Section 186

Subsection 186(1) - Related Corporations

See Also

Miedzi Copper Corporation v. The Queen, 2015 TCC 26 (Informal Procedure)

all expenses of a pure holdco related to its subsidiary investment

Essentially the appellant's only activity was to indirectly finance the mineral exploration activities of six Polish subsidiaries of its immediate wholly-owned Luxembourg subsidiary ("Luxco") by lending funds (raised through private placements) to Luxco, with such loans being converted to mandatorily redeemable preferred shares at the end of each year. The appellant had no employees or premises of its own, but was charged fees for consulting services provided by its executives and consultants as well as being charged for professional and other incidental services.

After noting the broad construction given to the phrase "in relation to" in Stantec, and in finding that the appellant was entitled to full input tax credits for GST on these charges, Paris J stated (at para. 35):

[E]verything Miedzi does can be said to be done in relation to the shares or indebtedness of Luxco. Therefore, there is a clear nexus between the administrative, management and legal services in issue and the shares or indebtedness of Luxco.

He stated (at para. 36) his agreement with the appellant's submission (at para.18) that:

Parliament intended subsection 186(1) to be applied as a look-through rule to allow a holding company to claim ITCs that the underlying corporation could have claimed if it incurred the costs of the services or property directly.

Words and Phrases
in relation to

Pay Linx Financial Corporation v. The Queen, 2011 TCC 203 (Informal Procedure)

services received did not relate to subsidiary's activities

The appellant, whose only "activity" was holding the shares of a wholly-owned subsidiary ("Pay Linx"), acquired property and services to maintain the register of its shareholders, and to facilitate trades of its shares on the TSX, as well as receiving legal services, and wire services to issue press releases. It claimed input tax credits on the basis that it incurred these expenses in relation to its shares of Pay Linx.

Little J. denied the claim on the basis that the property and services acquired by the appellant related to its own activities (which were not commercial activity) and not to the activities of Pay Linx.

Stantec Inc. v. The Queen, 2008 TCC 400 (Informal Procedure), aff'd 2009 FCA 285

listing fees to issue shares to target shareholders were eligible

The appellant acquired a US public company ("Keith") in a Delaware merger (in which Keith Industries merged into the appellant's US subsidiary, with the latter as the survivor, and Keith shareholders received shares of the appellant), which required the appellant's shares to be listed on the NYSE. Before going on to find that s, 186(2) also applied so as to provide input tax credits for GST on the fees incurred by the appellant in connection with this listing, C Miller J found that s. 186(1) applied to deem the appellant to incur the fees for use in its commercial activities, stating (at paras. 16-17):

The facts are quite clear – the listing services were acquired so that Stantec could complete its deal to own all the shares of the company resulting from the merger of Keith Companies and Stantec California. Those services, I find, can readily and reasonably be regarded as being in relation to the shares of either Keith Companies or Stantec California or the shares of the merged company; that is, the investment by Stantec in its new acquisition.

…The Government contends raising funds by issuing shares is one step removed from obtaining more operating company shares. I see no support for this one step removed doctrine. Policy P‑196R allows the application of subsection 186(1) if the holding company incurs costs to simply buy an operating company shares, without raising money by issuing its own shares. I fail to see how one acquisition is in relation to the subsidiary company shares and the other is not.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(2) "acquisition" of shares includes cancellation of those shares on a Delaware merger; "in relation to" to be construed broadly 305

Perfection Dairy Group Limited v. The Queen, 2008 TCC 342 (Informal Procedure)

nominal residual assets of a bankrupt sub had been acquired in its active business/186 prevailed over 141.01(2)

A subsidiary (“PFL”) of the appellant went into receivership in 1991, and in 1996 PFL and its shareholders launched an action against various parties claiming damages of $60 million on behalf of themselves and the bankrupt PFL. The appellant claimed $23,700 of input tax credits for GST on related legal fees incurred by it.

Webb J ultimately found that the appellant was entitled to such ITCs under s. 186(1) given his findings (at para 36) that “[t]he professional fees incurred in 1998 were in relation to the Legal Action, which, if successful, would result in PFL resuming its dairy product business and result in a significant increase in the value of the shares of PFL and the value of the indebtedness of PFL to the Appellant” and (at paras. 37-8) that in 1998 PFL continued to hold “some office furniture, pictures, and other miscellaneous assets… that had been acquired by PFL when it was carrying on the dairy products business.”

