Backgrounder: Consultation Concerning the GST/HST Holding Corporation Rules


Closing date:  September 28, 2018

Who may respond: The Department invites industry stakeholders and other interested parties to provide input into any of these proposals.

Comments on any of the issues described in this consultation paper should be submitted by September 28, 2018 to or to

Sales Tax Division
Tax Policy Branch
Department of Finance
90 Elgin Street
Ottawa, Ontario K1A 0G5

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential, the Department will make all efforts to protect this information within the requirements of the law.


A Goods and Services Tax/Harmonized Sales Tax (GST/HST) rule, generally referred to as the "holding corporation rule", applies where a parent corporation (a corporation that is resident in Canada and a GST/HST registrant) incurs expenses in relation to the shares or indebtedness of a commercial operating corporation (a corporation all or substantially all of the property of which is for consumption, use or supply exclusively in commercial activities), so long as the parent corporation is related to the commercial operating corporation. This rule deems the expenses to have been incurred in relation to commercial activities of the parent corporation, which allows the parent corporation to claim input tax credits to recover GST/HST paid in respect of those expenses.

Budget 2018 announced consultations on two aspects of this rule.

The Government is now seeking input on the following two aspects:

1. Related test

The holding corporation rule is intended to be an extension of a rule that allows a commercial operating corporation to claim input tax credits to recover tax paid in respect of expenses incurred in raising capital by selling or issuing its shares or bonds, notwithstanding that the raising of capital is an exempt financial activity, where that capital is for use by the corporation in commercial activity (i.e., the making of taxable supplies). The holding corporation rule allows a parent corporation to similarly recover GST/HST paid on expenses incurred by it that relate to the raising of capital, but for use by a related commercial operating corporation in the operating corporation's commercial activities rather than for commercial activities of the parent corporation itself, in cases where the commercial operating corporation would have been entitled to claim an input tax credit if it had acquired the property or services directly. This rule, which is an exception to the principle that investment by one person in the debt or shares of another person is an exempt financial service for which no input tax credits can be claimed, can be justified where the parent corporation and the commercial operating corporation are so integrated that they effectively function as a single entity and the parent corporation acquires property or services in respect of the commercial operating corporation as an extension of the commercial operating corporation and not as a passive investor.

Other look-through rules under the GST/HST legislation that treat two corporations as essentially being one person require that the two corporations be closely-related (generally, there is at least 90 per cent common ownership among the corporations) to benefit from these rules. However, the holding corporation rule allows a parent corporation to claim input tax credits in respect of a commercial operating corporation as long as the two corporations are "related" (generally, there is at least 50 per cent common ownership among the corporations). This can lead to inappropriate policy outcomes in certain circumstances. For example, a parent corporation that has a 51 per cent interest in a commercial operating corporation would be able to claim input tax credits in respect of its investment in the operating corporation, even though such input tax credits would be denied to other investors in the corporation and, unlike in the case of the relieving rules referred to above, the corporations are not so integrated as to effectively be a single entity.

As part of its commitment to review the holding corporation rule, the Government is interested in hearing stakeholders' views on replacing the current requirement in the holding corporation rule that the parent corporation and the commercial operating corporation be related with a requirement that they be closely-related in order to strengthen the rule and ensure that it does not lead to inappropriate policy outcomes.

2. Partnerships and trusts

The holding corporation rule applies only to a person that is a corporation and only in respect of shares or indebtedness of another person that is also a corporation. Representations have been made that the holding corporation rule should not be limited to corporations and should be extended to apply to partnerships and trusts, on the basis that these entities may perform a similar function as a parent corporation.

There is normally no policy reason for GST/HST rules to prefer one business structure over another. That said, other GST/HST group relief or look-through rules that provide tax relief respecting transactions between related or closely-related persons are generally limited to corporations and do not apply to partnerships or trusts where these rules are not revenue neutral. This is because voting rights are assigned to shares of a corporation and it is therefore possible to count voting rights of shares of a corporation, to determine if a given percentage of common-ownership of shares exists.  In contrast, partnership interests are not traditionally assigned voting rights. While the value of a partner's interest in a partnership could theoretically be used as a proxy for voting rights, the determination of a value of a partner's interest is complex in practice. Similar issues arise with trusts.

The Government is interested in hearing stakeholders' views regarding expanding the holding corporation rule to include partnerships and trusts, given the issues described above for determining a partnership's or trust's proxy for voting rights.

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