model for GST purposes must connect the purchase or lease of an input on which GST was paid with the use of that input by the business in its operations: Treasury allocations to the customer facing operating groups may be in accordance with the bank’s allocation policies in order to meet the regulatory requirements; however, the concept of an underlying allocation method or methods used must link a particular property or service on which tax was paid or payable to its use for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration. 2 .

The Minister then addressed the use of an OMF and emphasized that the Bank’s output-based method must result in a " “reasonable approximation” " of the assets and properties actually used by it for the purpose of making taxable supplies: OMF is the least preferred method to determine the operative and procurative extent of business inputs.

If an output method allocation is used, the calculation must give reasonable approximation of the inputs used for the purpose of making taxable supplies - in this case the zero-rated financial services provided by Treasury. [ 33 ] The Minister concluded that the Bank’s OMF did not result in a reasonable approximation of the inputs it used to provide zero-rated financial services to non-residents of Canada: The distortions noted in “Attachment A” to this letter, ha[ve] resulted in the method not providing a reasonable approximation of the inputs.

This has resulted in an excessive amount of ITCs that you have proposed to claim through OMF for the zero-rated financial services provided by the treasury department of the corporate support services group.

As explained in all our letters/submissions and meetings, the ITCs for the zero-rated financial services in question should be limited to the direct and allocable inputs for these services at the corporate level. [ 34 ] In Attachment A to the Decision letter, the Minister reiterated the general principles governing the use of an ITC allocation method to determine the operative and procurative extent of a property or service.

The Minister referred to the Bank’s 2016 Annual Report and its description of the Treasury group and the operating groups as responsible for the ongoing management of liquidity and funding risk across the enterprise.

The Minister noted that one of the main functions of a bank’s treasury department is to manage capital and liquidity to ensure that all parts of the bank can readily access the cash they need to conduct business activities. [ 35 ] Although Attachment A is lengthy and somewhat repetitive in structure, the Minister framed her denial of the 2018 Application around her concerns with the OMF and the two general principles cited in the Decision letter.

The repetition in Attachment A occurs because the Minister addressed separately, but in largely parallel terms, the non-domestic lending and borrowing functions (interest income and interest expenses) of the Corporate and Treasury groups and the counterparties to those various transactions (foreign branches, foreign subsidiaries and third parties). [ 36 ] OMF/Allocation Issue : The Minister stated that any ITC recovery for administrative and funding supplies provided by the Corporate group, including Treasury, should come from the GST Costs incurred or allocated to the Treasury function. The Minister

concluded that the OMF did not respect this principle because it permits the Bank to dip into the GST Costs of the customer-facing operating groups. [ 37 ] The Minister found that the Bank had claimed its eligible ITCs for the services provided by Corporate and Treasury to foreign branches, subsidiaries and third parties through its TSAs and cost recovery, each a prior pass or step in the 2018 Method.

It followed that the OMF permits additional and ineligible ITC recovery by allocating Treasury revenues (Interest Amounts) to the customer-facing groups: Including the treasury revenues […] from the branches into the OMF formulae at par with the revenues from the supplies made by the customer facing groups of the bank to claim additional ITC is not acceptable by CRA since the treasury functions are provided by the corporate supporting group which is distinct from the three customer facing groups of the bank.

Further, allocation of treasury revenue to the customer facing operating groups has no relevance to the ITC entitlement for the financial services provided by Treasury at the corporate level.

ITC entitlement should be limited to the direct and allocable costs to treasury including any back office support for the financial services in question. [ 38 ] OMF/Recovery Rate Issues : The Minister identified two issues in the OMF that, in her view, would distort the Bank’s rate of GST Cost recovery such that the use of the OMF would not provide a reasonable approximation of the Bank’s use of inputs for the purpose of making taxable (zero-rated) supplies for consideration.

The first distortion resulted from the components of the OMF ratio used to establish the Recovery Rate, namely the Bank’s exclusion of its Canadian intra-bank Interest Amounts from the denominator of the ratio. [ 39 ] The second distortion identified by the Minister in the 2018 Method was the assumption that the cost of carrying on business in the Treasury group and the customer-facing groups was comparable.

The Minister stated that this assumption skewed or distorted the Recovery Rate because it did not take into account the actual inputs required to undertake two very different businesses: |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| [ 40 ] The Minister concluded that the 2018 Method would result in an excess ITC claim based on the Treasury group’s funding operations.

In her view, the Bank should not ignore the fact that the non-resident financial services in question are provided by Treasury and not the three large customer-facing groups. The OMF does not maintain this distinction, permitting ITC recovery based in part on the Bank’s provision of domestic financial services. VII. Issues [ 41 ] I have organized my analysis of the Bank’s arguments into two broad sections: 1 . The standard for the Court’s review of the Decision; and 2 . My review of whether the Decision was reasonable. VIII.

Standard of review The Parties’ submissions [ 42 ] The Bank acknowledges that the presumptive standard of review of administrative decisions is reasonableness ( Canada (Minister of Citizenship and Immigration) v Vavilov , 2019 SCC 65 at para 23 ( Vavilov )) but submits that the presumptive standard is rebutted in the present case.

BMO relies on constitutional principles, the emphasis in Vavilov on the importance of legislative intent, and tax administration principles to argue that this is one of the rare cases in which an administrative decision must be reviewed for correctness ( Vavilov at paras 33, 69-70, 82, 108 ). The premise of the Bank’s submissions is that, in denying its proposed ITC computation method pursuant to subsection 141.02(20) of the ETA , the Minister is imposing a significant financial burden by essentially determining a material component of its net GST payable for FY 2018.

BMO argues that Parliament does not recognize a reasonable range of outcomes in determining a taxpayer’s tax payable for the year. A review of the Decision for reasonableness " “would inappropriately allow the Minister leeway to conclusively determine a qualifying institution’s tax payable, without sufficient recourse to the courts” " . [ 43 ] In the alternative, if the standard for the Court’s review of the Decision is reasonableness, the Bank submits that the review must be rigorous.

