File 11585-28(rs)
XXXXX June 5, 1995
Dear Mr. XXXXX
This is in reply to your letter of August 19, 1994 in which you requested our opinion on the interpretation of a particular provision in the Closely Related Corporations (GST) Regulations. Please excuse the delay in responding.
Statement of Facts and Assumptions
1. We assume that at a particular time an individual ("Mr. X") incorporated a company ("Corp. B"), retained 100% of the ownership of the value and number of the issued and outstanding shares of Corp. B's capital stock, having full voting rights under all circumstances and elected himself as the sole officer.
2. We assume that at a later time, Mr. X purchased 50% of the value and number of the issued and outstanding shares of capital stock of a second corporation ("Corp. A"), having full voting rights under all circumstances.
3. We assume that at the same time as mentioned in Clause 2 above, Corp. B purchased the remaining 50% of the value and number of the issued and outstanding shares of capital stock of Corp. A, having full voting rights under all circumstances.
4. We assume that immediately before the time Mr. X acquired ownership of the shares of capital stock of Corp. A as outlined in Clause 2 above, Mr. X was not an employee of Corp. A.
5. We assume that immediately after the time Mr. X acquired ownership of the shares of capital stock of Corp. A as outlined in Clause 2 above, Mr. X elected himself an officer of Corp. A.
6. We assume that Corp. A and Corp. B are GST registrants resident in Canada and neither of them is Co-operators Data Services Limited.
The issue is whether Corp. A is closely related to Corp. B pursuant to the Closely Related Corporations (GST) Regulations.
Paragraph 128(1)(b) of the Act provides that a particular corporation and another corporation are closely related where the other corporation is a prescribed corporation in relation to the particular corporation. At issue is whether the provisions of subparagraph 3(a)(i) of the Closely Related Corporations (GST) Regulations have been met. Clause 3(a)(i)(C) of the Closely Related Corporations (GST) Regulations requires that, where specified shares (as defined in section 2 of the said Regulations) are owned by employees, the shares cannot be traded on a stock exchange and the ownership of the shares by an employee must have arisen in respect of the employment of the employee.
We concur with your interpretation that, given the Statement of Facts and Assumptions, the requirements of subparagraph 3(a)(i) of the Closely Related Corporations (GST) Regulations have not been met. Therefore, Corp. A is not a prescribed closely related corporation to Corp. B.
Analysis
Clause 3(a)(i)(C) of the Closely Related Corporations (GST) Regulations requires, in part, that the ownership of the specified shares of the corporation by the employees arose in respect of the employment of the employee.
In our view, where an individual
(a) acquires a controlling ownership interest in a corporation at a time when the individual is not an employee of the corporation, and
(b) subsequently elects himself/herself an officer of the corporation it cannot be said that the individual's ownership of the shares arose in respect of the employment of the employee.
Additionally, we have assumed that the individual's ownership of the shares of Corp. A did not arise in respect of the employment of the individual as an employee of, for example, Corp. B. Having made this assumption, we concur with your opinion that Corp. A is not closely related to Corp. B pursuant to the Closely Related Corporations (GST) Regulations.
We hope that this proves of assistance to you. Please contact Robert Smith at (613) 941-3971 should you require any further information.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations XXXXX
| c.c.: |
S. Moran
R. Smith
R. Wong |
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