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Dear XXXXX
I refer to your letter of June 27, 1994, addressed to Mr. Ray Bradley, communicating your dissatisfaction with not being notified of a change to a response to a question you posed on the Question and Answer database. I understand Mr. Bradley has already addressed those concerns.
Your question has been reviewed. A response to the question will be posted in the Question and Answer database shortly. As a courtesy to you, I am replying to you personally, to ensure you are aware of the response.
Your original question reads as follows:
One U.S. Corporation is the wholly owned subsidiary of another. Both corporations have permanent establishments in Canada through which both corporations carry on exclusively commercial activities. Will Revenue Canada accept as valid a section 156 election to cover supplies between the two corporations which are solely attributable to the activities of the two permanent establishments in Canada (for example, rent for the premises and for equipment) in view of the rule in subsection 132(2) of the Excise Tax Act?
The following interpretation is based on the assumption that the permanent establishments in Canada are not separate legal entities from the U.S. corporations.
Under subsection 132(2) of the Excise Tax Act (the "Act") a non-resident person who has a permanent establishment in Canada is deemed to be resident in Canada, but only in respect of those activities the person carried on through that permanent establishment in Canada. This provision does not make the corporation a resident for the purpose of section 128 of the Act.
In order to be eligible to make the election provided for under section 156 of the Act, a corporation must be a specified member of a closely related group. The term "closely related group" is defined as follows in subsection 123(1) of the Act:
"'closely related group' means a group of corporations each member of which is closely related, within the meaning assigned by section 128, to each member of the group;"
Subsection 128(1) of the Act reads as follows:
128.(1) Closely related corporation - For the purposes of this Part, a particular corporation and another corporation are closely related to each other at any time if at that time the particular corporation is resident in Canada and is a registrant and at that time
(a) the other corporation is resident in Canada and is a registrant and not less than 90% of the value and number of the issued and outstanding shares of the capital stock of the other corporation, having full voting rights under all circumstances, 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),
(vi) REPEALED
(b) the other corporation is a prescribed corporation in relation to the particular corporation, and, for the purposes of this section, a non-resident insurer that has a permanent establishment in Canada shall be deemed to be resident in Canada.
One of the conditions in section 128 is that both corporations are required to be residents in Canada. As stated previously, subsection 132(2) does not make the corporations resident in Canada. Therefore, as both corporations are non-residents, an election under subsection 156(2) may not be made.
The foregoing comments represent our general views with respect to the subject matter of your letter. Unannounced proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memorandum 100-3, do not bind the Department with respect to a particular situation.
If you require any further information, please do not hesitate to contact Mr. Karl P. Marten at (613) 952-2214.
Yours sincerely,
H.L. Jones
Director
General Tax Policy
Excise/GST
Policy and Legislation
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