Tax Insights: GST/HST proposals target input tax credit claims of Canadian-resident holding corporations

August 07, 2018

Issue 2018-29

In brief

On July 27, 2018, the Department of Finance (Finance) released draft legislative proposals that may impact a Canadian-resident holding corporation’s entitlement to claim input tax credits (ITCs). Specifically, under proposed changes to section 186 of the Excise Tax Act (the ETA), the test for claiming ITCs will no longer be based on whether expenses incurred by a holding corporation can reasonably be regarded as being incurred for consumption or use in relation to shares or debt of a related corporation. Instead, ITCs will be available only where the expenses incurred by the holding corporation meet the specific requirements in paragraphs 186(1)(a) to (c) of the ETA.  

If enacted, these proposals will be effective after July 27, 2018. In addition to the draft legislation, Finance also released a consultation paper asking for stakeholders to comment on whether:

  • section 186 should be narrowed, so that it applies only in situations where the corporations are “closely related” versus “related,” which is currently the test, and 
  • partnerships and trusts should be able to claim ITCs when these entities perform functions that are similar to those of a holding corporation 

Comments on the draft legislation must be submitted to Finance by September 10, 2018, while comments regarding the consultation paper are due by September 28, 2018.

In detail

Current rules

Currently, section 186 generally allows a Canadian-resident holding corporation that is registered for GST/HST to claim ITCs on expenses that are incurred, if: 

  • the holding corporation was “related” to the corporation at the time it acquired the particular supply (the Related Test)
  • all or substantially all of the related corporation’s property was acquired for use exclusively in a commercial activity at the time the tax became payable for the supply (the Property Test), and
  • the expenses reasonably relate to the shares or debt of the related corporation (the Purpose Test)

Canadian jurisprudence has confirmed that the Purpose Test is a broad test and as a result, most Canadian-resident holding corporations that meet the Related Test and Property Test have been entitled to recover 100% of the GST/HST that they have paid.

Proposed rules

Under amended section 186, a Canadian-resident holding corporation that is registered for GST/HST can claim ITCs on expenses it incurs if the specific requirements in paragraphs 186(1)(a) to (c) of the ETA are met.

Paragraph 186(1)(a) generally allows an ITC to be claimed on expenses incurred for the following purposes:

  • selling or otherwise disposing of, purchasing or otherwise obtaining, or holding shares of the capital stock or indebtedness of the particular corporation by the parent, or
  • redeeming, issuing or converting or otherwise modifying shares of the capital stock or indebtedness of the particular corporation by the particular corporation

Paragraph 186(1)(b) allows ITCs to be claimed on expenses incurred to raise capital through the issuance of shares or debt in situations where the proceeds are transferred to an operating corporation for use exclusively in a commercial activity.  

Paragraph 186(1)(c) applies only to a certain type of holding corporation – namely, a holding corporation whose property comprises almost exclusively shares or debt of operating corporations that are related to the holding corporation, and whose property, all or substantially all of which, was last manufactured, produced, acquired or imported for use exclusively in a commercial activity. 

To the extent that this condition in paragraph 186(1)(c) is satisfied, an ITC may be claimed on expenses incurred “for the purpose of carrying on, engaging in or conducting any activity of the parent” other than activities that:

  • primarily relate to non-qualifying investments (e.g. shares or debt that are not in a related corporation that meets the Property Test), or
  • involve the making of an exempt supply other than certain financial services that are provided to a related “operating corporation” that meets the Property Test

The takeaway

If the legislative proposals are enacted, a Canadian-resident holding corporation’s ability to claim ITCs may be significantly reduced. In particular, in contrast with the current rules, which provide a fairly broad “relates to” test, holding corporations will need to closely examine the particular expenses that they incur and assess whether each expense meets the particular conditions referenced in paragraphs 186(1)(a), (b) or (c). It is unlikely that each and every expense will satisfy the more stringent Purpose Test. Therefore, holding corporations will need to adopt a fair and reasonable allocation method to calculate their ITCs. In addition to the added GST/HST cost that results from making ITCs less accessible, the proposals will also increase the compliance costs of Canadian-resident corporations, because:

  • there is more uncertainty with respect to whether an ITC is available, and 
  • Canada Revenue Agency (CRA) audit and enforcement activities will likely increase, and taxpayers will be faced with the burden of proving to the CRA that their ITC claims meet the more restrictive conditions


Contact us

Brent Murray

Partner, PwC Law LLP

Tel: +1 416 947 8960

Eric Paton

National Indirect Tax Leader, PwC Canada

Tel: +1 416 869 2878

Mario Seyer

Partner, PwC Canada

Tel: +1 514 205 5285

Randall Ian Schwartz

Partner, PwC Law LLP

Tel: +1 416 815 5117

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