GST Policy Statement

P-196 WHETHER ADMINISTRATIVE OVERHEAD COSTS FALL UNDER SUBSECTIONS 186(1) OF THE EXCISE TAX ACT.

Date of Issue

Subject

Legislative Reference(s)

National Coding System File Number(s)

Effective Date

Text

Issue and Decision:

Issue: Where the requirements of subsection 186(1) of the ETA have been met, for purposes of determining an input tax credit of a parent corporation, the parent corporation will be deemed to have acquired or imported property or services for use in commercial activities of the parent to the extent the parent can reasonably be considered to have acquired or imported the property or services for consumption or use in relation to the shares or indebtedness of a related corporation that is engaged in commercial activities ("Opco").

Do only direct costs, such as for example, accounting and legal services on the further acquisition of shares, meet the conditions under subsection 186(1) of the ETA, or do indirect costs, such as administrative overhead, rent, utilities, financial statement preparation, among others, also meet the conditions under subsection 186(1) of the ETA for purposes of determining an input tax credit of the parent corporation?

Decision: Both direct costs and indirect costs will qualify under subsection 186(1) of the ETA provided the parent corporation can demonstrate that the costs meet the requirements of subsection 186(1) of the ETA. Specifically, only property or services that can reasonably be regarded as having been acquired or imported by the parent for consumption or use in relation to the shares or indebtedness of a related corporation will fall under subsection 186(1) of the ETA.

Whether a particular property or service can reasonably be regarded as being acquired or imported by the parent corporation for consumption or use in relation to a parent's investment, and the extent of this relationship, is a question of fact. Each case must be examined in light of its particular facts in determining whether subsection 186(1) of the ETA may apply in the circumstances.

Evaluating whether a particular property or service meets the requirements of the subsection includes examining the nature of the property or service to see if it is reasonable that there is a relationship between the consumption or use of the property or service and the parent's investment in Opco. If it is reasonable that there is such a relationship, the extent of the relationship must then be determined - whether it is wholly or partially attributable to the investment. For example, the parent corporation is required to allocate its inputs between the activity of acquiring, holding, disposing of shares/ indebtedness of Opco, and other activities that are not commercial activities such as , for example, raising its own capital by issuing shares or borrowing money, and acquiring shares or debt of non-related corporations.

SAMPLE RULINGS

Sample Ruling #1:

Statement of Facts

1. Holdco, a corporation that is a registrant and resident in Canada, owns 51% of the shares of capital stock of another corporation, Opco.

2. Opco carries on the commercial activity of manufacturing widgets, and all of its property is for use in that activity.

Proposed Transactions

1. Holdco will acquire a further 5% of the shares of capital stock of Opco on October 1, 1996.

2. Holdco will acquire legal services, for consideration of $1000 and for which $70 GST will be payable, specifically to effect the purchase of the shares.

Ruling Requested

Holdco will be entitled to claim a full input tax credit by virtue of subsection 186(1) of the ETA because a) Holdco can reasonably be regarded as having acquired the legal services for consumption or use in relation to the shares of a related corporation, Opco, and b) Holdco is deemed to have acquired the services for use exclusively in the course of commercial activities of Holdco as they were acquired exclusively for use in relation to the shares of Opco.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of the facts, the proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed as described above, our ruling is as follows:

Holdco will be entitled to claim a full input tax credit by virtue of subsection 186(1) of the ETA because a) Holdco can reasonably be regarded as having acquired the legal services for consumption or use in relation to the shares of a related corporation, Opco; b) Holdco is deemed to have acquired the services for use exclusively in the course of commercial activities of Holdco as they were acquired exclusively for use in relation to the shares of Opco, and c) when tax is payable, all of the property of Opco is for consumption, use or supply exclusively in commercial activities.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4 issued by Revenue Canada and is binding provided that the proposed transactions are completed prior to November 1, 1996.

This ruling is based on the Excise Tax Act in its present form and does not take into account any proposed amendments to the Excise Tax Act which, if enacted, could have an effect on the ruling provided herein.

