Generally input tax credits (ITCs) can be claimed if a property or service is acquired for consumption, use, or supply in the course of a GST registrant’s commercial activities. The presence or absence of consideration does not appear to be critical to the finding of a supply as defined under the ETA. However, the FCA in Lyncorp International Ltd. (2011 FCA 352) concluded that ITCs cannot be claimed for GST paid on inputs acquired in providing free management and consulting services to related companies.
Mr. M was the sole owner and operator of Lyncorp (the appellant), which carried on business by, among other things, investing in shares or indebtedness of other active corporations to which Mr. M thereafter provided business consulting services. The consulting services provided were intended to maximize the value of those corporations for their respective shareholders, including the appellant and indirectly Mr. M. The appellant held minority interests – up to 50 percent – in the investee corporations. Neither the appellant nor the investee corporations paid Mr. M for the consulting services that he provided. The flight expenses in dispute were related to the trips taken by Mr. M using a private jet (in which the appellant had a fractional interest) to visit the investee corporations. The appellant paid the flight expenses and then claimed ITCs on the related GST paid by it. The ITC claim was disallowed and the appellant appealed to the TCC. (The appellant was also denied its claim for an income tax deduction for the flight expenses, which it said were incurred for the purpose of producing dividend income.)
The appellant argued that the consulting services were provided to the investee corporations for the purpose of ultimately benefiting the appellant in the form of future dividends. The minister said that the flight expenses were incurred for Mr. M’s personal benefit, not for the appellant; if there was any commercial purpose, the purpose of the supply related to the businesses of the investee corporations, not the appellant’s business.
The TCC began by reviewing the ETA definition of “commercial activity” and said that it excluded non-business and personal activities. The TCC determined that the disputed flight expenses were related to the businesses of, and supplied in the course of the commercial activities of, the investee corporations, not the appellant’s business or commercial activity. The TCC further determined that the appellant could be viewed as the ultimate consumer as it incurred flight costs to provide free consulting services to the investee corporations. Thus the TCC concluded that no ITCs were available to the appellant.
On the appellant’s appeal, the FCA did not find a palpable and overriding error in the TCC’s decision. The appellant argued that the broad definition of business – an undertaking of any kind whatever – did not require that a business be engaged in for profit. However, the FCA said that that argument did not meet the relevant objection: the term “business”, no matter how broadly defined, must be the appellant’s business. As a result, the FCA dismissed the appeal.
Although not directly discussed by the FCA, it seems that the provision of free management and consulting services to the investee corporations may have been viewed as a supply of services provided in the course of the appellant’s commercial activities. In the early days of the GST, the CRA commented to that effect when considering whether that type of activity would permit the supplier to register for the GST under the rules in section 240 of the ETA (which require “commercial activities”): see the CRA’s published position in the GST/HST Policy Statement P-032 (July 20, 1992, now obsolete): “It is the [CRA]’s position that the provision of management services by a holding corporation to a subsidiary corporation for nil consideration is considered to be a commercial activity”. In consequence one would expect that the acquisition of inputs by a GST registrant in providing management services to its related corporations, whether or not for consideration, is properly regarded as “for consumption, use or supply” in the commercial activities of the GST registrant within the meaning of those words in subsection 169(1) of the ETA.
The GST/HST Policy Statement P-032 is no longer in use, perhaps - in light of the Crown’s position in Lyncorp – because the CRA abandoned that position when it understood the full implications of its initial decision. That change is unfortunate: the finding in Lyncorp could result in a cascading of GST at the holding corporation level of a bona fide chain of commercial businesses. The result is not good tax policy, especially for businesses that are trying to compete globally in today’s economic environment. The relief available in section 186 of the ETA for holding companies to claim ITCs to the extent that their expenses relate to the shares or indebtedness of their related corporations (as determined under ETA section 126(2), that is having controlling interests in those corporations) is very limited and does not address the tax policy issue raised.
Robert G. Kreklewetz and Jenny Siu
Millar Kreklewetz LLP, Toronto
Please note that a version of this blog may have previously been published by the author(s) in the Canadian Tax Foundation’s Canadian Tax Highlights publication.