Proposed GST/HST changes target holding companies and cryptocurrency

May 31, 2019

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On May 17, the Department of Finance released draft GST/HST legislation that will have a significant impact on several industries. Here’s a summary of the proposed changes that you need to know:

  • The eligibility for Canadian resident holding corporations to claim input tax credits (ITCs) in relation to the shares and debt of related corporations may be limited to expenditures incurred for specific purposes; however, ITCs may now also be available to Canadian resident partnerships and trusts that are related to operating corporations.
  • The GST/HST drop shipment rules are being extended to apply to commercial services in relation to fungible goods (described below).
  • Supplies of certain cryptocurrencies have been classified as exempt financial instruments for GST/HST.
  • Driving services have been added to the definition of ‘freight transportation service.’ This results in international driving services qualifying as zero-rated (i.e., taxable but at a rate of 0%) for GST/HST.

Input tax credits for holding companies

Under current legislation, a corporation that is resident in Canada and registered for GST/HST can claim ITCs when it acquires property or services that can reasonably be regarded as having been acquired for consumption or use in relation to the shares of capital stock or indebtedness of a related corporation that is engaged exclusively (90% or more) in commercial activities. Whether an acquisition of property or services can reasonably be regarded as being in relation to the shares or indebtedness of a related corporation is subject to interpretation.

On July 27, 2018, the Department of Finance proposed legislative changes in an attempt to provide greater clarity to the application of these holding corporation provisions. In addition, consultations were initiated to seek input into whether the holding corporation rules should be extended to partnerships and trusts, and whether the requirement that the parties be related should be narrowed to those that are closely related. For GST/HST purposes, the term ‘related’ generally refers to the element of control whereas closely related generally requires 90% ownership.

The changes proposed on May 17, 2019 are intended to modify the legislative changes first proposed on July 27, 2018, and to extend the holding corporation rules to partnerships and trusts. The suggestion of restricting the holding corporation rule to closely related parties has not been advanced.

For the purposes of the proposed amendments, a corporation is an operating corporation of another corporation if all or substantially all (90% or more) of its property was last manufactured, produced, acquired, or imported for consumption, use or supply exclusively in the course of its commercial activities, and it is related to the other corporation.

Under the proposed amendments, the holding corporation may claim ITCs to recover GST/HST incurred on property and services to the extent the acquisition was for the purpose of the holding corporation obtaining, holding or disposing shares or indebtedness of the operating corporation, or the operating corporation issuing, redeeming, converting or otherwise modifying its shares or indebtedness.

In addition, a holding corporation may claim ITCs to recover GST/HST incurred to the extent property or services were acquired for the purpose of issuing its own shares or indebtedness, if the proceeds are lent to or used to acquire shares or indebtedness of the operating corporation, where the operating corporation in turn uses the proceeds in the course of its commercial activities.

Finally, where 90% or more of a holding corporation’s property consists of investments in operating corporations and property consumed, used, or supplied exclusively in the course of the parent’s commercial activities, it may claim ITCs to recover GST/HST incurred for the purpose of carrying on most activities of the parent, other than certain specified exempt activities.

The proposed amendments above continue to have an effective date of July 28, 2018.

In addition, effective May 18, 2019, the rules are proposed to be extended to partnerships and trusts that hold units of related operating corporations. The rules are not extended to include operating entities other than corporations.

What does this mean to your business?

  • A holding corporation that currently claims ITCs in relation to the shares or indebtedness of a subsidiary should review the changes to ensure that the expenses still qualify under the proposed rules.
  • A partnership or trust that’s related to an operating corporation may now be entitled to claim ITCs that were previously unavailable.
  • Unfortunately, the proposed changes don’t extend to a partnership or trust that is the operating entity in a tiered structure.
  • A holding corporation, partnership, or trust may be able to claim additional ITCs where all or substantially all of its property is comprised of shares or indebtedness of operating corporations and/or property consumed, used, or supplied in the course of the parent’s commercial activities.

Drop shipment relief extended to services in relation to fungible goods

Under the current drop shipment rules, a non-resident that isn’t registered for GST/HST that acquires goods or commercial services in Canada in certain circumstance may be relieved from paying GST/HST.

Proposed legislation announced on May 17, 2019 extends these drop shipment rules to relieve certain services to unregistered non-residents in respect of fungible properties. Note that for relief to be available, the properties at issue must be essentially identical to each other, or be of the same class or kind, be of the same measure and state, and be interchangeable for commercial purposes. While appearing broad in its application, the relief does not extend to services in relation to continuous transmission commodities (e.g., electricity, crude oil, natural gas or other goods transferred by means of a wire, pipeline or other conduit). It also does not include relief for storage services for goods.

The relief applies prospectively from May 18, 2019 onward, and retroactively where a supplier did not already charge, collect, or remit the tax prior to that date.

Cryptocurrency treated as a financial instrument

The proposal announced on May 18 included the introduction of the term ‘virtual payment instrument’ in the definition of ‘financial instrument,’ which captures other instruments such as debt and equity securities, insurance policies and precious metals, to name a few. This effectively exempts the supply of cryptocurrencies for GST/HST purposes where the definition of virtual payment instrument is met.

The Department of Finance’s position on digital currency, which took effect on May 18, provides much needed clarity to those who use the medium to buy and sell property and services that, in the absence of these rules, may have treated supplies of digital currency as a bartered taxable supply for GST/HST purposes. With that being noted, it appears that risk still applies to digital currencies that do not exist at a digital address of a publicly distributed ledger such as blockchain. Further, the valuation of cryptocurrencies was not addressed as part of the amendments potentially leaving the door open for CRA to assign erroneous values to supplies made by taxpayers.

Freight transportation services now include certain driving services

The Excise Tax Act provides relief of GST/HST on certain freight transportation services provided to transport tangible personal property internationally in the form of zero-rating. The proposed amendments broaden these provisions to include a service of driving an automotive vehicle designed or adapted to be used on roads for the purpose of delivering the vehicle to a destination effective May 18, 2019 or before if the supplier did not charge, collect, or remit GST/HST on such supplies prior to the amendments. Taxpayers should take note of these zero-rating provisions to ensure they don’t put themselves at a competitive disadvantage by overcharging GST/HST on such services.

BDO can help

If you’re concerned that these proposed amendments impact your business, contact a member of our national indirect tax team for assistance with these complex GST/HST changes.


The information in this publication is current as of May 31, 2019.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.