Financial institutions render tax-exempt financial services, as well as making supplies of property and services that are taxable (that is, subject to the 5% GST and 9.975% QST).

Financial institutions are not entitled to claim input tax credits (ITCs) or input tax refunds (ITRs) for property and services acquired for the purposes of rendering exempt financial services.

They can, however, claim ITCs (under the GST system) and ITRs (under the QST system) for property and services acquired to make supplies of taxable property and services.

A financial institution may acquire some property and services for the purpose of making supplies of both taxable and exempt property and services. If that is the case, ITCs and ITRs may be claimed in proportion to their use in making taxable supplies.

To determine the proportion, financial institutions must divide the property and services acquired into categories and use allocation methods to calculate the ITCs and ITRs claimed in each category. To do so, financial institutions must file the annual information return.