11 July 2003 GST/HST Interpretation 35775 - Eligibility of Two Canadian Corporations for the Election Under Section 156 of the Excise Tax Act

Dear Sirs:

Thank you for your correspondence XXXXX concerning the eligibility of two Canadian corporations to make an election under section 156 of the Excise Tax Act (the Act). We apologize for the delay in our response.

Interpretation Requested

In the following fact situation, are Corporations X and C eligible to make an election under section 156 of the Act?

•   Corporation X is resident in Canada and a registrant.

•   Corporation X is owned 100% by Canadian parent.

•   Canadian parent is resident in Canada and a registrant.

•   Corporation C is resident in Canada and a registrant.

•   Corporation D owns all the voting shares of Corporation C.

•   Corporation D's shares are owned by Corporation X, Corporation A and Corporation B.

•   None of Corporation X, Corporation A or Corporation B owns 90% or more of the voting stock of Corporation D.

•   Neither Corporation A nor Corporation B is resident in Canada and neither is a registrant.

•   Canadian parent owns 100% of Corporation A and Corporation B.

Interpretation Given

Based on the information provided, Corporations X and C are not eligible to make an election under section 156 of the Act.

We reviewed your comments concerning the application of section 128 to this situation. You have suggested that indirect ownership of the required shares would satisfy the policy intent of the share-ownership requirements for being closely related. However, the share-ownership requirements set out in subsection 128(1) can be satisfied only by corporations that meet the 90% threshold. You have also suggested that subsection 128(2) deems a corporation to be resident in Canada and that this could contribute to a corporation's eligibility to register. However, the exception under subsection 128(2) does not deem corporations to be resident in Canada. Rather, it allows us to set aside the residency requirement for being closely related in particular circumstances for a restricted purpose: under the provisions of subsection 128(2), two corporations are closely related to each other if they can each show that they are closely related to a common third corporation. Only for the purpose of determining that each of the two corporations is closely related to the common third corporation may we set aside the requirement that all corporations be resident in Canada.

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.

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) 954-4394.

Yours truly,

Doris McMullan
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate