28 July 2003 GST/HST Interpretation 41526 - Capital Pool Companies - Claiming Input Tax Credits

This is in response to your memorandum XXXXX in which you asked about Capital Pool Company (CPC) eligibility for input tax credits (ITCs) and the ramifications of our response if the CPC did not make a qualifying transaction, defined as an acquisition of a significant interest in a business or asset.

We understand from the information provided and from our research that XXXXX is a Canadian resident registrant and a CPC. As a CPC, its principal business is to identify and evaluate opportunities for the acquisition of an interest in assets or businesses. Having done so it will then negotiate an acquisition or participation in those assets or businesses subject to receipt of shareholder approval and acceptance for filing by the Exchange. The Exchange may suspend from trading or delist the common shares of XXXXX where it has failed to complete a qualifying transaction within 18 months of its date of listing.

XXXXX has submitted two letters of intent to potential qualifying transaction candidates. One of these transactions involved purchasing assets outside Canada. As of this date none of these transactions have materialized.

Per subsection 169(1), eligibility for ITCs is generally based on the registrant's intention at the time the property or service is acquired. The intent of an entity may be found in the entity's incorporating documents, prospectus and corporate minutes. Prior to the identification of any particular acquisition targets, the onus is on the registrant to show that the purchase of assets used in a commercial activity is an objective of the company before any ITCs can be claimed.

The registrant will be eligible to claim ITCs on property or service acquired in relation to the intention to purchase assets for use in the course of a commercial activity. No ITCs will be allowed in relation to the purchase of assets used in an exempt activity. If the registrant's intention is to acquire shares, no ITCs would be allowed on the property or service acquired in relation to this acquisition because the purchase of shares is an exempt activity.

Note that when a CPC is looking at different purchase options the inputs must be allocated to the different options on a reasonable basis. The ETA does not specify any method or formula that must be used to allocate property or services that are used partly in commercial activities and partly in other activities. However subsection 141.01(5) of the ETA requires that the method used by a person to determine the extent to which property or services are used in the course of commercial activities be fair and reasonable in the circumstances and be used consistently throughout the year. It is a question of fact whether a particular method used by a registrant is fair and reasonable in the circumstances. GST Memorandum 700-5-1 "ITC Allocation for Financial Institutions" and CCRA Policy Number P-063 "Output Based Method for Input Tax Credit Allocation" provide guidance on apportioning ITCs.

Where at any time a person ceases to be a registrant, the person shall be deemed under section 171(3)(a) to have made, immediately before that time, a supply of each property other than capital property that was held before that time for consumption, use or supply in the course of commercial activities. The person shall be deemed to have collected, immediately before that time, GST/HST in respect of the supply, calculated on the fair market value of the property at that time. As well, the person shall be deemed to have received, at that time, a supply of the property by way of sale.

If a person used capital personal property in its commercial activities and at any time ceases to be a registrant, paragraph 171(3)(b) of the ETA provides that the person shall be deemed, immediately before that time, to have ceased using the capital property in its commercial activities. As a result, the person shall be deemed under paragraph 200(2) to have made, immediately before ceasing to be a registrant, a supply of the property by way of sale and to have collected, at the particular time, GST/HST in respect of the supply calculated on the basic tax content of the property. Furthermore, the person shall be deemed to have received at that time a supply of the property by way of sale.

Note that we did not address the eligibility to register since the company had already been registered. An applicant must be engaged in a commercial activity or demonstrate a clear intention to be so engaged in order to qualify for voluntary registration.

Should you require additional information, do not hesitate to contact me at 957-8221[.]

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