Sample Ruling #2

Statement of Facts

1. Holdco is a corporation that is a registrant and resident in Canada, and owns 51% of the capital stock in each of Opco, Aco, Bco, Xco, Yco and Zco.

2. The corporations have outstanding loans from Holdco.

3. The corporations are engaged exclusively in the manufacturing of widgets.

4. All of the property of each corporation is for consumption, use or supply exclusively in the manufacturing of widgets.

5. Holdco has no activity other than the owning of shares and debt in the related corporations.

6. In order to manage its investments in the related corporations, Holdco has a team of employees for whom it provides office space, furniture and equipment.

Transactions

1. Holdco pays GST on a monthly basis for the rental of office space and office equipment.

2. Holdco also pays GST on accounting services acquired for the preparation of its annual financial statements.

Rulings Requested

Holdco is entitled to claim full input tax credits by virtue of subsection 186(1) of the ETA in respect of the rental of office space and equipment and for services in the preparation of Holdco's annual financial statements because a) Holdco can reasonably be regarded as having acquired the property and services for consumption or use in relation to the shares and indebtedness held by Holdco of the related corporations, and b) it is deemed to have acquired the property and services for use exclusively in the course of commercial activities of Holdco as they were acquired for use exclusively in relation to the shares and indebtedness of the related corporations.

Rulings Given

Based on the facts set out above, we rule that:

Holdco is entitled to full input tax credits by virtue of subsection 186(1) of the ETA in respect of the rental of the office space and equipment and the accounting services for the preparation of Holdco's annual financial statements because a) Holdco can reasonably be regarded as having acquired the property and services
for consumption or use in relation to the shares and indebtedness held by Holdco of the related corporations; b) it is deemed to have acquired the property and services for use exclusively in the course of commercial activities of Holdco as it acquired the property and services exclusively for consumption for use in the relation to the shares and indebtedness held by Holdco of the related corporations, and c) when tax is payable, all of the property of each corporations is for consumption, use or supply exclusively in commercial activities.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. 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, and that you have fully described all necessary facts and transactions for which you requested a ruling.

Sample Ruling #3

Statement of Facts

1. Holdco, a corporation that is a registrant and resident in Canada, owns 51% of the shares of capital stock of another corporation, Opco.

2. Opco carries on the manufacturing of widgets and all of its property is for consumption, use or supply in that activity.

Proposed Transactions

1. Holdco is proposing to issue shares of its own on May 1, 1996, in order to finance the purchase of a further 15% of the shares of Opco.

2. Holdco will pay GST on legal and accounting services acquired in order to issue the shares.

Rulings Requested

Holdco will be entitled to full input tax credits by virtue of subsection 186(1) of the ETA in respect of the legal and accounting services because a) Holdco can reasonably be regarded as having acquired the services for consumption or use in relation to the shares of Opco, and b) Holdco is deemed to have acquired the
services for use exclusively in the course of commercial activities of Holdco as they were acquired for use in relation to the shares of Opco.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of the facts, the proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed as described above, our ruling is as follows:

Holdco will not be entitled to claim input tax credits by virtue of subsection 186(1) of the ETA in respect of the legal and accounting services because a) Holdco cannot reasonably be regarded as acquiring the services for consumption or use in relation to the shares of Opco and b) it is not deemed to be acquiring the services for use in the course of commercial activities of Holdco as they are not for use in relation to the shares of Opco.

This ruling is subject to the general limitations and qualifications outlined in GST Memoranda Series 1.4. issued by Revenue Canada and is binding provided that the proposed transactions are completed prior to June 1, 1996.

This ruling is based on the Excise Tax Act in its present form and does not take into account any proposed amendments to the Excise Tax Act which, if enacted, could have an effect on the ruling provided herein.

Rationale

The services will be acquired for consumption or use in relation to Holdco issuing shares of its capital stock and not for consumption or use in relation to the shares of Opco (i.e., it is one step removed from obtaining additional shares of Opco). As such, it is not deemed to be for use in commercial activities of Holdco to any extent under subsection 186(1) of the ETA.