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, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 232687
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of the election under section 150 of the Excise Tax Act to a closely related group
Thank you for your letter of [mm/dd/yyyy], concerning the interpretation of the goods and services tax/harmonized sales tax (GST/HST) to the eligibility of certain persons to make an election under section 150 of the Excise Tax Act (ETA).
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the ETA unless otherwise specified.
From the information in your request, we have assumed:
1. Several credit unions have invested in a limited partnership fund, “FI Fund LP”. One credit union, “CU Inc.”, has ownership of 20% of the interest in FI Fund LP with the remaining ownership interests held by other credit unions.
2. FI Fund LP has both a general partner, “GP Inc.”, and a carried interest partner, “CIP Inc.”. GP Inc. receives management fees from FI Fund LP while CIP Inc. receives carried interest fees from FI Fund LP.
3. GP Inc. is wholly owned by a fund manager, “FM Inc.”
4. CIP Inc. is 50% owned (with 100% voting shares) by FM Inc. Of the remaining 50% ownership, 40% is owned by the senior management team of FM Inc. and 10% is owned by external parties.
5. FM Inc. receives management fees from GP Inc. and CIP Inc.
6. FM Inc. is 100% owned by CU Inc. and CU Inc. receives fees from FM Inc.
7. All of the persons listed above are registrants and resident in Canada.
8. The senior management team of FM Inc. are employees of CU Inc. and their shares of CIP Inc. cannot be publicly traded on a stock exchange. The ownership of those shares arose in respect of their employment with CU Inc. CU Inc. contracts with FM Inc. to provide the management services.
9. All of the persons listed above are not members of a mutual insurance group.
The ownership structure of the corporations identified above is as follows: […]
INTERPRETATION REQUESTED
You would like to know which of the persons identified in the assumptions above are eligible to make an election under section 150 with other persons as members of a closely related group.
INTERPRETATION GIVEN
Based on subsection 150(1), a person who is a member of a closely related group of which a listed financial institution is a member may elect jointly with another corporation that is a member of the same group to have certain taxable supplies made between them deemed to be supplies of a financial service. The definition of “closely related group” means a group of corporations, each member of which is a registrant resident in Canada and closely related, pursuant to section 128, to each other member of the group. Each electing member must be closely related under section 128 to be a member of the same closely related group.
Under paragraph 128(1)(a), a particular corporation and another corporation are closely related where qualifying voting control of the other corporation is held by, and not less than 90% of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of the capital stock of the other corporation are owned by:
(i) the particular corporation,
(ii) a qualifying subsidiary of the particular corporation,
(iii) a corporation of which the particular corporation is a qualifying subsidiary,
(iv) a qualifying subsidiary of a corporation of which the particular corporation is a qualifying subsidiary, or
(v) any combination of the corporations or subsidiaries referred to in subparagraphs (i) to (iv).
As set out in subsection 128(1.1), a person or group of persons holds “qualifying voting control” in respect of a corporation at any time if, at that time, the person, or the members of the group collectively, as the case may be, own shares of the corporation to which are attached not less than 90% of the shareholder votes that may be cast in respect of each matter, other than certain excluded voting matters. Excluded voting matters include:
* a matter for which a statue of a country, or of a state, province, or other political subdivision of a country, that applies to the corporation provides, in respect of the vote of the shareholders of the corporation on the matter, that:
* any shareholder of the corporation has voting rights that are different from the voting rights that the shareholder would otherwise have under the letters patent, instrument of continuance or other constating instrument by which the corporation was incorporated or continued, including any amendment to, or restatement of, the constating instrument, or
* holders of a class or series of shares of the corporation are entitled to vote separately as a class or series, and
* a matter that is a prescribed matter or a matter that meets prescribed conditions or arises in prescribed circumstances. There are currently no prescribed matters, prescribed conditions or prescribed circumstances.
The subsection also includes a person or group, as the case may be, as having qualifying voting control where the person or group is a prescribed person or group in relation to the corporation. There are currently no prescribed persons or groups.
Under subsection 128(4), where the shareholder voting rights attached to a share that is owned by a particular person are subject to a right (under a contract, in equity or otherwise) of control by another person who is not closely related to the particular person, that share is generally excluded in determining whether the particular person has qualifying voting control of the corporation in question. However, if the particular person and the other person are closely related, this exclusion will not apply.
A “qualifying subsidiary” of a particular corporation is defined in subsection 123(1) to mean a corporation where the particular corporation holds qualifying voting control in respect of that corporation and owns 90% or more of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of the capital stock of that corporation, and includes:
* a corporation that is a qualifying subsidiary of the particular corporation,
* where the particular corporation is a credit union, every other credit union, and
* where the particular corporation is a member of a mutual insurance group, every other member of that group.
In addition, a particular corporation and another corporation are closely related under paragraph 128(1)(b) where the other corporation is a prescribed corporation under the Closely Related Corporations (GST/HST) Regulations (the Regulations) in relation to the particular corporation.
The Regulations broaden the conditions under which corporations can be considered to be closely related under section 128 and include instances where the beneficial ownership of the shares arises in respect of the employment of a person or where the shares are held in trust as specified in the Regulations.
