3 March 1999 GST/HST Interpretation HQR0001306 - Application of the GST/HST to the Sale of Precious Metals

This is in response to a memo from XXXXX concerning certain ITC claims made by XXXXX relating to the takeover of XXXXX, formerly XXXXX, has claimed ITCs in respect of certain costs (the "Costs") incurred by XXXXX in taking over XXXXX XXXXX[.] The Costs relate to XXXXX for, and it's successful takeover of, XXXXX. A small portion of the Costs relate to a share issue by XXXXX which was used by XXXXX in a swap for XXXXX shares, as part of the takeover. The memo requested confirmation concerning the application of subsections 186(2) and (3) of the Excise Tax Act (the "Act"). It was pointed out in the memo that for these subsections to apply, among other requirements, it is necessary that all or substantially all of the property of XXXXX was property that was acquired or imported for consumption, use or supply exclusively in the course of commercial activities. Since the definition of the term "exclusive" depends on whether XXXXX considered a financial institution, confirmation was also requested that XXXXX revenue from the sale of precious metals is excluded from clause 149(1)(b)(ii)(B) of the Act, as it read for the relevant time, with the consequence that XXXXX was a financial institution, pursuant to paragraph 149(1)(b).

Two of XXXXX off-shore subsidiaries held "short-term investments". At the time of the memo, the auditor believed that these investments were held in off-shore banks. However, it has been confirmed that these investments were made in Canada. Confirmation was requested that these investments are considered property and must be included in any determination as to the extent of consumption, use or supply in the course of commercial activities.

Finally, confirmation was requested that XXXXX would not be permitted to claim ITCs in respect of the portion of the Costs that relate to the issue of XXXXX shares, pursuant to subsection 186(2).

Pursuant to subsection 186(2) of the Act, for the relevant period, generally, where a corporation (the "purchaser") is the recipient of a supply of property or a service relating to the acquisition or proposed acquisition by it of all or substantially all of the issued and outstanding shares of another corporation (the "target"), the property or service shall be deemed to have been supplied for use exclusively in the course of commercial activities of the purchaser, if certain requirements have been met. One requirement of this provision is that throughout the period beginning when the purchaser XXXXX acquired the property or the performance of the service began and ending, in this case, on the day the purchaser acquired all or substantially all of the shares, all or substantially all of the property of the target XXXXX was property that was acquired or imported for consumption, use or supply exclusively in the course of commercial activities (referred to, in the general case, as the "property test").

When determining the extent XXXXX property was consumed, used or supplied in the course of commercial activities, (i.e., when applying the property test) an analysis of the proportion of the market value of the property consumed, used or supplied in the course of commercial activities is recommended.

XXXXX unaudited unconsolidated financial statements, as at XXXXX, as well as information about XXXXX corporate structure, were provided. These financial statements indicate that XXXXX assets consisted of an investment in subsidiaries, which appears to represent 88.8% of total assets, and other assets. XXXXX has submitted an amount for the total cost of the XXXXX shares which is far in excess of the book value given, indicating that XXXXX market value greatly exceeds it's book value. Since the book value of the short-term investments may closely approximate their market value, the investment in subsidiaries may represent at least 90% of the market value of XXXXX total assets.

Since a substantial amount of XXXXX assets are investments in subsidiaries, it is necessary to examine subsection 186(3). Subsection 186(3) provides that where at any time a particular corporation meets the property test, all shares of the capital stock of the particular corporation owned by, and all indebtedness of the particular corporation owed to, any other corporation that is related to the particular corporation shall, for the purposes of section 186, be deemed to be, at that time, property that was acquired by the other corporation for use exclusively in the course of its commercial activities.

Thus, for the purposes of section 186, if a XXXXX subsidiary meets the property test, the shares of the subsidiary held by XXXXX shall be deemed to be property that was acquired by XXXXX for use exclusively in the course of XXXXX commercial activities. The same holds for the shares of subsidiaries held by other subsidiaries.

