Input Tax Credits (“ITCs”) are typically not available for “holding companies” that exist solely to hold shares or indebtedness of another company due to the fact that taxpayers are only entitled to ITCs in respect of tax paid on property or services acquired in the course of commercial activities. However, section 186(1) of the Excise Tax Act contains a special rule allowing a company to claim ITCs in respect of expenses “that can reasonably be regarded as having been so acquired 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 company, in certain instances.
The general requirement for those ITCs is that the corporate related subsidiary company pass a “substantially all” test, in terms of the property the corporate subsidiary last acquired (the test is whether 90% of that property was acquired for consumption, use or supply exclusively in the course of its commercial activities). If so, the holding company becomes entitled to ITCs with respect to expenses in relation to shares or debt of the related subsidiary.
Historically, the issue has either been whether the corporate subsidiaries are “related” (i.e., a 50% + test), and if related, whether the holding company’s expenses were “in relation to” the shares or indebtedness of the subsidiary.
A landmark decision of the Tax Court of Canada in Miedzi Copper Corporation v. The Queen (2015 TCC 26) has concluded that when the pre-conditions in section 186 have been triggered, the section can apply to provide ITCs for virtually all expenses of the holding company.
At all relevant times, Miedzi was a holding company resident in Canada, and was the sole shareholder of a Luxemburg company (“Luxco”), which sole purpose was to be the sole shareholder of six different mineral exploration companies which carried on commercial activities. Miedzi funded the operations of the exploration companies through loans, which were converted to preference shares of Luxco at the end of each year. Miedzi did not have its own office or employees and its operations were carried out by a consulting firm that it contracted with.
Miedzi claimed ITCs in respect of all GST/HST that it paid during the period, including:
- Services from and expenses incurred on Miedzi’s behalf by the consulting firm;
- Legal fees for its own incorporation, reporting and filing services, the private placement, reporting and filing services, advice relating to the TCC appeal, and advice on a shareholder’s agreement, a stock option plan and related amendments to articles;
- Accounting fees for the preparation of Canadian tax returns, audit of financial statements, advice on tax reporting obligations and advice relating to the HST audit;
- Miscellaneous cell phone, parking, meal and courier charges;
- Web domain name registration charge; and
- Hotel accommodation regarding attendance at a conference.
CRA assessed Miedzi, denying the ITCs relating to these services, arguing that they were not “in relation to” shares or debt of Luxco.
Meizdi objected to the assessment arguing that all of the services in issue were acquired in relation to shares or debt of Luxco, since the only activity carried on by Miedzi was holding the shares of Luxco.
Justice Paris, in a well-reasoned decision of the TCC first noted that section 186(1) – once all pre-conditions were met – deems a holding company to be carrying on commercial activities, thereby allowing it to claim ITCs. Justice Paris then noted that section 186(3) allows for the application of section 186(1) to tiers of related corporations.
Miedzi relied on the combination of both sections since it held the operating companies (i.e. the companies carrying on commercial activities) through Luxco. The specific issue to be determined was whether the services acquired by Miedzi (noted above) were “in relation to” shares or debt of Luxco.
The TCC cited the TCC and FCA decisions in Stantec Inc. (2008 TCC 400; aff’d 2009 FCA 285) for its conclusion that the phrase “in relation to” should be interpreted broadly for the purposes of section 186.
Given that Miedzi had no other activity apart from its share ownership in Luxco, the TCC concluded that everything that Miedzi does can be said to be done in relation to the shares or debt of Luxco. Accordingly, it was held that there was a clear nexus between the services in issue and the shares or debt of Luxco. In concluding as such, the TCC noted that “[b]ut for its ownership of the Luxco shares and its funding of Luxco by debt, Miedzi would not have acquired those services.”
The TCC agreed with Miedzi that subsection 186(1) was intended by Parliament to be a so-called “look-through” rule allowing a holding company to claim ITCs that the underlying corporation could have claimed if it incurred the costs of the services or property directly. It was noted that that purpose of the provision would be frustrated by the narrow reading of the provision suggested by the Minister. Accordingly, the appeal was allowed, and the TCC concluded that Miedzi was entitled to all of its ITCs at issue.
This decision would appear to break open section 186 to the potential application that was intended by Parliament for this special rule.
It is hard to fault the TCC for the conclusion that it reached in this case. On the other hand, CRA’s approach involved an unnecessarily complex analysis of the services being provided in determining whether the provision applied. As Justice Paris seems to have rightly concluded, this appears to have been inconsistent with both Parliament’s intention and previous interpretations by the TCC (and arguably the FCA and SCC).
In the end result, the TCC’s conclusion here should result in a more straightforward approach to the application of section 186 than had previously been the case. The rule should be that where the holding company does nothing other than hold shares and indebtedness of related corporations meeting all of the pre-conditions, all GST/HST paid on a holding company’s acquired services will be claimable as ITCs. More difficult situations may arise where the holding company has commercial or other exempt activities of its own, or owns a mix of “related” and “unrelated” (e.g., ownership < 50%) companies.
Unfortunately, Miedzi is an informal procedure decision, which might result in CRA continuing to ignore it (and the previous decisions in Stantec) as binding in respect of section 186(1). Time will unfortunately have to tell.