May 9, 2012
Holding Companies — Are You Overlooking GST/HST Risks or Opportunities?
Does your corporate group include holding companies? If so, have you considered whether these holding companies have an opportunity to claim input tax credits (ITCs) on some of their expenses to reduce your group’s overall GST/HST costs?
If your group’s holding companies have filed ITC claims, you should keep in mind that the CRA appears to be reviewing some of these claims. Holding companies (Holdcos) should note that stringent conditions apply to their ITC claims under the law and the CRA’s recently released policy remains restrictive, despite a court decision in favour of the taxpayer.
Indirect tax costs keep increasing (e.g., the Ontario and British Columbia HST, the recent QST rate increases and financial services soon becoming QST-exempt, eliminating the ability to recover QST paid on related expenses). As such, it is a good time for many Holdcos to review their corporate structures and expenses to determine:
· Whether they are entitled to ITCs
· Whether they can better substantiate past claims in light of the CRA’s recently published policy
· How much the proposed QST changes may cost.
Special ITC rules
for holding companies
Based on the special rules, Holdco is permitted to claim ITCs for GST/HST paid on expenses that are related to Subco’s indebtedness or acquiring, holding or disposing of the Subco shares provided, among other conditions, that Subco has acquired its own property for use in commercial activity. Specifically, Subco must have acquired all or substantially all of its property (generally interpreted by the CRA to mean 90% or more for a non-financial institution) exclusively in the course of commercial activities.
Examples of such expenses that may give rise to ITCs for Holdcos may include legal, appraisal and accounting services. The special rules for Holdcos also contain rules for multi-tiered corporations and certain takeovers.
While the CRA acknowledges in its memorandum that it is a question of fact whether a particular property or service can reasonably be regarded as being acquired by Holdco for use “in relation” to the shares of Subco, the CRA appears to apply a “first order supply” approach to determine whether the special rules apply. As such, the CRA looks to the immediate use of an input to determine a Holdco’s eligibility for an ITC.
However, interestingly, the Tax Court of Canada has previously rejected the CRA’s first order supply approach for the special rules and instead applied an “ultimate use” approach in a decision rendered in favour of the taxpayer.
For example, if a Holdco incurs an expense in issuing its own shares to raise funds to finance its acquisition of additional shares of its Subco, the immediate use of the expense may be related to Holdco’s shares, while the ultimate use of the expense may be related to Subco’s shares. It remains to be seen whether the CRA’s policy will be challenged again in the courts.
Holdcos may also be
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Information is current to May 7, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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