Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 167422
[…]
Dear [Client]:
Subject: GST/HST INTERPRETATION
Eligibility of corporations to make an election under section 156
Thank you for your […][correspondence] of [mm/dd/yyyy], concerning the interpretation of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the eligibility of certain corporations to make an election under section 156 of the Excise Tax Act (ETA).
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We were asked to assume the following:
1. Each entity in the structure is a corporation;
2. 100% ownership of the value and number of the issued and outstanding shares with full voting rights of each corporation downstream in the structure is held by the entity immediately above it;
3. All other conditions for making the section 156 election are met other than the question of whether the corporations are closely related under section 128 as required to be members of the same qualifying group; and
4. Hold Co. and each “US” entity are not resident in Canada, whereas each “C” entity is resident in Canada and is a registrant for GST/HST purposes.
The ownership structure of the corporations is as follows:
Hold Co.
| \
| \
US 2 US 3
| |
US 4 US 5
| |
-----------------------
| |
C 1 C 2
| |
C 3 C 4
The ownership structure on the left side consists of C3 for which 100% of required shares are owned by C1, for which 100% of required shares are owned by US4, for which 100% of required shares are owned by US2, for which 100% of required shares are owned by common parent Hold Co. The ownership structure on the right side consists of C4 for which 100% of required shares are owned by C2, for which 100% of required shares are owned by US5, for which 100% of required shares are owned by US3, for which 100% of required shares are owned by common parent Hold Co.
INTERPRETATION REQUESTED
Based on the above, you would like to know whether the following entities are eligible to make an election under section 156:
* C1 with C2
* C1 with C4
* C2 with C3
* C3 with C4.
INTERPRETATION GIVEN
Based on subsection 156(2), a “specified member” (which includes a “qualifying member”) of a “qualifying group” may elect jointly with another specified member of the same group to have certain taxable supplies made between them deemed to have been made for no consideration. The definition of “qualifying group” includes a group of corporations, each member of which is closely related, pursuant to subsection 128(1), to each other member of the group. Furthermore, under subsection 128(2), if two corporations can each demonstrate that they are closely related to a common third corporation under the conditions of subsection 128(1), they are closely related to each other for purposes of the GST/HST. Each electing member (e.g., C1 with C2) in the above ownership structure must be closely related under section 128 to be a member of the same qualifying group. (Each electing entity must also be a “qualifying member” of the group.)
Thus, in order for C1, C2, C3 and C4 to elect in the manner described above and assuming that all other conditions to elect are satisfied, C1 must be a member of the same qualifying group as C2, C1 and C4 must be members of the same qualifying group, and finally, C2 and C3 as well as C3 and C4 must each, respectively, constitute a qualifying group. This condition would be met also if the four corporations in question are all members of the same single qualifying group.
It can be established on the left side of the structure, that common parent Hold Co., US2, US4 and C1 are closely related to each other and members of the same qualifying group (Footnote 1) under either subparagraph 128(1)(a)(i) or (ii) and the same can be determined on the right side, establishing that common parent Hold Co., US3, US5 and C2 are closely related under the same provisions and members of a qualifying group (Footnote 2) . It can, thus, be established that 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 (Footnote 3) of Hold Co.
It can further be established that 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 (Footnote 4) . 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) since both are closely related under subsection 128(1) to common corporation US2 (or US4 for that matter; see footnote 4).
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). In order for two corporations to be closely related under subsection 128(2), they must be closely related to the common corporation under subsection 128(1).
Based on the above and provided all other conditions under section 156 are met, the following entities are closely related and eligible to make an election under section 156:
* C1 with C2
* C1 with C4
* C2 with C3
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-8811. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Monica Ma
Special Provisions – FI Unit
Excise and GST/HST Rulings Directorate
FOOTNOTES
1 Although C3 is not closely related to Hold Co. under subsection 128(1), since Hold Co. and C3 are both closely related to C1 under that subsection (C1 and C3 under subparagraph 128(1)(a)(i) and Hold Co. and C1 under subparagraph 128(1)(a)(ii)), it can be determined that C3 is closely related to Hold Co. under subsection 128(2).
2 It can similarly be established on the right side of the ownership structure that, although C4 is not closely related to Hold Co. under subsection 128(1), C4 is closely related to Hold Co. under subsection 128(2).
3 Qualifying subsidiary is defined in subsection 123(1) and generally means that one corporation is a qualifying subsidiary of a particular corporation if the particular corporation owns 90% or more of the value and number of the issued and outstanding shares of the capital stock having full voting rights under all circumstances of the other corporation and includes a corporation that is a qualifying subsidiary of a qualifying subsidiary of the particular corporation. Paragraph (a) of the definition of “qualifying subsidiary” does not extend more than two tiers down from the parent corporation.
4 C1 and C4 are also closely related to common corporation US5 using the same analysis.
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