Although, before so concluding, he found that in the absence of s. 186(1), the appellant would not have been entitled to such ITCs, “[t]he specific provisions of subsection 186(1)… must have been intended to override the more general application of section 141.01…” (para. 49).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) fees were incurred in relation to claim of bankrupt subsidiary rather than to earn consulting fees 152

Administrative Policy

8 March 2018 CBA Commodity Tax Roundtable, Q.14

Miedzi inapplicable to parent board governance expenses

CRA has required a direct link to exist between the use or consumption of the good and the service by a parent and the shares of the capital stock of the related corporation such that s. 186(1) would for example not apply to:

  • document preparation services for the board of directors of the parent;
  • expenses related to discussions regarding the replacement of members of that board;
  • updating the share register of the parent.

To the extent that a parent corporation has as its sole activity the ownership of shares of another corporation, will parent be entitled to claim ITCs, pursuant to s. 186(1), respecting the above (to the extent the other conditions are met) as per Miedzi Copper? CRA responded:

Our position on the interpretation of section 186 … has not changed. …[W] e would, for example, apply … the Miedzi case … where a particular situation has the same facts … .. Although the facts presented in the question appear to be similar to those in Miedzi, they are not the same.

23 November 2016 Interpretation 165129

inapplicable to subsidiary unit trust

A corporation (“Parent”) holds units of subsidiary trusts and has argued that it incurred GST/HST to supply management services to those unit trusts. Although it has provided sample invoices, it has not provided copies of management services agreements.

In noting that s. 186(1) could not be used as the basis for claiming input tax credits, in relation to the investments in the unit trusts, CRA stated:

The [Trusts] are not corporations, but trusts. Therefore, subsection 186(1) will not be applicable to any property or services acquired by the Parent in relation to its holding of trust units in any of the [Trusts], or in relation to its interest in any other entity (such as a partnership) which is not a related corporation. For example, to the extent that the Parent acquired legal or consulting services in relation to its holding of units in one of the [Trusts], it will not be eligible to claim ITCs under subsection 186(1).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) expenses incurred respecting a subsidiary unit trust are ineligible for ITCs unless incurred as management-services inputs 161

GST/HST Technical Information Bulletin B-110 Application of the GST/HST to the Practice of Acupuncture April 2017

Cancellalation fee paid to acupuncturist

A cancellation fee paid by a patient for a missed or cancelled appointment is treated as payment for the intended supply (that is, the acupuncture service or other treatment modality)….

May 2016 Alberta CPA Roundtable, GST Q.14

Miedzi Copper/Stantec have not changed 186 interpretation

Has the CRA updated its position on s. 186 following Miedzi Copper and Stantec? CRA responded:

Our position on the interpretation of section 186 has not changed. … We will apply the Court’s decision in Miedzi Copper [and Stantec] where the situation has the same facts as that case.

26 February 2015 CBA Roundtable, Q.21

s. 186(1) does not help a parent to qualify for a s.156 election

A parent corporation (which is not a financial institution) earns 60% of its income from management fees charged to its wholly-owned subsidiary (which is engaged exclusively in commercial activity) and 40% as interest and dividend income from the subsidiary. It claims full input tax credits under s. 169 (based on its management activity) and under s. 186 (respecting its interest and dividend income). Does the deeming effect of s. 186 permit a s. 156 election to be made? CRA responded (TI translation):

[S.] 186(1) of the ETA generally allows certain corporations to claim ITCs on expenses relating to shares of another corporation that is related to them or indebtedness of that corporation where the conditions of this subsection are satisfied. The provisions of subsection 186(1)…apply only for the purpose of ITC calculations and have no impact on the eligibility criteria for the election under section 156 of the ETA.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 156 - Subsection 156(1) - Qualifying Member s. 186(1) does not deem use of property in commercial activity 58

26 February 2015 CBA Roundtable, Q. 17

costs incurred respecting capital raises to fund an operating subsidiary are not creditable
(full text available with membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources)