The Decision must be internally coherent and justified in relation to both the facts and laws that constrain the Minister ( Vavilov at paras 85, 105, 120 ) and must bear the hallmarks of reasonableness: justification, transparency and intelligibility ( Vavilov at para 99 ). The Bank also submits that the Minister’s departure from her prior decisions must be explained in the reasons for the Decision ( Vavilov at para 131 ). [ 44 ] The Respondent submits that there is no basis to depart from the Vavilov presumption of reasonableness. In enacting

section 141.02 of the ETA , Parliament delegated to the Minister the authority to approve a QI’s proposed ITC computation method and Parliament’s legislative intent must be respected. The Respondent argues that the very enactment of

section 141.02 supports the presumption of reasonableness ( Vavilov at paras 24, 30 ). The Respondent also argues that the Bank’s characterization of the Minister’s decision as a tax assessment is misguided and derives from its dissatisfaction with subsection 141.02(8) and the imposition of the deemed 12% ITC recovery rate for residual inputs.

[45] Further, the Respondent submits that the Bank has failed to identify specific text in

section 141.02, or in the ETA generally, thatdemonstrates Parliament’s intent to accord the Minister’s subsection 141.02(20) decisions less deference. A detailed review of thescheme of

section 141.02 and the fact that it specifically carves the approval process for a QI’s ITC computation method from thegeneral provisions for non-QIs indicates a conscious decision by Parliament to position the Minister as the gatekeeper of the QI approvalprocess. [46] As the hearing of this application drew to a close, the Federal Court of Appeal (FCA) issued its judgment in Hunt v Canada, 2020FCA 118 (Hunt). The question before the FCA in Hunt was whether

section 207.05 of the Income Tax Act, RSC 1985 (5th Supp), c 1(ITA), offends

section 53 of the Constitution Act, 1867 and is unconstitutional as an improper delegation of a taxation power. At myrequest, the Bank and the Respondent provided written submissions regarding the impact of the FCA’s analysis in Hunt on the presentcase. The Bank submits that the FCA’s analysis is relevant to the Court’s

interpretation of

section 141.02 of the ETA and the scope of theMinister’s approval authority under subsection 141.02(20). The Respondent contends that Hunt has limited application to this applicationbecause

section 141.02 creates a regime that governs the accurate calculation of inputs and ITCs. It does not concern the imposition oftax or the delegation of a taxation power. Analysis [47] I have considered the Bank’s submissions carefully but conclude that there is no basis for departing from the presumptive standardof reasonableness for my review of the Decision. I find that Parliament’s intention to reserve the approval of a QI’s proposed ITCcomputation method to the Minister is evident in

section 141.02 of the ETA and must be respected (Vavilov at para 33). [48] The SCC identified five situations in which a departure from the presumption of reasonable review is warranted: legislative intent(legislated standards of review and statutory appeal mechanisms) and the rule of law (constitutional questions, general questions of lawof central importance to the legal system as a whole, and jurisdictional boundaries between administrative bodies) (Vavilov at para 69).The Court did not foreclose other situations that would call for correctness review but cautioned that such categories would beexceptional (Vavilov at para 70): [70] […] That being said, the recognition of any new basis for correctness review would be exceptional and would need tobe consistent with the framework and the overarching principles set out in these reasons.

In other words, any new categorywarranting a derogation from the presumption of reasonableness review on the basis of legislative intent would require asignal of legislative intent as strong and compelling as those identified in these reasons (i.e., a legislated standard of reviewor a statutory appeal mechanism).

Similarly, the recognition of a new category of questions requiring correctness review thatis based on the rule of law would be justified only where failure to apply correctness review would undermine the rule oflaw and jeopardize the proper functioning of the justice system in a manner analogous to the three situations described inthese reasons. [49] I find that none of the five situations identified by the SCC support a departure from the reasonableness standard. Parliament has notlegislated a standard of review for, nor a statutory appeal from, a subsection 141.02(20) approval or denial.

There is no constitutionalquestion, general question of law of central importance or jurisdictional boundary at issue in this application. [50] The Bank submits that the Decision falls within the SCC’s category of the exceptional case but I do not agree.

BMO focusses itssubmissions on constitutional arguments (and not constitutional invalidity), legislative intent and established principles of taxadministration, and emphasizes the significant financial implications of the Minister’s denial. [51] The Bank’s reliance on constitutional principles in support of correctness review stems from its characterization of the Minister’sDecision as a determination of its net GST owing for FY 2018. The Bank submits that the fiscal consequences of the Decision extendbeyond the approval of an ITC computation method, the narrow purpose of

section 141.02. The Bank argues that the Minister’s denial ofthe 2018 Application effectively determines the quantum of its ITC claim because subsection 141.02(8) automatically applies a 12%prescribed recovery percentage for residual inputs. [52] BMO states that the power of taxation is a democratic power that must be exercised by the House of Commons (sections 53 and 54of the Constitution Act, 1867). A taxation power may be delegated but only with clear and unambiguous language (Ontario EnglishCatholic Teachers’ Assn v Ontario (Attorney General), 2001 SCC 15 at para 77 (OECTA)).

As the exercise by the Minister of herapproval authority under subsection 141.02(20) is the exercise of a taxation power, BMO argues that such authority must be narrowlyconstrained and subject to very careful and exacting review (OECTA at para 77). [53] I do not agree with the Bank’s characterization of the Minister’s Decision and find that the Minister does not exercise a taxationpower in exercising her approval authority pursuant to subsection 142.02(20) of the ETA. Whether the Minister approves or denies a QI’sapplication, her authority extends only to a review of the computation method proposed.

