Input tax credit rules ain’t broke – careful how you fix ‘em

  • October 24, 2018

The CBA’s Commodity Tax, Customs and Trade Law Section was happy to respond to Finance Canada’s proposed amendments to GST/HST holding corporation rules issued in July. But it had one big question about the changes: Why?

The current rules are effective and accomplish their goal, the Section says in a letter to the Department of Finance. It notes that the courts have adopted a flexible and sensible approach to input tax credits, where GST/HST credits should be recoverable as a matter of tax credits.

“Given the current constructive state of the rules, we trust that the rationale for the proposed amendments is to clarify (and not restrict) the existing approach to ITCs for holding corporations,” the Section says. “We would appreciate, however, clarification on the rationale for the proposed amendments.”

That’s because “(w)e are concerned that the proposed changes may (inadvertently perhaps) have harmful repercussions on the competitiveness of Canadian businesses.” The Section fears that under the proposed amendments the flexibility of the current rules could be lost, while onerous tracking provisions could add administrative and related costs.

Moreover, companies wanting to avoid the “arbitrary restrictions” imposed by the proposed amendments would be incentivized to establish an arm outside the country.

“It is bad tax policy to encourage investors to establish investment vehicles outside Canada (or put another way, discourage them from establishing their investment vehicles in Canada).”

The Section agrees that the ITC holding corporation rules should be extended to other types of investment vehicles such as partnerships or trusts. The rules should not favour one particular structure (corporate) over another (partnership or trust). It also sees no reason to restrict the ITC holding corporation rules to “closely related” corporations, as opposed to the current test of “related” parties.

The Section makes a number of recommendations to ensure the proposed amendments address their concerns and are properly implemented.

“As we expect that additional challenges will come to light as more practitioners and businesses review the proposed amendments, we will endeavour to provide these examples,” the Section says.

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