The recent decision of the Tax Court of Canada (TCC) in Miedzi Cooper Corporation v. The Queen, 2015 TCC 26, should put to bed a needlessly ongoing debate with the Canada Revenue Agency (CRA) on the scope of input tax credit (ITC) entitlements of holding companies in connection with the commercial activities of their subsidiaries.
Miedzi is a holding company headquartered in Vancouver that carries on a mineral exploration business through several subsidiaries. It has no activities other than holding the shares of a Luxembourg company (Luxco), which in turn holds the shares of companies (Opcos) in Poland engaged directly in mineral exploration. Miedzi funded the operations of the Opcos by making loans to Luxco, which in turn made loans to the Opcos. The funds for the loans were raised by Miedzi undertaking a private placement. It incurred considerable expenses, such as fees for legal, accounting and consulting services as well as other miscellaneous costs. It then claimed ITCs in respect of all GST/HST it paid on those expenses.
The CRA denied a significant portion of the ITCs on the basis of its restrictive interpretation of section 186 of the Excise Tax Act (ETA). Miedzi had relied on a broad interpretation of section 186 in support of its ITC claim.
For the purposes of determining an ITC, subsection 186(1) essentially deems a holding company to have acquired certain property or services for use in the course of commercial activities of the company, which is the main ITC requirement under subsection 169(1). However, this deeming rule only applies to the extent the holding company can reasonably be considered to have acquired the property or services for use “in relation to” the shares or indebtedness of a related company that is engaged exclusively in commercial activities. Subsection 186(3) allows for the existence of an intervening holding company, such as Luxco, without limiting the claimant’s ITC entitlement.
The Crown argued that the phrase “in relation to” should be interpreted narrowly and that the provision should only apply to the extent the property or service is acquired for the holding company to do something in respect of the shares or indebtedness of the subsidiary, such as selling a portion of the shares. Corporate costs of the holding company that do not relate necessarily to the subsidiary are excluded. Regarding Miedzi, while certain of its expenses indeed related to the shares of Luxco, the Crown claimed that many did not.
This approach was neatly rejected by Paris J. based on the decisions of the TCC and the Federal Court of Appeal (FCA) in Stantec Inc. v. The Queen, 2008 TCC 400 and 2009 FCA 285. Paris J. maintained that subsection 186(1) was intended by Parliament “to be a look-through rule”, which was intended to avoid a loss of ITCs where a commercial activity is conducted through a holding company structure; consequently, subsection 186(1) should not be interpreted narrowly. He reasoned that everything Miedzi did could be said to have been done “in relation to” the shares or indebtedness of Luxco. Consequently, it was entitled to full ITCs.
In the past, the CRA has asserted that its restrictive interpretation was correct in spite of Stantec. The TCC’s decision in that case was made under the court’s Informal Procedure (and therefore is generally not binding on the court as precedent) and was upheld by the FCA on other grounds. Although the decision in Miedzi was also made under the Informal Procedure, it nonetheless affirms yet again a broad judicial interpretation of section 186, which it is hoped the CRA will finally accept.