She does not determine the net GST payable bythe QI, nor does she impose the 12% deemed recovery rate. The consequences of her denial are mandated by other subsections of section141.02, including subsection 141.02(8), duly enacted by Parliament in accordance with sections 53 and 54 of the Constitution Act, 1867.The Bank’s actual net GST payable will only be determined against its actual results, including the identification of its taxable andexempt supplies for the fiscal year, its gross GST paid and the application of the various provisions of

section 141.02. The Bank’sreliance on constitutional principles and the cautionary language in the OECTA case to argue for a departure from the presumptivestandard of reasonableness review is not persuasive. [54] As stated above, the specific question before the FCA in Hunt was whether

section 207.5 of the ITA offends

section 53 of theConstitution Act, 1867 and is unconstitutional as an improper delegation of a taxation power. The FCA answered the question in thenegative. The TCC had also considered whether sections 207.05 and 207.06, separately or combined, constitute an invalid delegation oftaxation power to the Minister. The FCA declined to address this second question because the answer depended on a number ofsubsidiary questions which the parties had not dealt with in their memoranda of fact and law.

The FCA stated that, in order to answerthose questions, the legislative provisions in question were to be interpreted using the accepted method of examining the text, contextand purpose of the provisions (Hunt at para 11, with reference to leading cases including Re Rizzo & Rizzo Shoes Ltd.,

(SCC) , [1998] 1 S.C.R. 27 , 154 D.L.R. (4th) 193 ; Entertainment Software Assoc. v Society Composers , 2020 FCA 100 at para. 39 ( Entertainment Software ) ; TELUS Communications Inc. v Wellman , 2019 SCC 19 ) . The FCA stated ( Hunt at paras 13-14 ): [13] In some cases, after a full examination of the text in light of its context and purpose, the Court might conclude that Parliament’s provision, in its authentic meaning, satisfactorily constrains the Minister’s discretion and defines what she can do and how she should do it.

The Minister would not be creating and imposing a tax or coming up with the tax rate on her own. She would not be a law unto herself. [14] But in other cases, the Court might conclude that Parliament’s provision, in its authentic meaning, gives the Minister an unconstrained, undefined discretion without criteria. The Minister, not Parliament, would be creating and imposing the tax or coming up with the tax rate on her own.

She would be a law unto herself. [ 55 ] The Bank submits that Hunt provides " “the proper analytical framework for determining the scope of the decision-making power conferred by Parliament on a tax authority, particularly for the purposes of

section 53 of the Constitution Act, 1867 ” " . However, I agree with the Respondent that

section 141.02 of the ETA creates a methodology for the calculation of ITCs and the Minister’s review of a QI’s application. The exercise of the Minister’s approval authority under subsection 141.02(20) is not an imposition of tax or the exercise of a taxation power. It is the exercise of a discretionary authority properly delegated to the Minister by Parliament to ensure computational accuracy. To paraphrase the FCA, the Minister is not imposing a tax or a specific tax rate on QIs; she is not a law unto herself. Parliament created the

section 141.02 statutory scheme for QIs and determined the treatment and rate of recovery for a QI’s ITC claim for residual inputs in the event the Minister denies an application. [ 56 ] The analytical framework for my review of the Minister’s Decision pursuant to subsection 141.02(20) is set out in Vavilov . That said, the SCC and FCA in Vavilov and Hunt , respectively, are aligned as to the nature of statutory

interpretation. I acknowledge the Bank’s arguments in its Hunt submissions regarding the importance not only of the text of

section 141.02 but also its context and purpose. In my view, these arguments are properly considered within the Vavilov framework and the SCC’s guidance regarding the nature and content of reasonableness review. [ 57 ] The Bank relies on the SCC’s statement in Vavilov that the " “polar star” " of judicial review is respect for legislative intent and that the presumption of reasonableness review is rebutted where a legislature signals that a different standard should apply ( Vavilov at para 33 ). [ 58 ] I find that Parliament’s enactment of

section 141.02 signals the legislature’s intent to confer substantive authority on the Minister to approve or deny a QI’s application for approval of its method of ITC allocation and computation ( Vavilov at paras 23, 33 ). The Court must respect Parliament’s intention. There is no indication in the

section or in the ETA generally that the exercise of such authority is to be reviewed by the Court for correctness ( Vavilov at para 33 ). Contrary to the Bank’s suggestion, the Minister’s Decision is owed deference. [ 59 ] The Bank argues that the legislative scheme of the ETA and relevant tax administration principles permit all taxpayers, other than QIs, to calculate their net GST owing using a system of self-reporting and self-assessment.

Each such taxpayer selects an ITC allocation method that is fair and reasonable and if, on audit, the Minister determines that the method is not fair and reasonable, the taxpayer has the right to appeal the resulting assessment to the TCC. The TCC determines whether the assessment is correct, not whether it is reasonable. In contrast, if the Court reviews the Minister’s Decision for reasonableness, the Decision does not have to be correct.

In the Bank’s view, such a result is contrary to Parliament’s legislative intent and marks the only type of taxing decision where the Minister has the right to be wrong. [ 60 ] I do not find the Bank’s reliance on general tax administration principles persuasive. Parliament has enacted legislation that overrides the general principles applicable to non-QIs and has provided no indication that the Minister’s decision was intended to be reviewed for correctness.

