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GST/HST — input tax credits for legal fees on selling company shares

My client was a holding company ("Holdco") that owned another company ("Xco") in the auto parts business. It sold the shares of Xco in a complex transaction for which the legal fees came to $450,000. Two days after the transaction closed, Holdco's law firm billed Holdco the legal fees plus HST of $58,500, and took payment out of the funds the law firm was holding in trust.

Holdco claimed an input credit (ITCs) to recover the $58,500 from the CRA. This was based on subsection 186(1) of the Excise Tax Act, which allows a holding company to claim ITCs for costs relating to shares of a related operating company. (Otherwise, since shares are "financial instruments", no ITCs are available for GST/HST paid on costs relating to shares.)

Holdco's claim for the $58,500 was denied, and it filed a Notice of Objection. The CRA appeals officer considering the objection wrote to Holdco to say that because Holdco no longer owned Xco at the time it paid the legal fees, it was not entitled to an ITC under subsection 186(1).

I wrote to the Appeals Officer to explain that she was misreading subsection 186(1). I showed that when the subsection is read carefully, the time at which the companies had to be related was when Holdco contracted for the legal services, not when it was billed or when it paid the legal fees.

The Appeals Officer quickly agreed, and allowed the objection so that my client got its $58,500.

Problem vanished!

(2014)