Proposed GST/HST changes target holding companies
On 17 May 2019, draft GST/HST legislation was proposed that may significantly impact the ability of Canadian resident holding corporations, partnerships, and trusts to claim input tax credits (ITCs) in relation to the shares and debt of related corporations.
Under current legislation, a corporation that is resident in Canada and registered for GST/HST can claim ITCs when it acquires property or services that can reasonably be regarded as having been acquired for consumption or use in relation to the shares of capital stock or indebtedness of a related corporation that is engaged exclusively (90% or more) in commercial activities. Whether an acquisition of property or services can reasonably be regarded as being in relation to the shares or indebtedness of a related corporation has proven to be contentious.
The proposed amendments attempt to limit the ability of a holding corporation to claim ITCs to recover GST/HST incurred on acquisitions of property and services to one or more specific purposes:
- For the purpose of the holding corporation obtaining, holding, or disposing shares or indebtedness of the operating corporation, or the operating corporation issuing, redeeming, converting, or otherwise modifying its own shares or indebtedness;
- For the purpose of the holding corporation issuing its own shares or indebtedness, if the proceeds are lent to or used to acquire shares or indebtedness of the operating corporation, where the operating corporation in turn uses the proceeds in the course of its commercial activities; or
- Where 90% or more of a holding corporation’s property consists of investments in operating corporations and property consumed, used, or supplied exclusively in the course of the parent’s commercial activities, for the purpose of carrying on most activities of the parent, other than certain specified exempt activities.
If enacted, the effective date for the proposed amendments described above is 28 July 2018 when the changes were first proposed.
In addition, effective 18 May 2019 if enacted, the new rules are proposed to be extended to partnerships and trusts that hold units of related operating corporations. The rules are not extended to include operating entities other than corporations, however.
Because proposed amendments have no legal effect until they have received royal assent, they cannot be imposed on a registrant. However, where amendments are applied retroactively after royal assent, the registrant will be responsible for applying the amended legislation from the effective date.
What does this mean to your clients with Canadian structures?
- A holding corporation that currently claims ITCs in relation to the shares or indebtedness of a subsidiary should review the changes to ensure that the expenses still qualify under the proposed rules.
- A partnership or trust that is related to an operating corporation may be entitled to claim ITCs that were previously unavailable.
- The proposed changes will not extend to a partnership or trust that is the operating entity in a tiered structure.
- A holding corporation, partnership, or trust may be able to claim additional ITCs where all or substantially all of its property is comprised of shares or indebtedness of operating corporations and/or property consumed, used, or supplied in the course of the parent’s commercial activities.