The self-reporting regime applicable to non-QIs and their right of appeal to the TCC if the Minister contests their allocation method on audit are superseded by

section 141.02.The application by analogy of a correctness standard for review of the Minister’s Decision is not warranted. [ 61 ] I agree with the Bank’s submission that the effect of

section 141.02 is to strip QIs of the right to appeal to the TCC the question of whether their ITC computation methods are fair and reasonable. The approval of a QI’s proposed method is now explicitly reserved to the Minister and the Minister’s decision under subsection 141.02(20) is subject to judicial review in this Court. The criteria to be applied to the exercise of the Minister’s authority, whether the method must be " “fair and reasonable” " or a " “reasonable approximation” " of the use of the inputs in question, is not determinative of the standard of review of the Decision. [ 62 ] The Bank also argues that

section 141.02 strips its right to appeal questions relating to its actual use of business inputs in a fiscal period to the TCC but here I disagree. Such questions are the subject of discussion on audit and a subsequent appeal to the TCC remains available. This argument goes to the scope of matters the Minister may consider in assessing a proposed computation method pursuant to subsection 141.02(20) and is an argument I return to in my substantive analysis of the parties’ submissions. [ 63 ] What then does the reasonableness standard entail in this case?

The SCC describes a reasonable decision as follows ( Vavilov at para 85 ): [85] […] a reasonable decision is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker. The reasonableness standard requires that a reviewing court defer to such a decision. [ 64 ] My review of the Decision begins with the reasons given by the Minister in light of the record and the submissions of the parties ( Vavilov at paras 83, 86, 96, 125 ).

The reasons must be justified, intelligible and transparent and must address the principal issues raised by the parties ( Vavilov at paras 95, 99, 127 ). The SCC reviewed in detail the content of reasons a reviewing court may expect and cautioned that a reasonableness review must consider both the decision maker’s reasoning and the outcome of the decision ( Vavilov at paras 86-87 ).

[65] The justification given by the decision maker must be reviewed against the relevant facts and law in each case (Vavilov at paras105-106). The SCC stated that "“the governing statutory scheme is likely to be the most salient aspect of the legal context relevant to aparticular decision”" (Vavilov at para 108). In this application, the legislative scheme of the ETA is central to my review of the Decision(Entertainment Software at paras 34-35). In exercising her authority under subsection 141.02(20), the Minister is constrained by theprovisions of the ETA generally and the regime imposed by

section 141.02. [66] The Bank and the Respondent disagree on the scope of

section 141.02 and the constraints on the Minister’s approval authority.Their dispute centres on Parliament’s purpose in enacting the

section and the test against which the Minister is required to assess a QI’sapplication under subsection 141.02(20). Although the parties discussed these issues in their standard of review submissions, they arealso best addressed as part of my substantive analysis of the Decision. [67] I return briefly to the Bank’s submissions regarding Hunt. BMO relied on the FCA’s statement in Hunt that a contextual andpurposive statutory

interpretation must be used to identify constraints on administrative decision-making powers to argue for correctnessreview. This issue is addressed directly by the SCC in Vavilov (at para 115) where the majority stated that issues of statutoryinterpretation may be evaluated on a reasonableness standard. The SCC then stated (Vavilov at para 117): [117] A court interpreting a statutory provision does so by applying the “modern principle” of statutory

interpretation, thatis, that the words of a statute must be read “in their entire context and in their grammatical and ordinary sense harmoniouslywith the scheme of the Act, the object of the Act, and the intention of Parliament”: Rizzo & Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 S.C.R. 27, at para. 21, …[Additional citations omitted]. IX. Analysis – Was the Decision reasonable? [68] I will first address the parties’ arguments regarding the scope of the Minister’s authority under subsection 141.02(20) of the ETA.These arguments focus on the mandate Parliament gave to the Minister in enacting

section 141.02 and the importance of ITCs inensuring the GST is a VAT. [69] I will then review the Bank’s submissions contesting the Minister’s concerns and conclusions in the Decision regarding the 2018Method and the structure of the OMF. Finally, I will address the Bank’s submissions regarding the Minister’s departure from her priorapprovals of the Bank’s ITC computation methods. 1.

Scope of the Minister’s approval authority pursuant to subsection 141.02(20) of the ETA [70] The Bank submits that the Minister was required to undertake a textual, contextual and purposive analysis of the scope of herapproval authority under subsection 141.02(20) in the Decision and that she unreasonably failed to do so (Vavilov at paras 117-121;Entertainment Software at paras 39-42). BMO states that a textual and contextual

interpretation of

section 141.02 must respect thefundamental role of ITCs in the GST regime, the principles of allocation methodology, and general tax administration principles. Further,the Minister was required to turn her mind to the reason Parliament enacted

section 141.02 and the mandate it intended to confer in sodoing. [71] The Bank makes two related submissions:

(1) Parliament’s purpose in enacting

section 141.02 of the ETA was limited to ensuringthat QIs may select only one method of ITC computation for a fiscal year; and (2) as a corollary, the Minister is bound by taxadministration principles and the general rules contained in the ETA for ITCs. The law concerning ‘fair and reasonable’ ITC allocation(subs. 141.01(5)) and computation methods is unchanged and constrains the Minister’s approval authority. [72] There is a third aspect to the Bank’s submissions regarding the scope of the Minister’s approval authority.

BMO argues that theMinister exceeded the scope of her authority under subsection 141.02(20) by raising factual issues at the approval stage. In its view, suchmatters must be left to the audit stage when the Bank’s proposed method can be tested against its actual business and financial results forthe fiscal year. Textual analysis: The text of

section 141.02 of the ETA [73] Subsection 141.02(20) of the ETA sets out the Minister’s authority to approve a QI’s proposed computation method: "Authorization " "Autorisation ""

(20) On receipt of an application made undersubsection (18), the Minister shall " "

(20) Sur réception de la demande visée auparagraphe (18), le ministre : ""(

a) consider the application and authorize ordeny the use of the particular methods; and " "

a) examine la demande et autorise ou refusel’emploi des méthodes particulières; ""(

b) notify the person in writing of thedecision on or before " "

b) avise la personne de sa décision par écritau plus tard : ""(

i) the later of " "(

i) au dernier en date des jours suivants : ""(

A) the day that is 180 days after thatreceipt, and " "(

A) le cent quatre-vingtième jour suivant laréception de la demande, ""(

B) the day that is 180 days before the firstday of the fiscal year to which the applicationapplies, or " "(

