Changes to the GST / HST Holding Corporation Rules

The federal government has proposed changes to rules around how a parent corporation can claim input tax credits to recover indirect taxes such as GST or HST. If passed, the amendments will affect the tax position of holding companies.
More specifically, the proposed changes impact a GST / HST rule commonly referred to as the “holding corporation rule.” This rule generally allows a parent corporation to claim input tax credits (ITCs) to recover GST / HST paid on expenses that relate to another corporation. Absent these specific rules, a holding company that has no other activity than holding shares or debt of a related corporation is generally not able to claim the credits on costs because it does not carry on commercial activities.

These rules provide that, where a parent corporation resident in Canada incurs expenses that can reasonably be regarded as being in relation to the shares held or indebtedness of a commercial operating corporation (a corporation all or substantially all of the property of which is for consumption, use or supply in commercial activities) and the parent corporation is related to the commercial operating corporation, the expenses are generally deemed to have been incurred in relation to commercial activities of the operating corporation and the parent corporation can claim the eligible ITCs.

The parent corporation was not required to be closely-related to the operating corporation, only having been related to the operation corporation, for purposes of this rule.

Proposed Changes and Consequences

The federal Department of Finance has proposed changes to the rules and invited input from business and practitioners. The key aspects of the changes are the following:

1. The potential expansion of the rules to include not only corporations, but also partnerships and trusts. 

The expansion of the rules to partnerships and trusts may be a reasonable change. However, the application of the closely-related test in these circumstances may not be straight-forward.

2. The required degree of relationship between the parent entity and the commercial operating entity, specifically, changing the “related to” test to “closely related to.” 

The tightening of eligibility rules with the “closely related to” test appears to be intended to even the playing field between majority and minority shareholders. On the other hand, this tightening can be seen as punitive to holding companies that own less than 90 percent of the shares of an operating company yet incur most of the costs of raising capital and which may have other governance responsibilities.

3. Replacing the “reasonably” and “in relation to” tests with specific activities and circumstances that allow the holding company to claim ITCs.

In some corporate structures, a holding company may be able to raise capital for investment in related corporations more efficiently than the commercial operating corporation. The current rules provide some flexibility in interpretation and application. Under the proposed changes, that flexibility is removed in favour of prescriptive activities which may restrict ITCs to the holding company and increase its costs.

•4. The introduction of a new property test for holding companies that requires that all or substantially all of a holding company’s property be shares or debt of a related operating company. 

Some holding companies own investments that are not shares or debt of related operating companies. Under the new property test, if those investments exceed 10 percent of the holding company’s investments, the holding company may be disqualified from claiming ITCs for costs that do relate to its related companies.

While the amendments are proposed to be effective retroactively to July 28, 2018, they have not yet been adopted by the government. This gives business owners the opportunity to review their tax strategies around holding companies and prepare for a possible change.

For more information, contact John Frim at 519-772-1961 or [email protected] or contact your local MNP Tax Advisor.•

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