Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
DATE November 15, 2011
TO [Client]
FROM Corinne Campbell-Rosser
Senior Rulings Officer
Corporate Reorganizations Unit
320 Queen Street
Place de Ville, Tower A
Ottawa, ON
FILE 135608
SUBJECT:
GST/HST INTERPRETATION
Input tax credit eligibility for capital pool companies
This concerns your letter of May 4, 2011, with regard to whether a capital pool company (CPC) is eligible to claim input tax credits (ITCs) prior to entering into a "qualifying transaction" (QT).
Facts
We understand from [...] that the facts are as follows:
1. [...] (the Exchange) provides the possibility of entering capital markets through its Capital Pool Company Program. Unlike a traditional initial public offering, the directors and officers of a CPC list a CPC on the Exchange and raise a pool of capital with no assets other than cash and with no commercial operations.
2. The CPC then uses this pool of capital to seek out an investment opportunity (i.e., complete a QT by acquiring an operating company that meets the Exchange's listing requirements either through the purchase of the operating company's shares or assets). The CPC's shares then continue trading as a regular listing on the Exchange.
3. The following are the steps to the CPC Program:
Step 1 - Founders incorporate a shell company (the CPC) and issue shares in exchange for seed capital
Step 2 - Prepare prospectus outlining management's intentions to sell CPC shares to raise additional funds and use proceeds to identify and evaluate potential acquisitions
Step 3 - Apply for listing on Exchange
Step 4 - Broker sells the CPC shares
Step 5 - Once the CPC share distribution is completed and closed, the CPC is listed on the Exchange
Step 6 - Within 24 months, the CPC identifies an appropriate business as its QT and issues a news release to announce intent to acquire business.
Step 7 - CPC prepares a draft filing statement detailing how the business will be acquired
Step 8 - The Exchange reviews and evaluates the business to ensure it meets initial listing requirements.
Step 9 - Filing statement posted on SEDAR for seven business days after which the qualifying transaction closes and the business is acquired.
Step 10 - The CPC then trades as a regular Exchange listed company.
4. [...] the only business permitted to be undertaken by a CPC is the identification and evaluation of assets or businesses with a view to completing a QT - until the completion of the QT, a CPC must not carry on any business other than the identification and evaluation of assets or businesses with a view to a potential QT.
5. [...] the Resulting Issuer (i.e., the CPC after finalizing the QT) cannot be a financial company, a financial institution, finance issuer, or mutual fund, as defined under applicable Securities Laws.
Example 1
6. [...] (CPC 1) is registered for GST/HST purposes under the Business Number [...]. CPC 1 was incorporated on [mm/dd/yyyy], under the [...]. It is classified as a CPC on the Exchange and its principle business is the identification and evaluation of companies, assets or businesses with a view to completing a QT [...].
7. According to its financial statements for the period [mmm/dd/yyyy] to [mm/dd/yyyy], it has no commercial operations and has no assets other than cash, sales tax recoverable, prepaid expenses and deferred share issuance costs. In addition, CPC 1 has not yet commenced the process of identifying a potential acquisition to complete its QT.
8. CPC 1 has not made any taxable or exempt supplies and therefore has not collected any GST/HST. Although CPC 1 has no revenues it has incurred significant expenses on which ITCs are being claimed.
9. At this point, it is unknown whether CPC 1's QT would be concluded through the acquisition of the assets or the shares of another entity. It is also unknown whether the acquired company would be engaged in commercial activities, exempt activities or a mixture of both. [...].
Example 2
10. [...] (CPC 2) registered for GST/HST purposes in [yyyy] and is an annual filer. Since it registered for GST/HST purposes, CPC 2 has claimed ITCs on purchases that consist largely of listing fees, legal fees, Exchange charges, etc., incurred in order to list the company publicly and sell its shares.
11. According to SEDAR documents, CPC 2 concluded a QT as required by the Exchange on [mm/dd/yyyy]. It acquired 100% of the shares of [...] (Company 2) an investment company registered in [...], and located in [...] [Country X]. Company 2 owns 100% of [...], a holding company and [...]% of [...], which has operations in [...] [City 1, Country X] manufacturing [...].
ISSUES:
A number of general questions have been raised with respect to CPCs as well as questions in respect of the specific cases set out above. They are as follows:
1. Can a CPC register?
2. If a CPC can register, is the CPC eligible to claim ITCs? If so, on what expenses?
3. In example 1 above, is CPC 1 entitled to ITCs on expenses incurred while it is in the process of identifying a QT and while it has no commercial activity?
