27 January 2000 GST/HST Interpretation 8164/HQR0001770 - of Proposed Section 156

Dear XXXXX

This is in reply to your letter of April 26, 1999 and the additional information dated December 9, 1999 concerning the making of an election under section 156 of the Excise Tax Act (the "Act") based on the proposed amendment to that section as announced in the Notice of Ways and Means Motion dated October 8, 1998.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency ("CCRA").

You provided us with the following information:

1. A partnership (the Partnership"), called XXXXX has been recently formed. It has four partners and is a GST/HST registrant.

2. The four partners are corporations resident in Canada and own the Partnership in the following proportions:

3. Each of the four partners is 100% owned by XXXXX, a GST/HST registrant resident in the U.S.

4. X Co., Y Co. and Z Co. are GST/HST registrants.

5. All of the assets of the businesses of X Co., Y Co. and Z Co. were recently transferred to the Partnership. However, the employment contracts of the employees were not transferred.

Questions:

A. Is the Partnership a "Canadian partnership" under the proposed section 156?

B. Are the Partnership and each of X Co., Y Co. and Z Co. members of a "qualifying group", and as such eligible to make an election under the proposed subsection 156(2)?

Our Comments:

A.

Under the proposed subsection 156(1), a "Canadian partnership" is defined to mean a "partnership each member of which is a corporation or partnership and is resident in Canada". Since all of the members of the Partnership (i.e. X Co., Y Co., Z Co. and W Co.) are corporations and are resident in Canada, we agree that the Partnership qualifies as a "Canadian partnership" under the proposed subsection 156(1).

B.

It is our view that since X Co., Y Co. and Z Co. are all 100% owned by XXXXX XXXXX, each of these corporations would be "closely related" to XXXXX XXXXX under subsection 128(1) of the Act if XXXXX were a corporation resident in Canada. Accordingly, by virtue of subsection 128(2) of the Act any two of these corporations (i.e. X Co., Y Co. or Z Co.) will be "closely related" to each other, and this group of corporations will qualify as a "closely related group" as defined in subsection 123(1) and a "qualifying group" as defined under the proposed subsection 156(1).

Provided that X Co., Y Co. and Z Co. collectively hold substantially all of the interest in the Partnership pursuant to the proposed subsection 156(1.3), each of X Co., Y Co. and Z Co. would be "closely related" to the Partnership by virtue of the proposed clause 156(1.1)(b)(iii)(C), and each of these corporations and the Partnership would qualify as members of a "qualifying group" as defined in the proposed subsection 156(1).

In general, X Co., Y Co. and Z Co. will collectively hold, at any time, substantially all of the interest in the Partnership if, at that time, they are entitled to receive at least 90% of both the Partnership's income for the relevant fiscal period of the Partnership and the total amount that would be paid (otherwise than as a share of income) to members of the Partnership if the Partnership were wound up. Another condition in the proposed subsection 156(1.3) is that X Co., Y Co. and Z Co. collectively must be able to direct the business and the affairs of the Partnership.

Furthermore, for each of X Co., Y Co. and Z Co. and the Partnership to be eligible to jointly make an election pursuant to the provisions of the proposed subsection 156(2), they must also qualify as "specified members" of a qualifying group as defined in the proposed subsection 156(1). Under the proposed subsection 156(1), to qualify as a specified member of a qualifying group, one of the requirements is that all or substantially all of the property (other than financial instruments) of the member was last manufactured, produced, acquired or imported by the member for consumption, use or supply exclusively in the course of its commercial activities, or if the member has no property (other than financial instruments), all or substantially all of supplies made by the member are taxable supplies. It is our view that at the time a supply is made by a person to a newly formed partnership, the proposed section 156 election may not be available since at that time the partnership would have no property and would have made no taxable supplies, and as such the partnership would not qualify as a "specified member" of the group.

The foregoing comments represent our general views with respect to the proposed amendment to section 156 of the Excise Tax Act as it relates to the subject matter of your letter. Any change to the wording of this proposed amendment or any future proposed amendment the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-1433.

Yours truly,

Phil Tang
Specialty Tax Unit
Financial Institutions and Real Property Division

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