New legislative proposals relating to the Excise Tax Act


On May 17, 2019, the federal Department of Finance released new legislative proposals to:

  1. Modify the GST/HST holding corporation rules that were originally introduced in the legislative proposals released on July 27, 2018;
  2. Extend the application of the drop-shipment rules;
  3. Expand the definition of a "freight transportation service"; and
  4. Outline the treatment of virtual currency (e.g., Bitcoin).

Interested parties can provide comments on the draft legislative proposals before June 17, 2019.

Holding corporation rules

The latest proposals modify some of the legislative proposals previously released on July 27, 2018 respecting the GST/HST holding corporation rules. Section 186 of the Excise Tax Act (ETA) enables registered Canadian corporations (i.e. the parent holding corporation) who hold the shares and/or debt of related corporations (“operating corporations”) that are engaged exclusively (90 per cent or more) in commercial activities, to claim certain input tax credits (ITCs).

May 17, 2019 legislative proposals

The latest proposals amend section 186 by adding or amending various subsections. Most notably, the latest amendments extend the application of the holding corporation ITC rules to include partnerships and trusts that are parent entities, as well as structures with partnerships or trusts that are operating entities. The latest changes are effective after the “Announcement Date” or May 18, 2019.

The amendments also introduce the definition of “unit” in new subsection 186 (0.1) to include an interest in a partnership and units in a trust. The definition of “operating corporation” in new subsection 186 (0.2) is amended such that a particular corporation may also be, at a particular time, an operating corporation of another person that is a partnership or a trust. This is a welcome change, since the original rules prevented a parent holding corporation from claiming ITCs simply because there were partnerships within the structure of the group of related entities.

The amendments also specify certain restricted circumstances where a parent can claim ITCs for certain limited expenses it incurs, which is an unfortunate outcome of these changes, whereby the original rules were broader as to the extent of ITCs a parent could claim.

Lastly, to accommodate the changes incorporating partnerships and trusts to claim certain ITCs as a parent entity, the amendments include a change to the voluntary registration rule under paragraph 240(3)(d) to include partnerships and trusts.

Organizations are encouraged to review their structures and how these changes may affect them and how the new rules can narrow the ability to claim certain ITCs. Specifically, where Canadian resident holding partnerships or trusts (effectively operating as a parent) hold related operating corporations, there may be an opportunity, under these new rules, for the holding partnership or trust to claim ITCs on its expenses under certain circumstances. Similarly, where a group of companies included operating partnerships or trusts and the parent was limited or prevented from claiming ITCs, there is now an opportunity to claim certain limited ITCs.

Drop shipment rules

The Excise Tax Act provides a set of relief rules known as the drop shipment rules that generally apply to non-residents who are not registered for GST/HST purposes. For instance, where goods or certain services related to such goods are purchased from a Canadian supplier, the goods are ultimately exported or the physical possession of the goods passes in Canada to a third party, these rules can provide relief from GST/HST.

Finance proposes to extend the existing relief provisions to ensure that the drop shipment rules apply to services involving fungible goods. Fungible goods are defined as incorporated, transformed or expended into the original goods. However, the new provisions included in new subsection 179 (7.1) will not apply to services related to fungible goods that are continuous transmission commodities transferred by means of wire, pipeline or other conduit.

These proposed changes are effective May 18, 2019, and apply to services made on or before that day, where the supplier did not already charge, collect or remit GST/HST.

Freight transportation services

The Excise Tax Act contains zero-rating rules related to international freight transportation services of goods or passengers. Finance proposes to expand these rules to include international driving services of delivering a vehicle that is designed to be used on highways or streets.

These proposed changes are effective May 18, 2019, and apply to such services provided on or before that day, where the supplier did not already charge, collect or remit GST/HST.

Virtual currency

To keep pace with developments in the Canadian economy, Finance proposes to include “a virtual payment instrument” to the definition of “financial instrument” in subsection 123(1) of the Excise Tax Act. Effectively, this proposal confirms that supplies of virtual currency will be exempt from the GST/HST.

Furthermore, “virtual payment instrument” will be added to subsection 123(1) to mean: “property that is a digital representation of value, that functions as a medium of exchange and that only exists at a digital address of a publicly distributed ledger, other than property that:

  • confers a right, whether immediate or future and whether absolute or contingent, to be exchanged or redeemed for money or specific property or services or to be converted into money or specific property or services,
  • is primarily for use within, or as part of, a gaming platform, an affinity or rewards program or a similar platform or program, or
  • is prescribed property.” (Note: Currently, no property is proposed to be prescribed.)

These proposed changes are effective May 18, 2019, and finally provide more certainty on the application of cryptocurrencies such as Bitcoin. Previously, such virtual currencies were treated administratively by the Canada Revenue Agency, as intangible personal property, rather than money or a currency.


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Maria Severino

National Tax Leader

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