Changes to Holding Company Rules May Limit Holding Corporations' Ability to Claim ITCs

  • April 09, 2019
  • Alicia Malone, associate and senior manager at KPMG Law LLP

Generally, under the Excise Tax Act (the “ETA”) a person may claim certain amounts of GST/HST it has paid as input tax credits (“ITCs”) only to the extent the person has commercial activity relating to the GST/HST amounts in question (i.e., the person has made taxable supplies). However, section 186 of the ETA, commonly referred to as the ‘holding company rules’ has traditionally allowed a corporation that held the shares, or debt, of a related corporation, to claim ITCs on the basis of the commercial activity of its subsidiary (or subsidiaries, as the case may be).

Though hotly contested between the Canada Revenue Agency and GST/HST registrants, the Tax Court of Canada as found the application of section 186 to be quite broad, with the main requirement (among others) being the inputs on which the ITCs were claimed could “reasonably be regarded as having been so acquired, imported or brought into the province for consumption or use in relation to shares of the capital stock, or indebtedness, of another corporation that is at that time related to the parent,” as set out in paragraph 186(1)(a) of the ETA[1]

On July 27, 2018 the Department of Finance (“Finance”) introduced proposed changes to section 186. The proposed changes are effective as of the date of the announcement.

The proposed new rules do away with the broad language in the current provision, and prescribe three scenarios in which a holding corporation may claim ITCs. In all three scenarios the subsidiary must be a qualifying “operating corporation.” An “operating corporation” is defined as a corporation that is related to the holding corporation and all or substantially all of its property was last manufactured, produced, acquired or imported for use or supply in the course of the corporation’s commercial activity. Similar to the old rules, a holding corporation can essentially look through a chain of related corporations between the holding corporation and the operating corporation so long as the chain is not interrupted by trusts, partnerships or other legal structures that are not corporations.