Section 186

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.

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).

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)….

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.

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.

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.

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.

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.

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.

General discussion.

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.