B) le cent quatre-vingtième jour précédantle début de l’exercice visé par la demande, " "(ii) any later day that the Minister mayspecify, if the day is set out in a writtenapplication filed by the person with theMinister. " "(ii) à toute date postérieure que le ministrepeut préciser, si elle figure dans une demandeécrite que la personne lui présente. "

[ 74 ] The text of subsection 141.02(20) and, more generally,

section 141.02 imposes no substantive constraint or criteria on the exercise by the Minister of her authority under the subsection. Most notably,

section 141.02 does not require the Minister to approve a QI’s application to use an ITC computation method that is ‘fair and reasonable’, one of the Bank’s central arguments in this application. Neither subsection 141.02(18) nor subsection 141.02(19), the provisions that set out a QI’s right to apply for pre-approval and the form and manner of any such application, provide that the QI’s proposed method must be fair and reasonable.

Subsection 141.02(22) requires the Minister to provide reasons in the event she denies a QI’s application but places no obligation on the Minister to explain why the particular computation method was not fair and reasonable. [ 75 ] In contrast, there are numerous instances in

section 141.02 where Parliament imposes the fair and reasonable standard on ITC computation methods (see, e.g., subss. 141.02(16), (27), (28), (30), (31), (32) and (33)). Certain of those provisions apply only to financial institutions that are not QIs, others may apply to QIs but only in specific circumstances. None of the provisions apply where, as in this case, the Minister exercises her subsection 141.02(20) authority, approves or denies an application without modifications, and notifies the QI in accordance with subsections 141.02(20) and (22). Purposive analysis: Parliament’s purpose in enacting

section 141.02 [ 76 ] The Bank submits that Parliament’s purpose in enacting

section 141.02 constrains the Minister’s approval authority. BMO states that

section 141.02 was introduced by Parliament in response to CIBC World Markets Inc. v Canada , 2011 FCA 270 ( CIBC World Markets ) and was intended to limit QIs to selecting, in advance, one ITC computation method per fiscal year. By way of factual background, CIBC had selected an ITC allocation method for its 1998 and 1999 fiscal years that resulted in the recovery of approximately 6% of the GST paid in each year. CIBC filed its GST returns using the selected method and the Minister accepted the ITC claims.

Subsequently, CIBC adopted a different allocation method that resulted in an increased ITC claim and the recovery of approximately 25% of the GST paid in each of 1998 and 1999. The bank made a second ITC claim using the more favourable method within the applicable limitation period and the Minister disallowed the additional ITCs claimed. [ 77 ] On appeal, the FCA allowed the claims, concluding that there were no words in the text of the ETA that prohibited more than one ITC claim for the same taxation year.

In fact, subsection 225(3) of the ETA contemplated the possibility that more than one claim could be made ( CIBC World Markets at paras 31-32, 48 ). Although the second method was more favourable to CIBC, it was still fair and reasonable. The FCA concluded that " “[p]rohibiting a later claim based on a method that has been accepted as “fair and reasonable” works a harsh result that, in my view, is not compelled by anything in the [ ETA ]” " ( CIBC World Markets at para 35 ). [ 78 ] The Respondent submits that Parliament did not enact

section 141.02 solely to address the issue of method shopping illustrated in CIBC World Markets . Rather, the new regime was primarily intended to respond to two cases: Bay Ferries Limited v The Queen , 2004 TCC 663 ( Bay Ferries ) and the FCA decision in Ville de Magog . [ 79 ] In each of Ville de Magog and Bay Ferries , the taxpayer ITC methodology was accepted as fair and reasonable but the Minister took the position that there were more accurate methods available. In both cases, the Courts found that the taxpayers’ methodology prevailed.

On appeal by the taxpayer from the TCC, the FCA stated in Ville de Magog (at para 15): [15] The only issue before the judge was whether the method elected by the appellant was fair and reasonable, as required by subsection 141.01(5). She did not have to determine which of the two methods in question was the best. Moreover, Memorandum 700-5-1 acknowledges in its 23 rd paragraph that more than one method may be fair and reasonable within the meaning of the Act (see also Navaho Inn v.

The Queen , 3 GTC 2067, at page 2071 (T.C.C.)). [ 80 ] The Respondent argues that the CRA and the Department of Finance were concerned that the two decisions provided QIs too much flexibility in selecting an ITC computation method. In the Respondent’s view, the predominant reason for enacting

section 141.02 was to reserve to the Minister the authority to approve the substance of QIs’ ITC computation and allocation methodologies. [ 81 ] The Respondent refers to a 2008 Ernst & Young report regarding the initial draft legislation containing proposed

section 141.02. The authors of the report opine that the CRA and Department of Finance were concerned with the results in Ville de Magog and Bay Ferries and sought to rein in the broad latitude of the fair and reasonable test for QIs. The Respondent also cites subsection 141.02(17) which, when applicable, alone addresses the concern raised in CIBC World Markets and the use of multiple computation methods within a single fiscal year. [ 82 ] The parties made submissions regarding the dates of the three decisions but I do not find the issue of timing determinative in establishing Parliament’s purpose in enacting

section 141.02. Parliament proposed the introduction of the

section in 2007. It is arguable that, at that time, Parliament, the Department of Finance and/or the CRA, were aware of all three cases cited by the parties. The background information contained in the record regarding the introduction of

section 141.02 does not speak to Parliament’s purpose other than to describe in general terms the introduction of a new legislative framework for an ITC allocation regime for financial institutions and the requirement for pre-approval in the case of QIs. It too is not determinative. [ 83 ] In my opinion, a purposive review of the introduction of

section 141.02 and the Minister’s pre-approval of QI computation methods does not require the limited

interpretation posited by the Bank. The structure of

section 141.02 itself suggests a purpose broader than a specific response to CIBC World Markets . The enactment of a provision similar to subsection 141.02(17) in conjunction with a requirement that a chosen method be used throughout the fiscal year (e.g. as in paragraph 141.02(21)(a)) would address CIBC World Markets . There would be no requirement for a pre-approval process.

