CRA notes that the ETA s. 150 election can accommodate a minority interest of management employees

An LP fund structure entailed a manager charging management fees to a carried interest corporation (CIP Inc.) in which it held 50% of the equity but 100% of the voting shares, with most of the balance of the equity (all non-voting shares) held by management employees of the parent of the manager (a credit union). CIP Inc. received “carried interest fees” from the LP. Could such fees be exempted using the ETA s. 150 election given that the credit union was a financial institution?

The credit union and manager clearly were closely related. However, the manager was also closely related to CIP Inc. given that it held 100% of the fully-voting shares of CIP Inc. Thus, the management fees paid by CIP Inc. could be exempted by the election.

CRA further noted that even if the manager held as few as 50% of the voting shares of CIP Inc., but at least 90% of the total value and number of the CIP Inc. shares, having full voting rights under all circumstances, were owned by the manager and the employees collectively, the manager and CIP Inc. would be closely related pursuant to s. 128(1)(b) and s. 3(a) of the Closely Related Corporations (GST) Regulations, which accommodate employee incentive shares to that extent.

However, CRA indicated that the definition of a closely related group is restricted to a group of corporations, so that the LP could not make the s. 150 election to exempt the “carried interest fees” paid by it to CIP Inc.

Neal Armstrong. Summaries of 18 November 2021 GST/HST Interpretation 232687 under ETA s. 128(1)(a)(i) and s. 150(6).