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

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.

The revised ETA closely-related person test requires that 90% or more of shareholder votes in respect of all corporate matters must be held and controlled by the tested person, with the exception inter alia of special voting matters provided by statute, or where a statute provides a special class vote. For an example of the first exception, CRA refers to the special voting right accorded by s. 183(3) of the CBCA to minority shareholders to approve an amalgamation. As an example of the second, it refers to the special class vote accorded by s. 176(1) of the CBCA to approve major amendments to the articles of incorporation.

Example

Corporation A and Corporation B have an election under section 150 in place on March 22, 2016. Corporation A owns 90% of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of the capital stock of Corporation B. However, Corporation A does not have qualifying voting control of Corporation B, as set out in the proposed changes to section 128 and consequently, they would not be members of the same closely related group on March 22, 2017. They enter into an agreement on January 1, 2017 for the provision of services by Corporation A to Corporation B. Under the agreement, 60% of the services will be performed before March 22, 2017 and the remaining 40% on or after that date.

Since the corporations are not members of the same closely related group on March 22, 2017 and not all or substantially all of the services to be provided under the agreement will be performed before that date, none of the services performed under this agreement would be deemed to be financial services.