August 30, 2018
Holding Company Rules – Proposed Amendments Will Affect ITCs
Holding company rules in Canada normally allow a Canadian resident parent (“Holdco”) corporation to claim input tax credits (ITC) for expenses relating to the shares or indebtedness of a related operating (“Opco”) corporation that is engaged in commercial activities.
On July 27th 2018, the Department of Finance Canada released proposed amendments to these holding company rules.
Although they have expanded the types of property that qualify for use in the commercial activity of an Opco, they have clarified, or rather narrowed, the types of expenses paid by the Holdco on which an input tax credits can be claimed.
Criteria for Claiming ITCs
Previously, the holding company rules allowed a Holdco to claim ITCs if it met the following conditions:
- Holdco is resident in Canada and a GST registrant.
- Holdco is related (>50% control) to Opco.
- The expense can reasonably be related to the indebtedness or shares of Opco.
- At the time Holdoc acquires the expense, 90% or more of Opco’s assets are used exclusively in commercial activities.
Proposed Amendments to ITC Claim Eligibility
The proposed changes clarify/codify the types of expenses eligible for ITC claims. The following conditions are unchanged:
- Holdco is resident in Canada and registered for GST.
- Holdco is related to Opco.
- At the time the expense is acquired by Holdco, 90% or more of Opco’s assets are used exclusively in commercial activities.
However, in the proposed changes to the holding company rules, the expenses eligible for ITC claims must now be for the following specific purposes:
- Holdco’s incurred expenses for transactions involving the shares of Opco such as selling/disposing, purchasing, or holding of the Opco shares or indebtedness.
- Holdco’s incurred expenses related to Opco redeeming, issuing or converting, or modifying the shares of its capital stock or indebtedness.
- Holdco’s incurred expenses in raising capital by issuing its own shares or debt to the extent the proceeds raised was transferred to Opco for Opco’s use in its commercial activities.
- Other expenses only if Holdco meets the following conditions:
- 90% or more of the properties held by Holdco are shares or debt of one or more related Opcos that each meet condition 3 above.
- The expense is not in respect of making an exempt supply unless it is one of the specified financial services listed.
In summary, if the proposed amendments to these holding company rules are enacted, a Canadian resident holding company’s ability to claim input tax credits may be significantly reduced due to the more restrictive circumstances and conditions. In addition, the Minister of Finance in Canada is looking to further restrict Holdco ITCs by changing the “related” requirement to a “closely related” requirement, and to expand these holding company rules to include partnerships and trusts.
The above content is believed to be accurate as of the date of posting. Canadian and US Tax laws are complex and are subject to frequent changes. Professional tax advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.