On July 27, 2018, the Department of Finance announced draft legislation to amend the GST/HST holding corporation rules in section 186 of the Excise Tax Act (Canada) ("the ETA"), effective on and after July 27, 2018. This article summarizes the background, the proposed rules, and related considerations for corporate groups that rely on the rules in section 186 to claim input tax credits ("ITCs").
Background
For the most part, the proposed changes focus on subsection 186(1) of the ETA, which generally allows a holding corporation to claim ITCs in respect of GST/HST expenses where the holding corporation and another corporation are "related" as defined in subsection 126(1) of the ETA ("the Related Test"), and the GST/HST expenses can reasonably be regarded as having been acquired for consumption or use in relation to shares or debt of the related corporation ("Purpose Test"). All or substantially all of the property of the related corporation must also be for consumption, supply or use exclusively in the course of its commercial activities ("Property Test"). While both the holding corporation and the related corporation must be corporations, only the holding corporation is required to be resident in Canada and registered for GST/HST.
Over the years, the Canada Revenue Agency ("the CRA") interpreted the Purpose Test in a manner that significantly limited the scope of subsection 186(1). For example, the CRA's view as expressed in GST/HST New Memorandum 8.6, "Input Tax Credits for Holding Corporations and Corporate Takeovers", November 2011, example #3, was that if a parent corporation raises capital by issuing its own shares in order finance the purchase of additional shares in a related corporation, related expenses would be "for consumption or use in relation to HoldCo issuing shares of its capital stock (the first order of supply) and not for consumption or shares in relation to the shares of [the related corporation]" as required to claim ITCs under subsection 186(1).
Practitioners and taxpayers generally took a broader view of subsection 186(1) based on the jurisprudence, including the Tax Court of Canada's informal decision in Stantec Inc. V.R., [2008] G.S.T.C. 137 (TCC). In the absence of a binding decision from the courts on the scope of this provision (the Tax Court of Canada's Act provides that an informal procedure judgement is not to be treated as precedent in any other case), the scope of subsection 186(1) remained the subject of dispute.
Proposed Rules
While the proposed changes address some of these issues, they go beyond clarifying the scope of the Purpose Test, and essentially replace it with a detailed set of rules. If the proposed legislation is enacted in its current form, ITC eligibility will no longer turn on whether the inputs "can reasonably be regarded" as being in relation to the shares or debt of a related corporation, but on whether the detailed and specific requirements of paragraph 186(1)(a), 186(1)(b) and 186(1)(c) are met.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