I find that the Minister reasonably interpreted her role as not merely temporal, requiring the establishment of a computation method before the fiscal year in question; but also substantive, permitting her to consider the substance of the proposed method. Contextual analysis: The continued relevance of fundamental ITC principles (section 169 and subsection 141.01(5))

[ 84 ] The Bank submits that general GST principles and rules for ITCs (section 169 and subsection 141.01(5) of the ETA ), the context in which the Minister approves a proposed method, apply to limit the exercise of her subsection 141.02(20) authority. BMO argues that the Minister erred in the Decision Report by (1) stating that the provisions of

section 141.02 override those general rules; and (2) failing to apply the fair and reasonable standard in the exercise her authority. I do not find the Bank’s arguments persuasive. [ 85 ] In the Decision Report, the Minister first stated that

section 141.02 applies in conjunction with existing ITC provisions such as

section 169 of the ETA . Subsection 169(1) permits the deduction of GST incurred in the course of a business’s commercial activities. She then explained the import of

section 169 and stated that the specific rules in

section 141.02 supersede the general rules in that

section and any applicable provisions in

section 141.01. The Minister immediately provided clarification for her statement, indicating that " “[f]or further clarification, specific rules for qualifying institutions in

section 141.02 should be considered first” " . In other words, the specific provisions of subsection 141.02 take precedence over any contrary general rules (see, e.g. Justice Stratas’ explanation in CIBC World Markets (at para 51 ) that paragraph 141.02(16)(

b) is related to subsection 141.01(5) " “in that it supersedes subsection 141.01(5) for financial institutions” " ). The Minister made no error of statutory

interpretation in this regard. [ 86 ] By way of example, the Minister explained in the Decision Report the interplay of subsection 141.02(8), the prescribed percentages for determining the extent of use of residual inputs, and the formulae described in subsection 169(1). Although this is merely one example of the Minister’s recognition of the general scheme of the ETA , the Bank’s argument that the Minister disregarded ITC principles, including

section 169 , is not accurate. She properly recognized their application to a QI’s ITC computations, subject to the provisions of

section 141.02. During cross-examination, the Minister’s representative confirmed the Minister’s approach, acknowledging that sections 169 and 141.02 apply to financial institutions, " “because

section 169 is the authority to an income tax (--), 141.02 dictates or describes the methodologies how it should be applied” " . [ 87 ] In addition to its reliance on the continued application of general ITC principles, the Bank submits that subsection 141.01(5) of the ETA requires the Minister to assess the 2018 Method using the fair and reasonable standard. BMO argues that the law concerning fair and reasonable ITC allocation methods was unchanged by the introduction of

section 141.02. [ 88 ] The Respondent submits that

section 141.02 is a comprehensive scheme that contemplates a regime distinct from that for non-QIs in process and content. The Respondent argues that Parliament deliberately omitted the fair and reasonable standard from subsection 141.02(20) and allowed the Minister a broader scope of inquiry into a proposed methodology.

The Respondent states that, while the assessment of whether a QI’s proposed method is fair and reasonable is one element of the Minister’s review, she may also consider other factors in determining whether the method results in a reasonable approximation of the inputs used for the purpose of making taxable supplies. [ 89 ] Subsection 141.01(5) states: " Method of determining extent of use, etc. " " Méthodes de mesure de l’utilisation " "

(5) Subject to

section 141.02, the methods used by a person in a fiscal year to determine " "

(5) Sous réserve de l’article 141.02, seules des méthodes justes et raisonnables et suivies tout au long d’un exercice peuvent être employées par une personne au cours de l’exercice pour déterminer la mesure dans laquelle : " " (

a) the extent to which properties or services are acquired, imported or brought into a participating province by the person for the purpose of making taxable supplies for consideration or for other purposes, and " "

a) la personne acquiert, importe ou transfère dans une province participante des biens ou des services afin d’effectuer une fourniture taxable pour une contrepartie ou à d’autres fins; " " (

b) the extent to which the consumption or use of properties or services is for the purpose of making taxable supplies for consideration or for other purposes, " " shall be fair and reasonable and shall be used consistently by the person throughout the year. " "

b) des biens ou des services sont consommés ou utilisés en vue de la réalisation d’une fourniture taxable pour une contrepartie ou à d’autres fins. " [ 90 ] I am not persuaded that the Bank’s insistence on a contextual

interpretation of subsection 141.02(20) results in the continued application of subsection 141.01(5). The Bank’s submission that Parliament did not intend for the Minister to be able to disregard fundamental ITC principles in the exercise of her subsection 141.02(20) authority is too broad. Those principles, including the importance of ITCs to the GST regime and

section 169 of the ETA , do not require the application of the fair and reasonable standard. The use of a standard other than that set forth in subsection 141.01(5) does not necessarily result in a derogation of ITC principles. [ 91 ] In terms of the immediate context surrounding subsection 141.02(20), Parliament has imposed the fair and reasonable standard in a number of other subsections of

section 141.02 (see paragraph 75 above). Parliament can reasonably be presumed to have purposefully omitted from subsection 141.02(20) a requirement that the Minister consider a QI’s proposed ITC computation method using the fair and reasonable test. The standard had long formed part of the fabric of

section 141.01, as the Bank insists, and Parliament specifically included the standard in distinct aspects of the new

section 141.02 scheme. [ 92 ] It is instructive that the introduction of

section 141.02 led to the amendment of subsection 141.01(5) . Parliament has indicated that subsection 141.01(5) is subject to

section 141.02. I find that this amendment, coupled with Parliament’s use of the fair and reasonable standard in certain provisions of

section 141.02, provides strong contextual evidence that the Minister was not constrained to apply the standard to her assessment of the 2018 Method under subsection 141.02(20) . Therefore, she made no reviewable error in omitting to

reference the standard in the Decision. [ 93 ] In Attachment A to the Decision letter, the Minister set out the general principles guiding her review of the Bank’s 2018 Method. She first referred to Bulletin B-106: An output-based allocation uses a calculation based on an output measure (e.g., revenue) to allocate the use of inputs to the extent that they cannot be allocated using tracking or causal allocation. If an output-based allocation is used, the calculation must give a reasonable approximation of the use of the inputs (emphasis added) for the purpose of making taxable supplies for consideration.