Memorandum 8.6, para. 11, Example 3, indicates that “HoldCo” may not claim input tax credits (ITCs) under s. 186(1) for legal and accounting costs incurred in connection with raising money through issuing shares, even where the issuance proceeds are used to purchase additional shares in “OpCo,” all of whose property is acquired for consumption, use or supply in widget manufacturing - on the basis that the services are acquired for consumption or use in relation to the first order supply (the share issuance) and not in relation to the shares of OpCo. However, in Stantec the Tax Court found that the s. 186(1) language implied a wide, rather than narrow, connection between the property and services acquired and the shares of the Opco, and rejected the above-noted example (published at that time in P-196R), stating:

I see no support for this one step removed doctrine. Policy P-196R allows the application of subsection 186(1) if the holding company incurs costs to simply buy an operating company shares, without raising money by issuing its own shares. I fail to see how one acquisition is in relation to the subsidiary company shares and the other is not.

In light of the Tax Court’s explicit rejection of the “one step removed doctrine,” does CRA intend to revise Example 3 to permit a Holdco to claim ITCs for costs incurred in connection with a share issuance of its own shares that relates directly to a purchase of additional shares in an Opco? CRA responded:

The Tax Court’s decision in Stantec Inc. v. The Queen was made under the informal procedure and was appealed. The Federal Court of Appeal declined to make a determination regarding the Tax Court judge’s findings pursuant to subsection 186(1) of the Excise Tax Act (ETA); which means they neither agreed nor disagreed. It was unnecessary to do so as it made a determination under subsection 186(2) of the ETA. We currently have no plans to revise Example 3 in paragraph 11 of GST/HST Memorandum 8.6, Input Tax Credits for Holding Corporations and Corporate Takeovers, but we are reviewing our interpretation of section 186 of the ETA.

CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 34

failure to self-assess under s. 218 where satisfy s. 186(1)
available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx

As s. 186(1) only applies for ITC purposes, it does not affect the determination of whether there is an imported taxable supply. However, where a registrant failed to account for HST on an imported taxable supply which should have been self-assessed and has not claimed an ITC for those amounts, administrative tolerance generally will be exercised so that no interest is assessed.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 217 - Imported Taxable Supply failure to self-assess under s. 218 where satisfy s. 186(1) 61
Tax Topics - Excise Tax Act - Section 281.1 - Subsection 281.1(1) failure to self-assess under s. 218 where satisfy s. 186(1) 61

27 March 2009 Interpretation 106684

s. 186(1) does not deem holdco to be generally engaged in commercial activity

A holding company, which is not a financial institution and which had been claiming ITCs respecting its subsidiaries under s. 186(1), paid a completion fee to a financial advisor respecting an acquisition of its shares. In finding that ITCs were not available under s. 186(1), CRA stated:

Subsection 186(1) does not...apply to the particular services in question on the basis that the services cannot reasonably be regarded as having been acquired by XXXXX for consumption or use in relation to shares or indebtedness of corporations related to XXXXX.

…[A]lthough subsection 186(1) may apply with respect to a parent corporation's investments in corporations to which it is related, subsection 186(1) does not deem the corporation to be engaged in commercial activities where it acquires inputs that relate to the shares and indebtedness of a related corporation. Rather, where subsection 186(1) applies, it deems the particular property or services acquired by the parent to be for use in the course of commercial activities of the parent to the extent the property or services have been acquired for consumption or use in relation to the shares or indebtedness of the related corporation. Therefore, while subsection 186(1) may apply to XXXXX with respect to the acquisition of certain property or services, it does not deem XXXXX to be engaged in commercial activities.

…[T]he fact situation with respect to XXXXX is distinguished [from BJ Services] on the basis it is not making taxable supplies in the course of a commercial activity and ITCs cannot be linked to the making of any taxable supplies.

P-196R "Whether Administrative Overhead Costs Fall Under Subsection 186(1) of the Excise Tax Act", August 10, 2007.

