GST/HST Memorandum 14-7 Closely Related Corporations June 2023

S. 132(2) does not deem the PE to be a resident person or a closely related person

8. Subsection 132(2) provides that where a person that is not resident in Canada has a permanent establishment in Canada, the person is deemed to be resident in Canada, but only in respect of the activities of the person carried on through that permanent establishment. This deeming rule under subsection 132(2) does not satisfy the residency requirement in the definition of closely related group since the definition applies to a corporation as a whole, not just to particular activities of the corporation carried on through its permanent establishments. In addition, a permanent establishment in and of itself is not a person for GST/HST purposes, as the definition of person in subsection 123(1) does not include a permanent establishment.

Notwithstanding s. 132(3), resident can be closely related re activities of its foreign PE

9. Subsection 132(3) provides that where a person who is resident in Canada (including a person deemed to be resident under subsection 132(1)) has a permanent establishment in a country other than Canada, the person is deemed to be non-resident in respect of, and only in respect of, activities that the person carries on through its permanent establishment outside Canada. Since a corporation that is deemed to be resident in Canada under subsection 132(1) will meet the residency requirement in the definition of closely related group, notwithstanding that it has a permanent establishment outside Canada, the corporation’s status as being resident in Canada will apply to its permanent establishment outside Canada for purposes of the definition of closely related group.

S. 128(1) rule generally does not apply where shareholder is non-corporate

25. In general, subsections 128(1) and (2) do not apply where a person other than a corporation, such as an individual, a partnership [footnote regarding exception pursuant to s. 156(1.1)] or a trust, holds the voting control and owns the shares of the corporation. For example, where an individual (other than as a result of their employment) holds qualifying voting control and owns all of the shares, having full voting rights, of the capital stock of Corporation A and Corporation B, these two corporations would not be closely related for GST/HST purposes since they are owned and controlled by an individual rather than by a corporation.

Recap of s. 128(1.1)

29. In other words, in order for a person (or a group of persons) to be considered to hold qualifying voting control of a corporation, 90% or more of shareholder votes in respect of all corporate matters must be held and controlled by the person (or by the group of persons) with limited exceptions. Only where a particular person (or a particular group of persons) has a high degree of both ownership and control of the corporation will the person (or the group of persons) and the corporation be considered to be closely related for GST/HST purposes.

Separate class vote accorded by CBCA not taken into account

31. [C]ertain matters listed in subsection 176(1) of the Canada Business Corporations Act entitling the holders of shares of a class or series to vote separately as a class or series are not considered for purposes of determining whether a person holds qualifying voting control of the corporation.

Example 4

• A and B each owns 50% of the shares of C, which wholly-owns D, but all of the voting rights attached to the shares of D are held by A.

Results

• Since A and B are not closely-related, C is not a qualifying subsidiary of either.
• Since C is not closely related to A, C is not deemed to own the shares of D for s. 128 purposes, and C and D are not closely related.

Example 10

• A and B (a qualifying subsidiary of A) each hold 50% of the full voting rights and 50% of the ownership for the shares of C, so that A and C are closely related under s. 128(1)(a)(v).
• C and D are closely related under s. 128(1)(a)(i) because C owns 90% of the shares, and has qualifying voting control (as described in s. 128(1.1)) of D.
• Consequently, A and D are closely related under s. 128(2).