4. In example 2 above, given that CPC 2 has completed its QT by purchasing 100% of the shares of Company 2 which owns 100% of a holding company and [...]% of the operating company, is CPC 2 entitled to ITCs on its legal fees, [...][the Exchange] fees, etc., incurred? Are these expenses incurred in the course of investing/financing activities and, as such, do not relate to commercial activities?
COMMENTS:
Our comments are as follows:
1. A CPC is not eligible to register for GST/HST purposes until it has identified a specific potential QT unless it is a listed financial institution.
2. A CPC is not eligible to claim ITCs prior to identifying a specific potential QT.
3. In example 1 above, CPC 1 is not entitled to ITCs on expenses incurred while it is in the process of identifying a QT and prior to identifying a specific potential QT.
4. In example 2 above, CPC 2 is not entitled to ITCs on expenses (e.g., legal fees and [...][the Exchange] fees) incurred while CPC 2 was in the process of identifying a QT. When CPC 2 identified its QT, if all or substantially all of the property of Company 2 was, for the purposes of section 186, property that was last acquired or imported by Company 2 for consumption, use or supply exclusively in the course of its commercial activities (as required by subsection 186(2)) then CPC 2 would be eligible to claim ITCs on particular inputs that are acquired, imported or brought into a participating province for consumption or use relating to the acquisition or proposed acquisition by CPC 2 of the shares of Company 2 if all other conditions for claiming an ITC are met.
Explanation
Comment 1
A CPC is not eligible to register for GST/HST purposes prior to identifying a specific potential QT.
Prior to identifying a specific potential QT, a CPC is selling shares of the CPC and is exclusively engaged in making exempt supplies. As a result, prior to identifying a QT, a CPC would not be required to register under subsection 240(1). Further, prior to the CPC identifying a specific potential QT, it is not clear what the CPC will be acquiring (i.e., assets or shares) and whether it will be engaged in commercial activity, exempt activity or a mix of both; therefore, paragraph 141.1(3)(a) would not apply to deem any particular thing done by the CPC to have been done in the course of commercial activities of the CPC. As a result, a CPC would not be engaged in commercial activity and would not be eligible to register for GST/HST purposes under paragraph 240(3)(a) prior to identifying a specific potential QT. However, once a CPC has identified a specific potential QT that is an asset purchase and the assets will be used in commercial activity then to the extent that the CPC does anything (other than make a supply) in connection with the acquisition or establishment of the commercial activity of the CPC, the CPC shall be deemed to have done that thing in the course of commercial activities of the CPC. As a result, a CPC may be eligible to register for GST/HST purposes once it has identified a specific potential QT through an asset purchase as long as that QT would result in the CPC being engaged in commercial activity.
Prior to identifying and purchasing the shares of the capital stock of another corporation, a CPC would not be eligible to register for GST/HST purposes under subparagraph 240(3)(d)(i) because the corporations would not be related.
Prior to identifying a target corporation the shares of which will be purchased as part of a QT a CPC would not be eligible to register for GST/HST purposes under subparagraph 240(3)(d)(ii). However, once a CPC has identified a specific potential QT that is a share purchase it may be eligible to register for GST/HST purposes under subparagraph 240(3)(d)(ii). Once a CPC is acquiring, or proposes to acquire, all or substantially all (i.e., 90% or more) of the issued and outstanding shares of the capital stock of another corporation, having full voting rights under all circumstances, where all or substantially all of the property of the other corporation is, for the purposes of section 186, property that was last acquired or imported by the other corporation for consumption, use or supply exclusively in the course of its commercial activities, it may be eligible to register for GST/HST purposes under subparagraph 240(3)(d)(ii).
If a CPC is a listed financial institution resident in Canada, it would be eligible to register for GST/HST purposes under paragraph 240(3)(c). As I discussed with [...], this would depend on whether a CPC would be an investment corporation for income tax purposes.
Comment 2
A CPC is not eligible to claim ITCs prior to identifying a specific potential QT.
If a CPC identifies a specific potential QT that is an asset purchase and the assets will be used in commercial activity, to the extent that the CPC does anything (other than make a supply) in connection with the acquisition or establishment of a commercial activity of the CPC, the CPC shall be deemed to have done that thing in the course of commercial activities of the CPC under subsection 141.1(3). As a result, once a CPC has identified a specific potential QT that is an asset purchase, it may be eligible for ITCs on inputs specific to that potential QT to the extent that the QT would result in the CPC acquiring those inputs for the purpose of making taxable supplies for consideration.
Subsection 171(1) provides that where at any time a person becomes a registrant and immediately before that time the person was a small supplier, for the purpose of determining an ITC of the person, the person shall be deemed:
(a) to have received, at that time, a supply by way of sale of each property of the person that was held immediately before that time for consumption, use or supply in the course of commercial activities of the person; and
(b) to have paid, at that time, tax in respect of the supply equal to the basic tax content of the property at the time.