29 November 2004 Interpretation 54669

Holdco required to allocate inputs but eligible for ITCs on inputs in free supplies to Opco

In responding to a question on the application of s. 186(1) to inputs used by a holding company partially for making supplies of administrative services for consideration to related corporations whose debt or shares are held by it, CRA stated:

[I]f a holding company acquires or imports property or a service or brings it into a participating province for consumption or use partially in relation to the shares or indebtedness of a related company and partially in relation to other activities of the holding company, the costs should be allocated pursuant to the rules in the ETA governing ITC eligibility. The types of expenses that would be eligible for ITCs would be generally limited to share and debt acquisition, holding and disposing of shares and debt, and dividend and interest receipts. ...

If the holding company makes free supplies of administrative services, subsection 141.01(4) of the ETA would deem the holding company's inputs that it used or consumed in making those supplies, for purposes of subsection 141.01(2) of the ETA, to have been acquired, imported or brought into a participating province in order to facilitate the endeavour of the operating company. Consequently, the holding company would still be eligible to claim ITCs on such costs, to the extent that the operating company is engaged in commercial activities.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(4) Holdco eligible for ITCs on inputs used by it to make free supplies to Opco 214

GST M 700-5-6 "Input Tax Credits for Holding Companies, Takeovers, and Multi-Tiered Corporations"

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(2) 0

Guide for Providers of Financial Services under "Special Provisions" - "Investments by Related Corporations"

General discussion.

Articles

Allan Gelkopf, Zvi Halpern-Shavim, "Five Arbitrary Differences between Corporations and Partnerships for GST/HST Purposes", Sales and Use Tax, Federated Press, Volume XIII, No. 2, 2015, p. 674.

CRA apparently not following Miedzi/partnerships not covered (pp. 674-5)

Stantec. . .[and] Miedzi Copper… significantly expand the scope of ITC entitlement for holding corporations, although the CRA has not changed its published position, apparently on the basis that the decisions were issued under the Tax Court of Canada's Informal Procedure, . . .The rule under subsection 186(1) only applies to related corporations. If the underlying operating entity is a partnership, or if the "holding company" itself is a partnership, there is no ITC available to the holding company.

Subsection 186(2) - Takeover Fees

See Also

Stantec Inc. v. The Queen, 2008 TCC 400 (Informal Procedure), aff'd 2009 FCA 285

"acquisition" of shares includes cancellation of those shares on a Delaware merger; "in relation to" to be construed broadly

The appellant acquired a US public company ("Keith") in a Delaware merger (in which Keith Industries merged into the appellant's US subsidiary, with the latter as the survivor, and Keith shareholders received shares of the appellant), which required the appellant's shares to be listed on the NYSE. In finding that the appellant was entitled to input tax credits for GST on the fees incurred by it in connection with this listing, C Miller J found that ss. 186(1) and 186(2) both applied, so that the appellant was deemed to incur the fees for use in its commercial activities.

The transactions, although not a purchase of Keith's shares, was an "acquisition" of the shares, by way of "contractually having control of the disposition of those shares in the form of their cancellation" (para. 24). To hold otherwise would defeat the essence of s. 186(2), which is to deal with takeovers (para. 25).

In affirming C Miller J's finding that the listing services were "in relation to" the shares for the purpose of s. 186(2) (without commenting on the same finding made in relation to s. 186(1)), Layden-Stevenson JA stated (at paras. 16-17):

Applying the Supreme Court’s construction [of “in relation to” in Slattery, [1993] 3 S.C.R. 430], he reasoned that the nexus between acquiring the listing services and the shares of either Keith or Stantec California need not be one of prominence, let alone exclusivity. He concluded that the listing services were acquired so that Stantec could complete its deal to own all the shares of the company resulting from the merger of Keith and Stantec California. ...Miller J. found, as a fact, that the services “can readily and reasonably be regarded as being in relation to the shares of either Keith Companies or Stantec California or the shares of the merged company, that is, the investment by Stantec in its new acquisition.”

Words and Phrases
in relation to acquisition
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(1) listing fees to issue shares to target shareholders were eligible 255

Administrative Policy

15 November 2011 Headquarters Letter Case No. 135608

Where a "capital pool company" which has raised capital pursuant to a prospectus on a blind pool basis has identified a corporation to acquire, s. 186(2) may apply to permit it to claim ITCs respecting the related expenses thereafter incurred by it.

GST M 700-5-6 "Input Tax Credits for Holding Companies, Takeovers, and Multi-Tiered Corporations"

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 186 - Subsection 186(1) 0