GEM Health - Tax Court of Canada finds that there was no barter of management services for HST purposes between two affiliates employing the same key manager

A parent corporation holding a subsidiary engaged in HST-exempt activities (of operating nursing homes) reduced the non-creditable HST that the subsidiary otherwise would have borne on management fees charged by the parent to the sub, by having the group’s key executive draw a salary from the subsidiary for the performance of management services respecting the subsidiary’s homes. Sommerfeldt J found that this approach worked, and rejected CRA assessments which grossed-up the fees charged by the parent to the subsidiary by the amount of the executive’s salary at the subsidiary, and conversely imputed the earning of management fees by the subsidiary from the parent. This implicitly amounts to Sommerfeldt J accepting a “two hat” approach to allocating management services: the executive was wearing his hat of subsidiary employee when he spent time on its homes; and was wearing his hat of parent CEO when he attended to other matters. This two-hat approach can be helpful in other contexts, for example, where an executive spends part of her time attending to the investment undertaking of a parent income fund or REIT (ITA s. 132(6)(b)), and the balance to operating matters of subsidiaries which are not consistent with an investment undertaking.

Sommerfeldt J also accepted that the activities of the parent relating to new home construction in other subsidiaries were conducted as their agent, notwithstanding that it booked the expenditures as assets on its books and sent purported invoices for those amounts to the subsidiaries when the work was largely completed. In his view, it was quite contrived to consider that, as each brick was laid, the parent was acquiring the ownership of that brick rather than such brick becoming the property of the real estate owner (i.e., the subsidiary.)

Finally, booking, at year end, a reduction in management fees previously charged by the parent to some of the subsidiaries did not generate an input tax credit for the HST previously charged on the reduced amount because the parent failed to issue credit notes for the reduction, as required by ETA s. 232(3).

Neal Armstrong. Summaries of GEM Health Care Group Limited v. The Queen, 2017 TCC 13 under General Concepts – Agency, ETA s. 153(1), s. 232(3).