Lang Michener Tax Tips -- GST Input Tax Credits and Assumed Liabilities

On a business transfer implemented as an asset purchase, the buyer will often assume business liabilities arising in the normal course up to the time of closing. Where these assumed liabilities include a GST component, special issues must be taken into account.

In the recent Telus Communications (Edmonton) case, Telus was denied input tax credits for GST paid by it on liabilities assumed as part of a business acquisition.

Telus acquired the business assets of Edmonton Telephones (Ed Tel). Ed Tel had contracted for various supplies in the normal course of business, and these supplies were made to Ed Tel before closing. However, the supplies were paid for by Telus after closing as part of its assumption of business liabilities. Telus was denied an input tax credit for the GST paid by it to the suppliers as part of these assumed liabilities. The Court concluded that Ed Tel was clearly the "recipient" of the supplies for GST purposes and so was the only entity that could have claimed the input tax credits, even though the liability to pay for the supplies and the GST was assumed by Telus. 

While the law has changed to some extent since the Court's decision in Telus, the issues reviewed by the Court can still have relevance to current and future transactions. Where a seller will be in a position to claim a tax credit for a liability assumed and paid for by a buyer, the buyer should consider an appropriate purchase price adjustment or otherwise take this into account in the purchase strategy. This highlights the importance of a clear understanding of the effect of transactional taxes in the context of a business acquisition.