The auditor has identified two of the subsidiaries in XXXXX corporate structure. These are XXXXX[.] A break-down of the market value of XXXXX was provided. This shows that XXXXX XXXXX held substantial amounts of cash and "short-term investments". A break-down of the short-term investments for each of XXXXX shows that these were all Canadian investments and consisted of Treasury Bills, Commercial Paper, Promissory Notes and Term Deposits. Pursuant to subsection 123(1), money includes any currency, cheque, promissory note, letter of credit, ..., and other similar instrument. All the short-term investments held by XXXXX XXXXX are promissory notes or similar instruments. Pursuant to subsection 123(1), property does not include money. As a result, the short-term investments are considered money and are excluded from the property test if it is determined that these investments were held by the respective companies for the duration of the period described in subsection 186(2).

Once money is excluded, it must be determined if all or substantially all of the remaining property was for consumption, use or supply exclusively in the course of commercial activities. Pursuant to subsection 186(3), if XXXXX meets the property test, i.e., if all or substantially all of XXXXX property was acquired or imported by it for consumption, use or supply exclusively in the course of its commercial activities, then the shares of XXXXX for purposes of subsections 186(1) and (2), are deemed to be property that was acquired by XXXXX XXXXX for use exclusively in the course of its commercial activities.

If it is determined that XXXXX met the property test, it's shares, held by XXXXX are deemed to be property that was acquired by XXXXX  for use exclusively in the course of its commercial activities.

Finally, the same rationale applies to XXXXX itself. If it is determined that its investment in subsidiaries consists of shares of capital stock of related corporations that met the property test for the relevant period, these shares are deemed to be property that was acquired by XXXXX for use exclusively in the course of its commercial activities. As discussed earlier, XXXXX investment in subsidiaries may represent 90% or more of XXXXX property. If this is the case, XXXXX will have met the property test.

XXXXX made the first bid for XXXXX and started incurring the Costs before this time. It is understood that XXXXX and its wholly-owned subsidiary, XXXXX XXXXX[.] From the information provided, it appears that XXXXX acquired most of XXXXX XXXXX. XXXXX [.] Thus, the period referred to in subsection 186(2) begins some time before XXXXX XXXXX when XXXXX first became the recipient of supplies of property or services relating to the acquisition or proposed acquisition of all or substantially of the issued and outstanding shares of XXXXX stock having full voting rights under all circumstances. This period ends the day XXXXX acquired all or substantially all of XXXXX. Therefore, it must be determined if XXXXX  met the property test during this entire period.

It must now be determined if the Costs relate to the acquisition of all or substantially all of XXXXX shares. Comments were requested, and will be provided, concerning the portion of the Costs that were incurred in a share issue by XXXXX  These shares were used in a swap to acquire certain of XXXXX shares.

Property and services that pertain to other activities, such as issuing shares or other financing activities, do not fall within subsection 186(2). Expenses incurred in relation to making a supply of an exempt financial service (i.e., share issue) that is not the supply of the financial service of acquiring the shares of the target corporation are not eligible for input tax credits under section 186. Expenses incurred in relation to the issuing of shares of the purchasing corporation or the borrowing of money by the corporation are incurred in relation to the making of supplies of those particular financial services and not in relation to the acquisition of the shares of the target corporation. Thus, subsection 186(2) does not apply to allow XXXXX to claim ITCs in respect of the portion of the Costs that relate to the issue of its own shares.

For the relevant period, subsection 185(1) permits persons that are not financial institutions to claim an ITC to the extent (determined in accordance with subsection 141.01(2)) that the property or service was acquired or imported for consumption, use or supply in the course of making supplies of financial services (other than financial services that are not related to commercial activities of the registrant). If XXXXX was not a financial institution, this provision still would not apply. These costs were incurred for the purpose of making supplies of financial services, i.e., the issue of XXXXX own shares. No evidence has been provided to show that the share issue is related to XXXXX commercial activities. On the contrary, the share issue appears to be related to the acquisition of XXXXX[.] Thus, subsection 185(1) does not apply to allow XXXXX to claim ITCs in respect of the portion of the Costs that relate to the issue of its own shares.