Holding Company ITCs: New CRA Memo
Holding companies (holdcos) are commonly used for share acquisitions and for other income tax purposes. From a GST/HST perspective, holdcos are generally involved in exempt activities--acquiring and holding shares. Because input tax credits (ITCs) under section 169 of the ETA are available only in respect of commercial activities and not in respect of exempt activities, holdcos are normally unable to claim ITCs, absent special rules. Subsection 186(1) allows holdcos to claim ITCs for inputs reasonably regarded as "relating to" shares or debt of a related corporation engaged exclusively in commercial activity. Subsection 186(2) allows holdcos to claim ITCs for inputs that "relate to" the acquisition or proposed acquisition of all or substantially all of the voting shares of another corporation engaged exclusively in commercial activity. If all the other conditions of subsection 186(1) or (2) are met, the holdco is deemed to have acquired the inputs for use in the course of its commercial activities and is thereby entitled to claim ITCs.
Recent case law supports a broad interpretation of the phrases "relating to" and "relate to." In Stantec (2008 TCC 400, aff'd. 2009 FCA 285), the TCC considered the meaning of the phrase "relating to" in section 186 and concluded that it implies a wide rather than a narrow view in connecting two matters (Slattery (Trustee of) v. Slattery,  3 SCR 430). The court stated that the concept of "in relation to" is not one of prominence, let alone exclusivity. The connection need not be primary, substantial, or directly related. The court held that listing services acquired by a holdco to list its shares on a stock exchange in order to acquire the shares of a related corporation qualified under both subsections 186(1) and (2) because the listing services "relate to" the shares of the other corporation and "relate to" the acquisition of those shares, respectively.
As set out in GST / HST Memorandum 8.6, "Input Tax Credits for Holding Corporations and Corporate Takeovers" (November 2011), some aspects of the CRA's interpretation of section 186 appear to be significantly narrower than the case law. The memorandum provides an example in which a holdco raises money by the issuance of its own shares so that it can finance the acquisition of additional shares of a related company. According to the memorandum, the holdco would not be entitled to ITCs under subsection 186(1) for legal and accounting services acquired to issue the shares because the services are not reasonably "related to" the shares of the other company. Rather, the services are acquired for use in relation to the holdco's issuance of its own shares (an exempt activity), the "first order of supply."
Interestingly, the TCC specifically rejected the same example (in reference to an earlier policy statement, P-196P) in Stantec. Since the memorandum does not indicate whether it distinguishes or otherwise takes Stantec into consideration, this point could cause uncertainty for taxpayers. Further, the memorandum's "first order of supply" or direct-use concept appears to be based on the definition of "commercial activity" and the specific wording of section 169 (see 398722 Alberta Ltd., 2000 CanLII 15331 (FCA)). It is not entirely clear, however, whether it is appropriate to apply this concept to section 186 of the ETA, since that provision explicitly deems inputs to be acquired for use or consumption in commercial activities when certain conditions are met.
Moskowitz & Meredith LLP, Toronto