6 June 2003 GST/HST Interpretation 43271 - Section 156 Election for Nil Consideration

Dear XXXXX:

Thank you for your letter XXXXX XXXXX with attachments XXXXX.

Interpretation Requested

Are Canada 1 Co, Canada 2 Co, and Canada 3 Co (collectively the "Canada Cos") shown on the following organizational charts for the specified periods qualifying members of a closely related group?

Period up to XXXXX

•   XXXXX Co owns 100% of XXXXX Co.

•   XXXXX Co owns 60% of Canada 1 Co, Canada 2 Co and Canada 3 Co.

•   XXXXX Co owns the remaining 40% of Canada 1 Co, Canada 2 Co and Canada 3 Co.

•   XXXXX Co and XXXXX Co are not Canadian residents and are not registrants.

•   The Canada Cos are Canadian residents and registrants.

•   XXXXX Co owns 100% of XXXXX Co.

•   XXXXX Co also owns 60% of Canada 1 Co.

•   XXXXX Co owns the remaining 40% of Canada 1 Co.

•   XXXXX Co also owns 40% of Canada 2 Co and Canada 3 Co.

•   Canada 1 Co owns the remaining 60% of Canada 2 Co and Canada 3 Co.

•   XXXXX Co and XXXXX Co are not Canadian residents and are not registrants.

•   The Canada Cos are Canadian residents and registrants.

Interpretation Given

The definition of a closely related group is set out in subsection 123(1) of the Excise Tax Act (the Act) and says "closely related group" means "a group of corporations each member of which is closely related, within the meaning assigned by section 128, to each other member of the group."

Section 128 has two subsections. In part, the requirements under subsection 128(1) that determine if two corporations are closely related to each other are as follows:

"For the purposes of this Part, a particular corporation and another corporation are closely related to each other at any time if at that time the particular corporation is resident in Canada and is a registrant and at that time

(a) the other corporation is resident in Canada and is a registrant and not less than 90% of the value and number of the issued and outstanding shares of the capital stock of the other corporation, having full voting rights under all circumstances, are owned by

(i) the particular corporation,

(ii) a qualifying subsidiary of the particular corporation,

(iii) a corporation of which the particular corporation is a qualifying subsidiary,

(iv) a qualifying subsidiary of a corporation of which the particular corporation is a qualifying subsidiary, or

(v) any combination of the corporations or subsidiaries referred to in subparagraphs (i) to (iv)."

The definition of "qualifying subsidiary" is set out in subsection 123(1) of the Act. The portion of the definition relevant to this interpretation states that a

"qualifying subsidiary of a particular corporation means another corporation resident in Canada not less than 90% of the value and number of the issued and outstanding shares of the capital stock of which, having full voting rights under all circumstances, are owned by the particular corporation, and includes

(a) a corporation that is a qualifying subsidiary of a qualifying subsidiary of the particular corporation, ..."

It is assumed that the ownership percentages in the corporate structures provided represent ownership of shares of the type specified in subparagraph 128(1)(a). An examination of those percentages of share ownership indicates that no corporation owns 90% or more of any of the Canada Cos. Moreover, no corporation satisfies the definition of "qualifying subsidiary". Accordingly, without a particular corporation satisfying the 90% share ownership requirement and without qualifying subsidiaries owning shares in combination with a particular corporation, the share ownership concentration is not sufficient to satisfy any of the subparagraphs under paragraph 128(1)(a).

Subsection 128(2) provides:

"Where under subsection (1) two corporations resident in Canada are closely related to the same corporation, or would be so related if all of the corporations were resident in Canada, they are closely related to each other for the purposes of this Part."

Under subsection 128(2), if two corporations can each demonstrate that they are closely related to a common third corporation under the conditions of subsection 128(1), the Act says they are closely related to each other for GST/HST purposes. The corporations that could have been candidates as the common third corporation in the first period are XXXXX Co and XXXXX Co. However, neither corporation is a registrant. While subsection 128(2) may set aside the requirement for being resident in Canada for certain corporations, it does not set aside the registration requirement for being closely related. With the change in the ownership structure for the second period, there is no candidate as a common third corporation even if the registration requirement was satisfied.

Based on the information provided, the three Canada Cos are not members of a closely related group.

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