For example, inputs should be used in the same proportion in making the supplies included in the calculation and the average profit margin for the supplies included in the calculation should be the same. [ 94 ] The Minister then cited GST/HST Memorandum 8.3 (Calculating Input Tax Credits) (Memorandum 8.3) and general principles regarding output-based computation methods, including the fact that a chosen method must be fair and reasonable. Memorandum 8.3 does not apply to financial institutions but the Minister’s reliance on the Memorandum’s

summary of output-based methods in the Decision indicates that she recognized the importance of the fair and reasonable standard in the ITC computation scheme. [ 95 ] I do not accept the Bank’s position that subsection 141.01(5) requires the Minister to approve a proposed ITC computation method if it is fair and reasonable. Such an

interpretation of subsection 141.02(20) ignores Parliament’s distinction between QIs and non-QIs. The Bank provided no submissions as to why the Minister’s application of the reasonable approximation standard to her assessment of the 2018 Method was unreasonable or otherwise improperly derogated from fundamental ITC calculation principles. The Minister’s use of the standard is consistent with the CRA’s guidance in Bulletin B-106 and I find no reviewable error in the Decision in this regard.

Scope of the Minister’s approval authority vs audit matters [ 96 ] The Bank returns to tax administration principles to argue that the scope of the Minister’s authority under subsection 141.02(20) must be narrowly circumscribed to respect the distinction between the audit and approval processes and to safeguard its right to appeal audit disputes to the TCC. These submissions revisit the purpose and context of

section 141.02. BMO argues that subsection 141.02(20) contemplates a methodology review. It does not extend to the review of a QI’s underlying factual assumptions, the assessment of which must be reserved to audit. [ 97 ] BMO submits that the Minister denied its 2018 Application based on her disagreement with its underlying business assumptions, thereby exceeding her authority. The Bank states that Canada’s tax compliance system is premised on the principle of self-assessment based on a taxpayer’s own views as to its tax payable ( BP Canada Energy Company v Canada (National Revenue) , 2017 FCA 61 at paras 81-82 ).

Section 141.02 is a departure from established principles and is unique because the Minister’s approval process proceeds in the absence of actual data. [ 98 ] The Bank argues that a QI must be able to self-report using an ITC computation method based on its expected future use of inputs. Unless the proposed ITC computation method is completely beyond reason, the Minister must accept the QI’s business assumptions and approve the method as proposed. All disputes as to future use of inputs and the components of the proposed methodology will be dealt with at audit, assessment and, ultimately, by appeal to the TCC.

The Bank emphasizes the need to maintain the distinction between assessment and audit, a distinction it states was blurred in this case as the same CRA personnel were involved in both. The audit process, a distinct, lengthy and detail-oriented process based on the QI’s actual results, acts as a further limitation on a QI’s ITC claim. [ 99 ] The Respondent submits that the Minister is not required to assume that a QI’s expected use of inputs is true. In its view, the Bank’s argument is circular.

The Respondent argues that the very purpose of a methodology review is to assess how the QI is going to use its inputs to establish quantitative amounts. While the Respondent acknowledges that what is and is not methodology may be a fine line, the Minister is fully authorized to question the structure of the method proposed and the formula itself. [ 100 ] I find that the Minister’s approval authority under subsection 141.02(2) of the ETA requires her to focus on the structure of a QI’s proposed methodology and the application of the methodology to the QI’s business.

The Minister is required to base her assessment on the business information submitted by the QI but is not required to adopt the QI’s characterization of that information for GST purposes. She is not required to assume the accuracy of the proposed elements or structure of the QI’s methodology. [ 101 ] The Bank’s position unreasonably limits the Minister’s authority. I do not agree that the Minister must approve a QI’s proposed ITC computation method unless it is " “completely beyond reason” " .

Other than insisting on the distinction between the approval and audit processes and the importance of the self-reporting principle, BMO has not identified any indication in the text or context of

section 141.02 of Parliament’s intention to so limit the Minister’s authority. The Bank has not argued that the 2016 business information it provided to the CRA mischaracterized its business operations or that its 2018 operations would differ materially. The Bank’s submission ignores the structure of

section 141.02 and seeks to reinstate its pre-existing right of appeal of disputes regarding methodology to the TCC. [ 102 ] Throughout

section 141.02, Parliament carefully delineates the situations in which a financial institution and, more rarely, a QI, will have access to appeal to the TCC (see, e.g., subss. 141.02(27), (28), (29) and para. 141.02(31)(g)). The flowcharts provided by both parties at the hearing of this application do not differ in their tracing through the

section of the consequences of a Minister’s approval or denial of a QI’s application. Parliament has removed from the ambit of a TCC appeal the question of whether a QI’s ITC computation method is fair and reasonable and authorized the Minister to assess, in advance, a QI’s proposed method. The interplay of various subsections of

section 141.02 prohibit an appeal of the Minister’s decision to the TCC. This marked change to the rights of QIs does not alone mean that the Minister’s approval authority must be narrowly circumscribed as argued by the Bank. [ 103 ] Parliament intended a pre-approval process for the computation methods of QIs, without access to actual results. As stated above, neither the text of

section 141.02 nor a purposive and contextual

interpretation of the

section indicates that the process is merely a temporal limitation placed on QIs to select one ITC computation method prior to the commencement of a fiscal year. The Minister must assess a QI’s application, including the business information set out by the QI, against the applicable principles and provisions regarding

ITC allocation methods. [ 104 ] I find that the Minister acted within the scope of her subsection 141.02(20) authority in her assessment of the 2018 Application. She did not usurp the audit function. The Minister acknowledged the Bank’s factual assertions as to the integrated nature of its business and relied on its expected future use of inputs to gauge the application of the 2018 Method against the Bank’s 2016 financial information. The Minister focussed on the structure of the Bank’s proposed 2018 Method.

