18 October 2005 GST/HST Interpretation 63115 - Subsection 136(2) of the Excise Tax Act (ETA) and multiple residential complexes

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the eligibility of two Canadian corporations to elect under section 156. (All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.)

In your letter, you asked us to provide you with an application ruling. Rulings are binding on the Canada Revenue Agency and are limited to specific fact situations of particular persons. Consequently, we need specific details, including the name of the particular person or persons to whom the ruling applies. In the absence of such details, we are providing you with an interpretation of the requirements under section 156 and the eligibility of corporations "C" and "E" to elect under that section, given the fact situation illustrated in your letter.

We understand that the attributes of the corporations in question are set out in the organizational diagram that you supplied and which we reproduce below:

You would like to know if the Canadian resident GST/HST registered Companies "C" and "E" are eligible to elect under section 156 in respect of taxable supplies made between these two entities.

If they are not eligible to make this election, you would like a detailed explanation of the technical limitations presented by the depicted organizational arrangement that prevent the use of a section 156 election.

Interpretation Given

Based on the information provided, Companies "C" and "E" would not be eligible to elect under section 156 in respect of taxable supplies made between these two entities.

Explanation

(Since all the persons involved are corporations, only those provisions that refer to corporations are included in this explanation.)

For a particular person and another person to elect jointly under section 156 (election for nil consideration), both persons must be specified members of a qualifying group. This requirement is set out in subsection 156(2).

To be a specified member of a qualifying group, the corporation must be a member of a closely related group and meet certain other conditions.

A "closely related group" is defined in subsection 123(1) to mean "a group of corporations each member of which is closely related, within the meaning assigned by section 128, to each other member of the group."

The concepts of "closely related groups" and "closely related corporations" and the requirements of section 128 are explained in GST/HST Memorandum 17.14, Election for Exempt Supplies.

Given the requirements under subsection 128(1) for being closely related, Corporation C and Corporation E would not be closely related under the provisions of that subsection.

Under the provisions of subsection 128(2), where two corporations resident in Canada are each closely related to a common third corporation, or would be so related if all of the corporations were resident in Canada, they are deemed to be closely related to each other. However, an analysis of the corporate links in the organizational diagram reveals that there is no other corporation to which both Corporation C and Corporation E would be closely related, since there is no other corporation that is also a registrant. While subsection 128(2) allows the requirement that the corporations be resident in Canada to be set aside for the purposes of determining if the corporations that are in fact resident in Canada are each closely related to a third corporation, subsection 128(2) does not allow the requirement that this third corporation be a registrant to be set aside. As a result, corporations C and E would not be deemed under subsection 128(2) to be closely related to each other.

Since Corporation C and Corporation E would not be closely related according to the requirements set out in section 128, they would not be members of a qualifying group. Consequently, they would not be eligible to make the election under section 156.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-4394.

Yours truly,

Doris McMullan
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/09/26 — RITS 63157 — GST/HST Treatment of Real Property Partially Converted to Business Use