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Canada

20 August 2018

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Proposal to Tighten Rules on GST/HST Input Tax Reclaims by Holding Companies

Finance Canada on 27 July released proposals which would restrict the eligibility of holding companies to reclaim input tax with respect to GST/HST charged to them on their acquisitions of goods and services. The Federal Government had already indicated in the 27 February 2018 Budget that it intends to review and restrict the rules.

One of the main conditions of eligibility for reclaims of GST/HST input tax is that the person must be engaged in an economic activity. Holding companies the activity of which is limited to the holding of shares in other (group) companies are not deemed to be engaged in an economic activity and, therefore, would not be eligible for GST/HST input tax reclaims. Under the existing Holding Company Rules, however, a holding company may reclaim input tax in the following circumstances: the holding company is "related to" an operating company and the operating company is engaged exclusively in a taxable activity. In that case, the holding company may claim the GST/HST input taxes on its costs or imports, to the extent the costs are "related to" to the shares or indebtedness. In contrast to the strict interpretation adopted by the Revenue, the Court interpreted the words "related to" expansively, thus allowing holding companies to claim the recovery of input taxes where the costs or imports are only indirectly or even secondarily related to the shares or indebtedness.

The pending amendment is intended to clarify the law in support of the restrictive position of the Revenue service by introducing a set of tests exactly defining the circumstances in which a holding company may be eligible to recover input taxes. The amendment would become effective on the declaration date, ie 27 July 2018.

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