Section 128

Subsection 128(1) - Closely Related Corporation

Administrative Policy

5 July 2012 Interpretation Case No. 119159

Incorporated societies which had the same board members and, therefore, were controlled by the same group of persons did not qualify as closely related (so that the s. 156 election was unavailable) becasue they did not have share capital.

Paragraph 128(1)(a)

Administrative Policy

11 October 2017 Interpretation 181628

a corp. (F) held 50-50 by two 100% grandchildren of A was closely related for ETA purposes to A and to H (another 100% grandchild of A)

A parent corporation (Corporation A) wholly owns three subsidiaries (Corporations B, D, and G) that in turn wholly own qualifying subsidiaries (Corporations C, E and H, respectively). Two of the subsidiaries (Corporations C and E) collectively (50% each) wholly own another corporation (Corporation F). Is Corporation F is closely related to Corporation A under s. 128(1)(a)(v) or 128(2); and is Corporation F closely related to Corporations G and H?

After noting that Corporations A, B, C, D, E, G and H would be closely related to each other under ss. 128(1)(a)(i) to 128(1)(a)(iv) where the voting rights requirements in s. 128(1.1) were met, CRA stated:

[W]here all such conditions are met, Corporation F would be closely related to Corporation A under subparagraph 128(1)(a)(v) as Corporation F is owned by a combination of qualifying subsidiaries referred to in subparagraph 128(1)(a)(ii); that is, a combination of qualifying subsidiaries (namely Corporation C and Corporation E) of the particular corporation (Corporation A).

Further, where the conditions relating to qualifying voting control and required share ownership are met, Corporation G (the particular corporation) would be closely related to Corporation F under subparagraph 128(1)(a)(v) as Corporation F is owned by a combination of qualifying subsidiaries referred to in subparagraph 128(1)(a)(iv); that is, a combination of qualifying subsidiaries (namely Corporation C and Corporation E) of a corporation (Corporation A) of which the particular corporation (Corporation G) is a qualifying subsidiary.

Corporation H (the particular corporation) would be closely related to Corporation F based on the same analysis.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Qualifying Subsidiary great-grandchild held on a 50-50 basis 33

26 February 2015 CBA Roundtable, Q. 20

“closely-related” is informed by policy that 90% common ownership is covered
(full text available with membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources)

Does the 90% test in s. 128(1)(a) only take into consideration shares that have “full voting rights under all circumstances” in both the numerator and the denominator? For example, Corporation A holds 100% of Corporation C’s class A shares, and Corporation B holds 100% of Corporation C’s class B shares. If the class B shares do not have full voting rights under all circumstances, are Corporation A and Corporation C closely related? CRA responded:

Assuming that the class B shares have no voting rights and that there are no other issued and outstanding shares, it appears that Company A and Company C are closely related as it owns 90% or more of the value and number of the issued and outstanding shares of the capital stock of Company C having full voting rights under all circumstances. It is important to note that the explanatory notes to section 128… refer to a degree of common ownership of at least 90%. Furthermore, the determination of “closely related” is relevant for purposes of the elections under sections 150 and 156… . The explanatory notes to these provisions refer to wholly-owned corporations. Any application of the provisions of section 128… to a particular fact situation should be consistent with the policy intent of the provision.

Susbsection 128(1.1)

Paragraph 128(1.1)(a)

Subparagraph 128(1.1)(a)(i)

Administrative Policy

GST/HST Notice No. 303 - Changes to the Closely-related Test

exception for special voting matters provided by statute, or where a statute provides a special class vote

Exception for special voting matters provided by statute, or where a statute provides a special class vote

Thus, in order for a person (or group of persons) to be considered to hold qualifying voting control of another corporation, 90% or more of shareholder votes in respect of all corporate matters must be held and controlled by the person, with limited exceptions. Where there are any matters in respect of which a statute of a country, state, province, or other political subdivision of a country, that applies to the corporation provides that the votes of the shareholders of the corporation in respect of the matter are different from the voting rights that the shareholders would otherwise have pursuant to the corporation’s constating documents, then that matter is not considered for the purposes of determining whether a particular person holds qualifying voting control in respect of the corporation.

CBCA examples

For example, subsection 183(3) of the Canada Business Corporations Act provides that “each share of an amalgamating corporation carries the right to vote in respect of an amalgamation agreement whether or not it otherwise carries the right to vote.” Therefore, the distribution of voting rights in respect of the shareholders vote on an amalgamation agreement is not considered when determining whether a person holds qualifying voting control of a corporation. …

[T]he matters listed in subsection 176(1) of the Canada Business Corporations Act entitling the holders of shares of a class or series to vote separately as a class or series are not considered for purposes of determining whether a person holds qualifying voting control of the corporation.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 156 - Subsection 156(1.1) - Paragraph 156(1.1)(b) examples of CBCA exceptions 104
Tax Topics - Excise Tax Act - Section 150 - Subsection 150(2) - Paragraph 150(2)(b.1) example of substantially all test not satisfied 166

Subsection 128(2)

Administrative Policy

19 June 2015 Interpretation 167422

limitations on stacking
this position was reversed in 167422R

Holdco, a non-resident corporation, holds two stacks of wholly-owned Canadian and US corporations: US 2 holding US4, holding C 1, holding C 3; and US 3 holding US 5, holding C 2, holding C 4. Which of the Canadian corporations are closely related? CRA responded:

…Hold Co., US2, US4 and C1 are closely related…under either subparagraph 128(1)(a)(i) or (ii) and the same can be determined on the right side… . C1 and C2 are closely related under subsection 128(2) as both are closely related under subsection 128(1) to common parent Hold Co.

…C1 and C2 are closely related to Hold Co. under subparagraph 128(1)(a)(ii) since 100% of the required shares of each (i.e., C1 and C2) are owned by a qualifying subsidiary…of Hold Co.

C1 and C4 are closely related under subsection 128(2) since, based on the definition of qualifying subsidiary in subsection 123(1) and subsection 128(1), both are closely related to common corporation US3… . C1 is closely related to US3 under subparagraph 128(1)(a)(iv) as 100% of the required shares of C1 are owned by (a qualifying subsidiary of) a qualifying subsidiary of Hold Co. of which US3 is a qualifying subsidiary. C4 is closely related to US3, based on the same definition and subparagraph 128(1)(a)(ii), since 100% of the required shares of C4 are owned by (a qualifying subsidiary of) a qualifying subsidiary of US3.

A similar analysis on the opposite side of the ownership structure establishes that C2 and C3 are closely related under subsection 128(2)… .

However C3 and C4 are not closely related to each other since they are both closely related to common parent Hold Co. under subsection 128(2) rather than under subsection 128(1).

[Therefore] the following entities are closely related and eligible to make an election under section 156:

  • C1 with C2
  • C1 with C4
  • C2 with C3
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 156 - Subsection 156(1) - Qualifying Group limitations on stacking 50