1 August 2003 GST/HST Ruling 39572 - Input Tax Credits

Dear XXXXX:

Thank you for your letter XXXXX addressed to the XXXXX GST/HST Rulings Centre, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below. Your letter has been forwarded to us for our reply. We apologize for the delay in our response.

Statement of Facts

From the information contained in your letter, from our telephone conversation XXXXX XXXXX and from other information you have provided to the XXXXX GST/HST Rulings Centre our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. XXXXX is structured into different distinct legal entities, XXXXX XXXXX (Fund), XXXXX. (XXXXX), XXXXX (Partnership) and XXXXX.(Inc.). The operations are at the partnership level where GST/HST is paid and collected.

2. XXXXX currently holds a XXXXX % limited interest in Partnership. It previously held a XXXXX % limited interest in Partnership. XXXXX only asset is its interest in Partnership. XXXXX incurred a number of administrative expenses on which it paid GST/HST.

3. Inc., the general partner, holds XXXXX % interest in Partnership.

4. Fund is a public entity structured as a trust fund. It owns XXXXX % of the outstanding common shares of XXXXX and XXXXX % of Inc. The capital received from the trust unit holders is loaned to XXXXX for use in Partnership. Fund's revenues are from interest and dividends and are always distributed to the trust unit holders. Fund incurred a number of expenses on which it paid GST/HST.

5. The administrative expenses incurred by Fund and XXXXX are mainly legal and audit fees. The legal fees relate to XXXXX negotiations to acquire Partnership units (XXXXX % to XXXXX %) and the Fund's expenses are in relation to the initial public offering of trust units and TSE listing fees.

The audit fees are from the public auditors. The audit is required for publicly traded companies. The audited financial statements produced are consolidated into Fund.

6. Partnership operates a XXXXX business. All employees that work for XXXXX are employed by Partnership.

7.  Each entity is registered for GST/HST purposes.

Ruling Requested

You have requested a ruling on whether Fund and XXXXX could claim GST/HST input tax credits (ITCs) on the administrative expenses.

Ruling Given

Based on the facts set out above, we rule that Fund and XXXXX are not eligible to claim ITCs with respect to the administrative, legal, professional and other expenses related to their investments. For GST/HST purposes, Fund and XXXXX have not used the inputs in the course of their commercial activities.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Subsection 169(1) of the Excise Tax Act (ETA) sets out the general rule for determining ITCs. It provides that, where property or a service is acquired or imported for consumption, use or supply by a registrant, the registrant is entitled to claim an ITC equal to the fraction of the tax paid or payable on the acquisition or importation that represents the extent to which the property or service is for consumption, use or supply in a commercial activity of the registrant.

Under subsection 169(1) Fund and XXXXX are not entitled to claim ITCs because they are not engaged in commercial activities. Fund incurred expenses related to its ownership of shares in XXXXX and XXXXX incurred expenses related to the holding of a partnership interest. The holding of shares and the holding of a partnership interest are not commercial activities on their own. No other provision in the ETA, the most relevant of which are outlined in the following paragraphs, would entitle Fund or XXXXX to claim ITCs.

Paragraph 272.1(2)(b) of the ETA provides that where property or a service is acquired or imported by a member of a partnership on its own account for consumption, use or supply in the course of activities of the partnership, for the purposes of determining an ITC or rebate of the member, the member is deemed to be engaged in those activities of the partnership. No ITCs are allowed for XXXXX because there is no property or services acquired or imported for consumption, use or supply in the course of activities of Partnership.

Where a member of a partnership acquires or imports property or services related to the raising of funds, negotiation or legal services that the member will use to acquire or maintain an interest in a partnership, such property or services will not be considered to have been acquired or imported for consumption, use or supply in the course of activities of the partnership. The deeming provision in paragraph 272.1(2)(b) of the ETA would, therefore, not apply for the purposes of determining an ITC of the member in respect of such property or services.

Subsection 186(1) of the ETA provides that a corporation that is a registrant and resident in Canada may claim ITCs for the tax paid or payable on property or services acquired, imported or brought into a participating province for consumption or use in relation to the shares or indebtedness of a corporation. No ITCs are allowed for XXXXX because the legal and accounting services incurred are not in relation to the shares or indebtedness of a corporation. As for Fund no ITCs are allowed because it is not a corporation.

Subsection 185(1) of the ETA provides that where tax in respect of property or a service acquired, imported or brought into a participating province by a registrant becomes payable by the registrant at a time when the registrant is neither a listed financial institution nor a person who is a financial institution, the registrant can claim ITCs to the extent that the property or service was acquired, imported or brought into the province as the case may be, for consumption, use or supply in the course of making supplies of financial services that relate to commercial activities of the registrant. ITCs are not allowed for XXXXX nor Fund under this provision because neither is engaged in commercial activities.

Note that Partnership can only claim ITCs on property or a services acquired or imported for consumption use or supply in its own commercial activity and not on property or services acquired or imported for consumption, use or supply in the activities of Fund or XXXXX.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8221.

Yours truly,

Denise Villeneuve
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate