27 January 2000 GST/HST Interpretation 8190/HQR00001796 - ITC Eligibility Related to Advisory Fees

This is with regard to the memo of March 22, 1999, from XXXXX of XXXXX, which was forwarded to us by XXXXX of your Unit. XXXXX requested advice as to ITC eligibility in respect of costs incurred as a result of a takeover attempt, an amalgamation of two corporations, and a winding-up of one corporation into another.

Background

During the time at issue, XXXXX were all GST/HST registrants involved in making taxable supplies with respect to XXXXX XXXXX made an unsolicited offer to purchase all of the shares of XXXXX XXXXX takeover bid was unsuccessful, and XXXXX subsequently amalgamated with XXXXX which was not a GST/HST registrant. The amalgamated company XXXXX retained the legal name XXXXX and continued to be registered under XXXXX existing GST/HST registration number until XXXXX was subsequently wound up into XXXXX[.] As a result of the initial takeover bid by XXXXX, the amalgamation of XXXXX with XXXXX, and the consequent winding-up of [XXXXX] XXXXX both XXXXX acquired or imported various services and property, including legal, auditing and financial advisory services.

During the time at issue, none of the corporations were financial institutions for purposes of the Excise Tax Act.

Comments

Whether or not XXXXX was entitled to claim ITCs with respect to taxable takeover costs that it incurred depends on the reason the costs were incurred. It is first necessary to ascertain the extent to which a particular service was acquired or imported by XXXXX for consumption or use in the course of its commercial activities.

Subsection 141.01(2) of the Excise Tax Act (ETA) provides, in part, that where a person acquires or imports a property or a service for consumption or use in the course of an endeavour of the person, that person shall be deemed to have acquired or imported the property or service for consumption or use in the course of commercial activities of the person, to the extent that the service is acquired or imported by the person for the purpose of making taxable supplies for consideration in the course of that endeavour.

XXXXX acquired certain inputs in order to provide advice to shareholders in keeping with the legal obligations of the corporation (the required inputs). It is our view that property or services acquired or imported by a corporation in fulfilling obligations under a securities or corporations act, such as producing circulars for shareholders concerning takeover bids, would generally be considered to have been acquired or imported for the purpose of making supplies for consideration in the course of the corporation's endeavour for the purposes of section 141.01. Costs with respect to inputs that may be acquired or imported in preparing and distributing the circulars generally include legal and accounting fees, valuation reports, fairness opinions, printing costs and mailing costs. Therefore, to the extent that XXXXX was engaged in commercial activities, the corporation would have been entitled to claim input tax credits in respect of tax paid or payable on the required inputs, provided the conditions of subsection 169(1) of the ETA are met.

If substantially all of the required inputs were acquired or imported for consumption or use in the course of XXXXX commercial activities, all of the consumption or use of the inputs by XXXXX would be deemed to have been in the course of those activities, as specified in section 141 of the ETA. If less than substantially all of the required inputs were acquired for consumption or use in the course of XXXXX commercial activities, the taxable inputs should be apportioned. It is therefore necessary to consider whether any of XXXXX activities are not considered to be commercial activities, such as investments in other corporations. In that regard, we understand that XXXXX did in fact have significant investments in other corporations. If a significant proportion of the required inputs related specifically to XXXXX investments in other corporations, it is necessary to be determined whether the deeming provisions in subsection 186(1) apply to that portion of the required inputs that should be apportioned to these investments. If those deeming provisions do apply, XXXXX will be deemed to have acquired or imported those required inputs for use in the course of its commercial activities. If subsection 186(1) does not apply, then that portion of the required inputs relates to other than commercial activities, and XXXXX has no ITC entitlement in respect of those required inputs.

The above information applies to XXXXX ITC eligibility with respect to inputs that it acquired or imported to fulfill its legal responsibilities for dealing with the takeover bid. To determine whether XXXXX was eligible to claim any ITCs with respect to other inputs (non-required inputs) incurred in response to the same takeover bid, it is again necessary to determine the purpose for acquiring or importing the particular input. For example, to the extent that the purpose of acquiring or importing a non-required input is to increase the amount for which XXXXX shares were sold, no ITC should be allowed with respect to any taxable inputs related to that activity, as the sale of XXXXX shares is an exempt supply of a financial service.

ITCs may be available with respect to inputs pertaining to an amalgamation or winding-up where the inputs can be regarded as relating to the commercial activities of the person. For example, certain activities other than the making of a supply, with regard to the amalgamation of XXXXX and XXXXX and the winding-up of XXXXX XXXXX into XXXXX, may be deemed to have been done in the course of commercial activities of the particular person pursuant to subsection 141.1(3). A detailed review of the reasons for acquiring the inputs, and the nature of the amalgamation and winding-up activities, would be required in order to determine the ITC entitlement of a particular person with respect to a particular input.

Where XXXXX was eligible to claim ITCs with respect to inputs incurred because of the amalgamation, but did not do so prior to the amalgamation, paragraph 271(b) of the ETA may permit XXXXX XXXXX to claim such ITCs. Where two or more corporations are merged or amalgamated to form one corporation, paragraph 271(b) states, in part, that for the purposes of applying the provisions of Part IX of the ETA in respect of property or a service that was acquired or imported by a predecessor, the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor.

Where XXXXX XXXXX was eligible to claim ITCs with respect to inputs incurred because of the winding-up of XXXXX XXXXX into XXXXX, but did not do so prior to the winding-up, paragraph 272(a) of the ETA may permit XXXXX to claim such ITCs. Where a particular corporation is wound up, and not less than 90% of the issued shares of each class of the capital stock of the particular corporation were, immediately before that time, owned by another corporation, paragraph 272(a) states, in part, that for the purposes of applying the provisions of Part IX of the ETA in respect of property or a service acquired or imported by the other corporation as a consequence of the winding-up, the other corporation is deemed to be the same corporation as, and a continuation of, the particular corporation.

If you require any further information concerning this matter, please contact me at (613) 952-9211.

Don Dawson
Technical Analyst
Specialty Tax Unit
Financial Services and Real Property
Excise and GST/HST Rulings Directorate

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