File: 11585-9
11585-26
11725-1
This is in reply to your memorandum of October 18, 1995 wherein you requested our views with respect to the input tax credit entitlement of registrants under certain cost sharing arrangements.
Our understanding of the situation is as follows:
1. XXXXX are closely related corporations.
2. There are a number of cost sharing agreements among the corporations. In addition, the corporations have filed elections under subsection 150(1).
3. Two situations have been identified:
• a service or property is acquired in the name of and paid for by one corporation; subsequently an allocation of the expense will be made to the other corporation for its proportionate share of the use of the property or service by means of intercompany journal entries and each corporation has been claiming input tax credits on its share, e.g., lease of a building;
• a service or property is acquired in the name of and paid for by one corporation; subsequently a proportion of costs incurred by one corporation will be allocated to the other corporations based on the use of the property or service by the other corporations; however, the company who initially paid the expense has been claiming input tax credits on the entire amount based on its entitlement rate.
4. The issues that have been raised are as follows:
• documentation requirements have not been met since registrants are claiming input tax credits on expenses where the invoices are addressed to other registrants;
• input tax credits are being claimed on inputs relating to the reimbursed expenses even though no tax is charged on the reimbursement since the re-supply is made under a 150(1) election.
It is our view that the following questions must be answered to determine the status of the transactions between the corporations.
1. Is one corporation acting as agent for the other corporation? The relationship between each corporation must be examined to determine if an agency relationship exists. If it is determined that it does exist then it must be determined whether the particular property or service has been acquired by the corporation in its capacity as agent for the other corporation.
If an agency relationship exists and a particular property or service has been acquired in that capacity as agent then there is no re-supply. No tax is exigible and input tax credits are claimable by the other corporation to the extent it has acquired the property or service for use in its commercial activities.
If an agency relationship exists but the particular property or service has not been acquired in that capacity as agent then there is a re-supply. Tax is exigible and input tax credits are claimable by the other corporation to the extent it has acquired the property or service for use in its commercial activities. Input tax credits are also claimable by the corporation making the re-supply to the extent that the re-supply is a taxable supply.
In the second situation, where the company in whose name the property or service is acquired claims the input tax credit, if it is acting as agent for the other corporation and incurred the expense in that capacity then it is not entitled to claim the input tax credit solely on its own account. It would be entitled only to its proportionate share.
You have noted that in the XXXXX memorandum of August 1, 1991, its legal department advised against having an agency agreement because of the restrictions imposed by the Bank Act. It is important to keep in mind that the existence of an "agency" agreement, while persuasive, does not prove the existence of an agency relationship. What must be examined is how the companies actually conduct their mutual affairs. Policy statement P-182 entitled, "Determining the Meaning of "Agent" and "Agency"["] should be referenced in that regard.
2. If it is established that there is not an agency relationship between two particular corporations, the agreements between the corporations and third parties should be examined to determine who is the recipient of each particular supply. It may be that in certain situations, both corporations are parties to the agreement and are both recipients. In this case each would claim input tax credits in proportion to their acquisition of the property or service.
If it is determined that the corporations do not have an agency relationship and that only one of the corporations is the recipient of the supply from the third party, then there is a re-supply from one corporation to the other corporation. If the parties involved have entered into the subsection 150(1) election then there is no input tax credit entitlement to the extent that the property or service is supplied under this election. The only input tax credit entitlement is to the extent that the registrant acquired the property or service for its own use in its commercial activities and has met the documentary requirements under subsection 169(4).
If you have any questions, please contact P. Roach at (613) 952-9214 or R. Osudar at (613) 952-9220.
Yours truly,
J. Sitka
A/Director
Financial Institutions/Corporate Reorganizations
GST Rulings and Interpretations
c.c.: H.L. Jones, Director, General Applications Division
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