Under paragraph 3(a) of the Regulations, for the purposes of paragraph 128(1)(b), a particular corporation and another corporation would be considered to be closely related if it is the case that they meet all of the following requirements:
(i) at least 90% of the total value and number of all the specified shares of the other corporation is represented by shares that are each owned or held in one of the following manners:
(A) the share is owned by the particular corporation,
(B) the share is owned by a corporation closely related to the particular corporation under paragraph 128(1)(a),
(C) the share is owned by one of the following:
(I) a particular employee of one of the following:
* the other corporation,
* a corporation closely related to the other corporation under paragraph 128(1)(a),
* the particular corporation, or
* a corporation closely related to the particular corporation under paragraph 128(1)(a),
where the specified shares owned by employees cannot be publicly traded and ownership of the shares by the particular employee arose as a result of the employment of that employee, or
(II) a corporation in which employees referred to above hold qualifying voting control and own 90% or more of the total value and number of all specified shares of that corporation where the specified shares owned by employees cannot be publicly traded and ownership of the shares by the employees arose as a result of the employment of those employees, or
(D) the share is held in trust for the benefit of the other corporation or of a particular employee referred to above in subclause (C)(I) where the shares of the other corporation that are employee-owned cannot be publicly traded and became shares of the employee as a result of the employment of that employee,
(ii) at least 50% of the total value and number of the specified shares of the other corporation is represented by shares that are each owned by either the particular corporation or a corporation closely related to the particular corporation under paragraph 128(1)(a), and
(iii) the particular corporation would hold qualifying voting control in respect of the other corporation if the particular corporation were to own all of the following:
(A) all of the issued and outstanding specified shares of the capital stock of the other corporation that are included in clauses (a)(i)(A) to (D), and
(B) all of the issued and outstanding shares of the capital stock of the other corporation that are not specified shares and that would be included in clauses (a)(i)(A) to (D) if they were specified shares.
Under paragraph 3(b) of the Regulations, a particular corporation and another corporation would be considered to be closely related for the purposes of paragraph 128(1)(b) if qualifying voting control of the other corporation is held by, and 90% or more of the total value and number of all the specified shares of the other corporation is owned by, one of the following:
(i) the particular corporation,
(ii) a corporation that is closely related to the particular corporation under paragraph 128(1)(a),
(iii) a corporation that is a prescribed corporation in relation to the particular corporation for having met all the conditions described above under paragraph 3(a) of the Regulations, or
(iv) any combination of the corporations referred to in subparagraphs (i) to (iii).
“Specified share” means an issued and outstanding share of the capital stock of a corporation having full voting rights under all circumstances.
Shares held in trust for the benefit of an employee, or owned by a corporation that is 90% owned by employees that also hold qualifying voting control in respect of the corporation, are treated as being employee-owned.
Finally, where two corporations are closely related to the same corporation under the provisions of subsection 128(1), they are considered closely related to each other under subsection 128(2).
Relationship between CU Inc., FM Inc. and GP Inc.
To the extent that CU Inc. has qualifying voting control in respect of FM Inc. and CU Inc. holds all of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of FM Inc., CU Inc. and FM Inc. would be closely related to each other under subparagraph 128(1)(a)(i). Similarly, to the extent that FM Inc. has qualifying voting control in respect of GP Inc. and FM Inc. holds all of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of GP Inc., FM Inc. and GP Inc. would be closely related to each other under subparagraph 128(1)(a)(i).
On this basis, GP Inc. would be a qualifying subsidiary of CU Inc. as it is a qualifying subsidiary of FM Inc., which is a qualifying subsidiary of CU Inc. Therefore, CU Inc. and GP Inc. would be closely related to each other under subparagraph 128(1)(a)(ii).
In these circumstances, CU Inc., FM Inc. and GP Inc. would all be closely related to each other under subparagraphs 128(1)(a)(i) and (ii).
Relationship between CU Inc., FM Inc., GP Inc. and CIP Inc.
CIP Inc. may be closely related to FM Inc. under paragraph 128(1)(a) to the extent that FM Inc. has qualifying voting control in respect of CIP Inc. and FM Inc. holds all of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of CIP Inc. Where the shares owned by the employees of CU Inc. and external parties have no voting rights under any circumstance and there are no other issued and outstanding shares, FM Inc. may hold all of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of CIP Inc.
In that case, CIP Inc. would be a qualifying subsidiary of FM Inc. and, consequently, also a qualifying subsidiary of CU Inc. As a result, CU Inc., FM Inc., and CIP Inc. would all be closely related to each other under subparagraphs 128(1)(a)(i) and (ii). CIP Inc. would also be closely related to GP Inc. under subparagraph 128(1)(a)(iii), as they would both be qualifying subsidiaries of FM Inc., or under subsection 128(2).
If FM Inc. does not hold qualifying voting control in respect of CIP Inc. and own at least 90% of the value and number of the issued and outstanding shares of CIP Inc., having full voting rights under all circumstances, FM Inc. and CIP Inc. may otherwise be closely related under paragraph 128(1)(b).
