14 July 1999 GST/HST Interpretation HQR0001244 - Whether Input Tax Credits May be Claimed on Costs Incurred in Respect of Takeover Bids

We have completed our review of the issue whether input tax credits (ITCs) may be claimed by XXXXX on costs incurred by XXXXX in respect of certain takeover bids made by XXXXX and offer the following comments.

XXXXX was in the business of XXXXX made two bids to take over XXXXX board recommended rejection of both bids XXXXX also made two takeover bids for XXXXX XXXXX recommended acceptance of XXXXX second offer. XXXXX and its wholly-owned subsidiary XXXXX acquired over XXXXX XXXXX shares on XXXXX[.] The remainder of the shares were acquired shortly after. On XXXXX was wound-up into XXXXX acquired all of the XXXXX shares from XXXXX was wound-up into XXXXX on XXXXX[.] Generally, the memo of XXXXX to XXXXX states that the relevant costs in question (the "Costs"), consisting of legal fees, advisors engagement fees, auditing, advertising and other fees, were in respect of property and services that were consumed and used by XXXXX to analyze, examine and study offers made by XXXXX and XXXXX, and that the information was then incorporated into circulars that were sent out to XXXXX shareholders.

The majority of the Costs consist of fees paid to financial advisors. Letters of engagement, describing the services to be provided by the financial advisors, XXXXX were provided. These letters show that, in the case of the first three, the advisors were engaged to assist XXXXX as financial advisor with respect to the unsolicited take-over bid" for XXXXX common shares by XXXXX referred to as the Offer. Also, the advisors would provide services in respect of "any possible responses thereto including, without limitation, the solicitation of additional take-over bids, a recapitalization" of XXXXX or any purchase by XXXXX of securities or assets of any other company or companies (including any financing related to any such recapitalization or purchase), or the possible sale of all or part of XXXXX way of asset sales, merger, consolidation, amalgamation, reorganization or otherwise. Further, the advisory services could include "advice and assistance in evaluating the Offer and other services customarily rendered by a financial advisor in the circumstances including" "the furnishing of opinions as to the adequacy or fairness of the consideration under the Offer".

With respect to the advisory services to be provided by XXXXX these include advice concerning the Offer and the provision of "investment banking advisory services to XXXXX with respect thereto and matters arising therefrom". These services were to include "options and responses to the Offer, advising on XXXXX possible strategies as a result of the making of the Offer" including such actions as described in the above paragraph. Further, XXXXX has not been engaged to prepare a valuation of XXXXX or any of its assets or to furnish opinions as to the adequacy of the Offer or any other transaction to shareholders of XXXXX from a financial point of view.

XXXXX has stated that the Costs were required as a matter of corporate and securities law as a result of the takeover bids. A submission was made outlining that the XXXXX requires that, where a takeover bid has been made, the directors of the offeree corporation must prepare and deliver a directors' circular within ten days of the bid. This circular must include either a recommendation to accept or reject the bid with reasons, or a statement that the directors are unable to make, or are not making, a recommendation and the reasons for this. Further, they have indicated, the XXXXX requires that every director and officer of a corporation act honestly and in good faith and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Therefore, the Costs should be treated as any other indirect costs incurred as a result of carrying on business as a corporation and public company.

Generally, XXXXX, as it read at the relevant time, reinforces the requirement to allocate inputs between commercial activities and activities that are not commercial activities. Specifically, ITCs may only be claimed in respect of inputs that were acquired or imported for the purpose of making taxable supplies for consideration in the course of an endeavour of the person.

It is the Department's position that property or services acquired, imported or brought into a participating province by a corporation in fulfilling obligations under a securities or corporations act in producing circulars for shareholders concerning takeover bids, would generally be considered to have been incurred for the purpose of making supplies for consideration in the course of the corporation's endeavour for purposes of XXXXX XXXXX ITCs would be available only on inputs with respect to supplies that are taxable supplies in the course of the corporation's commercial activity. ITCs would not be available with respect to the corporation's exempt supplies. As a result, tax in respect of some or all of the Costs is eligible for ITCs, for purposes of subsection 169(1), where the requirements of that provision are met.

Please note, although securities or corporations law may not specifically require the hiring of outside experts, the corporate directors have little choice except to rely on reports of lawyers, accountants, engineers, appraisers or other persons whose profession lends credibility. Directors, by law, are required to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances and their duty is first to the company itself, not the shareholders. It is widespread business practice to retain professional advice in the event of a take-over bid and this will generally be treated by the courts as a normal cost of doing business.

However, from the letters of engagement, a portion of the Costs may not be meet the above criteria. Reference is made to possible assistance in the solicitation of additional takeover bids, a recapitalization of XXXXX or other actions like an asset sale, merger, consolidation, amalgamation and reorganization. These types of activities would not normally be considered to be required in fulfilling legal requirements in a takeover situation. Further, the letter of engagement describing services that may be supplied by XXXXX provide that XXXXX was not engaged to prepare a valuation of XXXXX or to provide an opinion as to the adequacy of the takeover bids. This may also indicate that a portion of these services was not used by XXXXX in meeting its requirements in a takeover situation. Thus, it is necessary to verify the exact nature of the services provided by the advisors, as well as the other goods and services supplied, to determine if the Costs meet the requirements of subsection 141.01(2) as discussed above.

I trust these comments will be of assistance to you. Should you have any questions, please do not hesitate to contact me at (613) 957-8226.

Kirk Moore
A/Technical Officer
Corporate Reorganizations Unit

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