She questioned whether the proposed allocation method and OMF ratio resulted in a reasonable approximation of the inputs used for the purpose of making taxable supplies. I address whether the Minister did so reasonably in the next

section of this judgment

Summary regarding

interpretation of

section 141.02 of the ETA [ 105 ] The Bank summarizes the preceding sections of my analysis by posing two questions: (1) which party is right about the purpose of

section 141.02?; and (2) what was the Minister’s job under subsection 141.02(20) ? [ 106 ] I find that a textual, contextual and purposive analysis of

section 141.02 of the ETA indicates that Parliament has conferred on the Minister the authority to approve the proposed ITC computation method of a QI by assessing the structure of the proposed methodology and the business information provided by the QI applicant. The Minister’s authority is not limited substantively by criteria in subsection 141.02(20) or, more generally,

section 141.02 , nor is it limited to a temporal assessment. [ 107 ] In enacting

section 141.02, Parliament did not empower the Minister to disregard fundamental GST and ITC principles in exercising her pre-approval authority, nor did the Minister do so in this case. I have considered the Bank’s reliance on those principles and on general principles of tax administration in support of its argument that the Minister must approve a proposed methodology if it is fair and reasonable. I do not agree.

The Bank has not pointed to a specific derogation by the Minister of those principles in the Decision other than her failure to apply the fair and reasonable standard set out in subsection 141.01(5) of the ETA . However, I find that subsection 145.01(5) has been superseded by the specific QI regime in

section 141.02 . The structure of the

section and Parliament’s intentional use of the fair and reasonable standard in subsections other than subsection 141.02(20) are strong evidence of a contrary decision by the legislature. The amendment to subsection 141.01(5) to render its application subject to the specific provisions of

section 141.02 bolster this conclusion. [ 108 ] The Bank argues that the Minister erred in failing to include in the Decision her statutory

interpretation of subsection 141.02(20) before providing her substantive reasons for the denial. I do not find the argument indicative of a reviewable error. The Minister was not required to set out a comprehensive statutory

interpretation of

section 141.02 and subsection 141.02(20) in the Decision. [ 109 ] The Minister explained the guiding principles for her assessment of the Bank’s 2018 Application in Attachment A to the Decision letter, consistent with departmental guidance. She set out the test against which she would assess the 2018 Method ( Vavilov at para 123 ). I find no evidence in the Decision or in the record that the Minister breached general GST principles or improperly ignored the importance of ITCs as the mechanism by which the GST remains a VAT. In light of my findings regarding the scope of

section 141.02 , I conclude that the Minister carried out her analysis within the contextual and purposive constraints of the legislation ( Vavilov at para 108 ). The Minister exercised her discretion under subsection 141.02(20) in accordance with the statutory scheme of the ETA , the principles of ITC computation and allocations methods, and the specific regime contemplated by Parliament in

section 141.02 ( Vavilov at para 120 ). 2.

Were the Minister’s reasons for the Decision reasonable? [ 110 ] The Minister gave three reasons for her denial of the Bank’s 2018 Application: - The Bank’s allocation of the Treasury group’s Interest Amounts (the Treasury Allocations) to the three customer-facing operating groups permitted the Bank to recover a portion of the GST Costs of those groups but the operations of those groups are substantially confined to the provision of financial services to Canadians (exempt supplies). - The components of the OMF ratio proposed by the Bank omitted one crucial factor, leading to a distorted Recovery Rate. - The 2018 Method did not account for differences in operations and operating costs between the Corporate group, on the one hand, and P&C, Wealth Management and Capital Markets, on the other, resulting in further distortion of the Bank’s ITC claim. [ 111 ] The Minister concluded that the Treasury Allocations and the two distortions resulted in an ITC computation method that did not reasonably approximate the actual use of the Bank’s residual inputs and an improperly elevated Recovery Rate.

The Bank challenges each of the Minister’s reasons for her denial. The Bank also submits that the Minister was required to justify the departure from her prior approvals of its ITC allocation methods and failed to do so. OMF/Allocation issue: The Treasury Allocations [ 112 ] The Bank submits that the Decision is fundamentally flawed due to the Minister’s mischaracterization or misunderstanding of the nature of its business.

BMO states that the lynchpin of the Minister’s denial of the 2018 Application was her refusal to accept its Treasury function as an integral element of the customer-facing operating groups. [ 113 ] The Treasury Allocations contemplated in the 2018 Application reflect the Bank’s position that it carries on one integrated and inseparable banking business through five operating groups. The 2018 Method and OMF calculations rely on BMO’s financial reporting systems, including its |||||||||||||||||||||||||||||||| calculations, and present its operations in a manner consistent with its non-tax reporting.

The Bank argues that its financial services business comprises the lending and borrowing of funds within Canada and in many other countries but the two elements of its business are not distinct. The one (lending) cannot exist without

the other (borrowing). The Bank’s regulators require such integration and mandate its public reporting on a consolidated basis. [114] The Respondent states that the Minister understood the Bank’s business and its integration argument. The Respondent submitsthat BMO’s insistence that the Treasury Allocations are permissible because the customer-facing operating groups rely on the Treasurygroup f

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