CIP Inc. and FM Inc. would be closely related under paragraph 128(1)(b) if:
* at least 90% of the total value and number of the issued and outstanding shares of the capital stock of CIP Inc. having full voting rights under all circumstances are owned by FM Inc. and CU Inc.’s employees combined,
* the shares owned by employees of CU Inc. cannot be publicly traded on a stock exchange,
* the ownership of those shares by an employee arose in respect of their employment with CU Inc., and
* FM Inc. itself owns at least 50% of the total value and number of the voting shares of CIP Inc..
To the extent that FM Inc., CU Inc., and GP Inc. are closely related to each other under paragraph 128(1)(a) as noted above and FM Inc. and CIP Inc. are closely related to each other, CU Inc. and GP Inc. would also be closely related to CIP Inc. under paragraph 128(1)(b) as a result of shares owned by a corporation, or such corporation’s employees, closely related to them under paragraph 128(1)(a). Even if paragraph 128(1)(b) were not to apply, they would also be closely related to CIP Inc. under subsection 128(2).
CIP Inc. would not be closely related to FM Inc. and, by extension, would not be closely related to CU Inc. or GP Inc. if:
* FM Inc. and CU Inc.’s employees do not combine for at least 90% of the total value and number of the issued and outstanding shares of the capital stock of CIP Inc. having full voting rights under all circumstances, or
* FM Inc. itself does not own at least 50% of the total value and number of the voting shares of CIP Inc.
Relationship between CU Inc., FM Inc., GP Inc., CIP Inc., and other credit unions
Under the definition of a qualifying subsidiary, every other credit union is also a qualifying subsidiary of any particular credit union that is a corporation. As a result, CU Inc. is a qualifying subsidiary of every other credit union that is a corporation.
Please note that under subsection 150(6), every credit union is deemed to be a member of a closely related group of which every other credit union is a member. Further, every credit union is deemed to have filed an election under subsection 150(1) with every other credit union and the election is deemed to be in effect at all times. Therefore, a credit union does not have to file the election and cannot revoke the election in regards to supplies made to another credit union.
In order for a credit union that is a corporation and another corporation that is not a credit union to be members of the same closely related group, as defined in subsection 123(1), the credit union and the other corporation must:
* be closely related as set out in section 128,
* both be resident in Canada, and
* the corporation that is not a credit union must be a registrant.
FM Inc. and GP Inc. would be closely related to every other credit union that is a corporation under subparagraph 128(1)(a)(ii) on the assumption as set out above that FM Inc. and GP Inc. are both closely related to CU Inc.
If CU Inc. and every other credit union that is a corporation are each closely related to any one of FM Inc. and GP Inc. under subsection 128(1), CU Inc. and every other credit union that is a corporation would be closely related to each other under subsection 128(2).
Where CIP Inc. is a qualifying subsidiary of FM Inc. as set out above, CIP Inc. would be closely related to every other credit union that is a corporation under subparagraph 128(1)(a)(ii).
Where CIP Inc. is not a qualifying subsidiary of FM Inc. but CIP Inc. is closely related to FM Inc. under paragraph 128(1)(b) as set out above, CIP Inc. would not be closely related to every other credit union that is a corporation under paragraph 128(1)(b) as shares owned by CU Inc.’s employees would not be included when determining the total value and number of the issued and outstanding shares of the capital stock having full voting rights under all circumstances.
These shares would not be included as CU Inc. would be closely related to every other credit union that is a corporation under subsection 128(2) and not paragraph 128(1)(a). However, as CIP Inc. and every other credit union that is a corporation would each be closely related to any one of FM Inc. and GP Inc. under subsection 128(1), CIP Inc. and every other credit union that is a corporation would be closely related to each other under subsection 128(2).
Where CIP Inc. is not a qualifying subsidiary of FM Inc. or closely related to FM Inc. under paragraph 128(1)(b) as set out above, CIP Inc. would not be closely related to every other credit union that is a corporation as it would not be closely related to FM Inc. or GP Inc.
As a result, CU Inc., FM Inc., GP Inc., and every other credit union that is a corporation would be closely related under section 128 and form a closely related group under subsection 123(1). CIP Inc. may also be a member of this group, depending on the voting rights under all circumstances attributable to its shares.
Each credit union within the group is a listed financial institution under subparagraph 149(1)(a)(iv). Where all other conditions to elect are satisfied, each member of this group may elect under subsection 150(1) with another member of the group to have certain taxable supplies made between them deemed to be supplies of a financial service.
FI Fund LP
In respect of FI Fund LP, the definition of a closely related group is restricted to a group of corporations. As a partnership, FI Fund LP cannot be a member of a closely related group for the purposes of the election under section 150.
While subsections 156(1.1) and 156(1.2) include rules for determining if Canadian partnerships are closely to other Canadian partnerships or corporations, those rules apply for the purposes of section 156 only and do not apply for the purposes of section 150.
For more information on making an election under section 150, please refer to GST/HST Memoranda Series Chapter 17.14, Election for Exempt Supplies.
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(s) given in this letter, including any additional information, 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(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me […]. 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,
Stephen Walker
Financial Services Unit
Financial Institutions and Real Property Division
Email this Content