GST/HST Policy Statement P-019, Eligibility for ITC on start-up costs - Eligible capital property explains that when a small supplier becomes a registrant, that person may be eligible for ITCs on certain property held by the person at that time. These expenses, which relate to services which have already been supplied to the person, may be treated as "eligible capital expenditures" under the Income Tax Act and may, as a result, meet the definition of "property" in the ETA. Where this is the case, a person may be eligible for ITCs on these expenses under subsection 171(1). Interpretation Bulletin IT-143R, Meaning of Eligible Capital Expenditures provides guidance on what would be considered eligible capital property for income tax purposes.
As a result, once a CPC is either engaged in commercial activity or subsection 141.1(3) applies and the CPC is eligible to register and registers for GST/HST purposes, it may be eligible to claim ITCs on property held by the CPC at that time provided all other conditions for claiming an ITC are met. This may include certain of its expenses that are considered eligible capital property for income tax purposes.
If a CPC identifies a specific potential QT that it will complete by purchasing all or substantially all of the issued and outstanding shares, having full voting rights under all circumstances, of the capital stock of a corporation (a target corporation), it may be eligible for ITCs on certain inputs under subsection 186(2).
For subsection 186(2) to apply, all or substantially all of the property of the target corporation must be property that was acquired or imported for consumption, use or supply exclusively in the course of commercial activities during the period described in subsection 186(2).
Where the conditions of subsection 186(2) are met, the CPC would only be eligible to claim ITCs for those inputs that the CPC acquired, imported or brought into a participating province for consumption or use relating to the acquisition or proposed acquisition by the CPC of those shares (e.g., those inputs used prior to identifying a QT would not be eligible for ITCs because those inputs would not relate to the purchase of the shares of the particular corporation that constitutes the QT).
Under subsection 186(2), for the purposes of claiming an ITC, the GST/HST in respect of the property or service is deemed to have become payable and been paid by the purchaser on the later of:
• the later of the day all or substantially all of the shares of the target corporation were acquired and the day the intention to acquire the shares is abandoned; and
• the day the tax become payable or was paid by the purchaser.
As a result, where the conditions of subsection 186(2) are met, for ITC purposes, any tax paid in respect of the property or service acquired, imported or brought into a participating province for consumption or use relating to the acquisition or proposed acquisition by the CPC of shares of the corporation that is a specific potential QT would generally be deemed to have become payable and been paid by the purchaser after the CPC would be eligible to be registered for GST/HST purposes.
Comment 3
In example 1 above, CPC 1 is not entitled to ITCs on expenses incurred while it is in the process of identifying a QT and prior to identifying a specific potential QT.
Comment 4
In example 2 above, CPC 2 is not entitled to ITCs on expenses that are not related to a specific potential QT (e.g., legal fees, [...][the Exchange] fees, and expenses related to evaluating other companies that are not the specific QT) incurred while CPC 2 was in the process of identifying a QT. CPC 2's QT was the purchase of 100% of Company 2's shares. Company 2 is a holding company and it owns 100% of [...], another holding company and [...]% of [...], which has operations in [City 1, Country X] manufacturing [...].
If CPC 2 was a registrant and a corporation resident in Canada, it was eligible for certain ITCs when it identified its QT if CPC 2 met the conditions in subsection 186(2). More specifically, if all or substantially all of the property of Company 2 was, for the purposes of section 186, property that was last acquired or imported by Company 2 for consumption, use or supply exclusively in the course of its commercial activities then CPC 2 would be eligible under subsection 186(2) to claim ITCs on particular inputs that are acquired, imported or brought into a participating province for consumption or use relating to the acquisition or proposed acquisition by CPC 2 of the shares of Company 2 if all other conditions for claiming an ITC are met. This evaluation would be made by evaluating whether the requirements of subsection 186(3) are met at each level of the ownership structure and whether the shares of capital stock held by Company 2 are, for purposes of section 186, property acquired for use exclusively in the course of commercial activities.
If CPC 2 was a registrant and a corporation resident in Canada, it was eligible for certain ITCs once it completed its QT if CPC 2 met the conditions in subsection 186(1). More specifically, ITCs would be available on property or a service acquired, imported or brought into a participating province that can reasonably be regarded as having been so acquired, imported or brought into the province for consumption or use in relation to the shares of the capital stock or indebtedness of Company 2 (a related corporation) if, at the time tax becomes payable, or is paid without becoming payable by CPC 2, all or substantially all of the property of Company 2 is property that was last acquired or imported by Company 2 for consumption, use or supply by Company 2 exclusively in the course of its commercial activity and all other conditions for claiming an ITC are met.
UNCLASSIFIED
Email this Content