May 9, 2012

No. 2012-23



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.

Holdco structures are common in Canada in many industries including mining, manufacturing and real estate. Holdcos may be used to help limit liability or to acquire shares in an existing business that may be resident in Canada or in another country.

Special ITC rules for holding companies
Special rules apply to GST-registered Holdcos that are resident in Canada and that invest in related corporations that are engaged in commercial activity. These special rules allow a Holdco to claim ITCs for GST/HST paid on some expenses under specific circumstances. The special rules are needed because a Holdco that only holds shares or indebtedness in a subsidiary corporation (Subco) would not normally be entitled to claim ITCs under the general rules.

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.

KPMG observation

Technical issues arising from the special rules include the meaning of the words “related to” Subco shares or indebtedness, which can affect a Holdco’s ability to claim ITCs.


Also, the CRA has been challenging Holdcos’ ability to claim ITCs related to Holdcos’ own amalgamations, takeovers and other corporate reorganizations.

CRA’s policy
The CRA’s GST/HST memorandum “Input Tax Credits for Holding Corporations and Corporate Takeovers”, released in November 2011, sets out its interpretation of the special rules for Holdcos. This interpretation appears to be more restrictive than a court decision rendered before this memorandum was released.

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.

KPMG observation

As noted above, one of the conditions of the special rules relates to the use of the Subco’s own property. The CRA policy does not address how to determine the extent to which Subco’s property is used in commercial activity. For example, it is unclear whether this calculation should be based on the current value attributed to classes of property on Subco’s balance sheet or on some other measure.

Holdcos may also be financial institutions”
An additional matter to consider is that Holdcos may be financial institutions for GST/HST purposes based on the percentage of their revenue that is generated from financial services. For example, a Holdco could be a financial institution because it has $1 million in interest revenue from unrelated entities. Being a financial institution could affect Holdco’s ability to claim full ITCs as well as require it to file a GST/HST Annual Information Return.

KPMG observation

It is important for a Holdco to determine whether it is a “financial institution” for GST/HST purposes. The CRA is also reviewing Holdcos’ ability to claim full ITCs when they qualify as financial institutions. A Holdco that qualifies as a financial institution may, however, have alternate arguments to allow it to claim ITCs if they relate to investments of non-resident entities.

We can help
Your KPMG adviser can help your corporate group determine whether your holding companies can claim ITCs. If your holding companies have claimed ITCs, we can help you evaluate any risks or exposures you may face. For details, contact your KPMG adviser.



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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