1 August 2003 GST/HST Interpretation 42611 - Election Under Section 156 of the Excise Tax Act

Dear XXXXX:

Thank you for your letter XXXXX

(with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your client's operations.

Statement of Facts

Based on the information included in your letter, our understanding of the facts is as follows:

1. Partnership B is a limited partnership that is registered for GST purposes and is involved exclusively in commercial activities. Partnership A is a limited partnership that is not currently registered for GST purposes and does not carry on any commercial activity. Partnership A's sole purpose is to hold certain shares of corporations within the affiliated group and, in particular, to hold the majority limited partnership interest in Partnership B.

2. Corporations C and E carry on commercial activities and are registered for GST purposes.

3. Corporations C and E, and Partnerships A and B are Canadian residents.

Stage 1

4. Partnership A is a limited partner and holds XXXXX % interest in Partnership B; Corporation C is a limited partner and holds XXXXX % interest in Partnership A.

5. Per the diagram Corporation C owns XXXXX % of Corporation E.

6. The Partnership Agreement that governs the activities of the various corporations and partnerships within the group specifies that the General Partner of each partnership is authorized and obliged to manage, control, administer and operate the business and affairs of the relevant partnership and to represent the partnership and to make all decisions regarding the affairs of the partnership. Nevertheless, the Limited Partner(s) are granted the authority to remove the General Partners from their role under circumstances such as fraud, wilful misconduct, wilful breach of a fiduciary duty or any other material breach of the terms of the Partnership Agreement, or a failure to maximize the return on investments of the partnership assets.

7. The property manufactured, produced, acquired or imported by Corporation E, Corporation C and Partnership B were for consumption, use or supply exclusively in the course (90% or more) of their commercial activities.

8. Corporation E and Corporation C make taxable supplies to Partnership B.

Stage II

9. Partnership A is a limited partner and holds XXXXX % interest in Partnership B.

10. Corporation E is a general partner and holds XXXXX % interest in Partnership B.

11. Corporation E is a general partner and holds XXXXX % interest in Partnership A.

12. Corporation C is a limited partner and holds XXXXX % interest in Partnership A.

13. Per the diagram Corporation C owns XXXXX % of Corporation E.

14. The Partnership Agreement that governs the activities of the various corporations and partnerships within the group specifies that the General Partner of each partnership is authorized and obliged to manage, control, administer and operate the business and affairs of the relevant partnership and to represent the partnership and to make all decisions regarding the affairs of the partnership. Nevertheless, the Limited Partner(s) are granted the authority to remove the General Partners from their role under circumstances such as fraud, wilful misconduct, wilful breach of a fiduciary duty or any other material breach of the terms of the Partnership Agreement, or a failure to maximize the return on investments of the partnership assets.

Interpretation Requested

You requested an interpretation as to whether the election for nil consideration under section 156 of the Excise Tax Act (ETA) would be available under stage I and stage II for transactions between Corporation C, Corporation E and Partnership B.

Interpretation Given

It is our view that in both stages I and II the proposed section 156 election is available for Corporation C and Corporation E, but would not be available for Partnership B and Corporation C nor for Partnership B and Corporation E.

Explanation

In order to be eligible to make the election for nil consideration, pursuant to subsection 156(2) of the ETA, the persons electing must be "specified members" of a "qualifying group" as defined in subsection 156(1) of the ETA. Based on the facts provided, Partnership B is not closely related to Partnership A and Partnership A is not closely related to Corporation C nor Corporation E since A is not a registrant as required under subsection 156(1.1) of the ETA. Consequently Partnership B, Partnership A and Corporation C and also Partnership B, Partnership A and Corporation E are not closely related and therefore not specified members of the qualifying group. Corporation C and Corporation E qualify to make an election but Partnership B and Corporation C, and Partnership B and Corporation E do not qualify to make an election pursuant to this subsection under stage I and stage II.

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) 957-8221.

Yours truly,

Denise Villeneuve
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate