28 March 2002 GST/HST Interpretation 37217 - Section 156 Election – Non-residents

Dear XXXXX

Thank you for your letter of August 29, 2001, addressed to John Sitka, Director, General Operations and Border Issues Division, concerning a non-resident corporation with a permanent establishment in Canada that has made an election under section 156 of the Excise Tax Act (the "Act"). We apologize for the delay in responding to your letter.

To be eligible to file an election for nil consideration under section 156 of the Act, a number of conditions must be met including the condition that each corporation making the election must be a specified member of a closely related group. In general terms, subsection 128(1) of the Act provides that two corporations are closely related if both corporations are registrants and resident in Canada and certain capital stock ownership requirements are met.

In order for the residency requirement in subsection 128(1) of the Act to be met, the corporation in its entirety must be resident in Canada. Where a non-resident person has a permanent establishment in Canada, subsection 132(2) of the Act provides that the person is deemed to be a resident but only in respect of the activities carried on through the permanent establishment. The person as a whole is not deemed to be resident in Canada. Accordingly, where a non-resident corporation has a permanent establishment in Canada and is deemed under subsection 132(2) of the Act to be resident in Canada in respect of the activities carried on through the permanent establishment, the residency requirement in subsection 128(1) of the Act is not met. Therefore, a non-resident corporation with a permanent establishment in Canada and a Canadian corporation within the same corporate group are not closely related under subsection 128(1) of the Act. Note that this interpretation does not address the situation where a non-resident corporation is an insurer with a permanent establishment in Canada.

Where corporations have already made an election under section 156 of the Act, which they were not eligible to make, the registrant supplier was and is required to collect and remit tax pursuant to the Act in respect of the value of consideration for the taxable supplies made in Canada to the other corporation within the same corporate group. You or your client should contact the local office of the XXXXX in order to make the appropriate adjustment to previously filed returns.

Although it is our understanding that the Department of Finance is currently reviewing the group relief provisions in the Act, as of this date, no legislative changes have been proposed.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to 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 Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4394.

Yours truly,

J. Allard
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate