26 February 2015 CBA Roundtable, Q.21

A parent corporation (which is not a financial institution) earns 60% of its income from management fees charged to its wholly-owned subsidiary (which is engaged exclusively in commercial activity) and 40% as interest and dividend income from the subsidiary. It claims full input tax credits under s. 169 (based on its management activity) and under s. 186 (respecting its interest and dividend income). Does the deeming effect of s. 186 permit a s. 156 election to be made? CRA responded (TI translation):

[S.] 186(1) of the ETA generally allows certain corporations to claim ITCs on expenses relating to shares of another corporation that is related to them or indebtedness of that corporation where the conditions of this subsection are satisfied. The provisions of subsection 186(1)…apply only for the purpose of ITC calculations and have no impact on the eligibility criteria for the election under section 156 of the ETA.

CRA indicated that s. 186(1) applied “only for the purpose of ITC calculations” and does not have the effect of deeming the holding company to be engaged in commercial activity – so that it would generally not qualify for the purposes of making a s. 156 election with a subsidiary so as to avoid having to charge GST on management fees.