GST/HST Memorandum 14-8 Closely Related Canadian Partnerships and Corporations for Purposes of Section 156 June 2023

S. 156(1.3)(b)(i) tests applied on a source-by-source basis

9. The income entitlement part [in s. 156(1.3)(b)(i)] recognizes the fact that a partnership can have a different income sharing arrangement for each source of income of the partnership.

Test in s. 156(1.3)(b)(iii) precludes a limited partner as such being closely related to the partnership

12. In a limited partnership, the limited partners typically do not manage or exert control over the partnership. Instead, it is the general partner that directs the business and affairs of a limited partnership and has control over the partnership’s property and business. A limited partner that is not able to direct the business and affairs of a limited partnership cannot hold all or substantially all of the interest in the partnership for purposes of section 156. Therefore, such a limited partner would not be closely related to the limited partnership for purposes of subsection 156(1.1) and thus not a specified member of a qualifying group, even if it were entitled to 90% or more of the limited partnership’s income and were entitled to receive 90% or more of the total amount that would be paid to all members of the partnership on the winding-up of the partnership.

3 stacked Canadian partnerships, which thus form a closely related group, are closely related to a 4^th Canadian partnership jointly owned by them

Example 3

• By virtue of A holding substantially all of the interest in B (also a Canadian partnership), A and B are closely related under s. 156(1.1)(a)(i)(A) and form a qualifying group. On essentially the same basis, B is closely related to C (in which it has a 95% partnership interest).
• Since substantially all of the interest in C, as set out in s. 156(1.3), is held by a Canadian partnership (B) that is a member of a qualifying group of which A is a member, A and C are closely related under s. 156(1.1)(a)(i)(B). Accordingly, A, B and C constitute a qualifying group under s. 156)(1)(b).
• A, B and C hold respective 60%, 20% and 20% interests in D (also a Canadian partnership). Since the qualifying group of A, B and C holds substantially all of the interest in D as per s. 156(1.3)(b), D is closely related to A, B and C under s. 156(1.1)(a)(i)(C).

By virtue of a qualifying group – consisting of a holding partnership (X) holding 90% of a partnership (Y) and 90% of a corporation (Z) – each holding 1/3 of Corporation L, X and Y are closely related to L, so that Z and L are closely related under s. 156(1.2)

Example 7

• X is closely related to Y (also a Canadian partnership) under s. 156(1.1)(b)(i)(A), so that they form a qualifying group. by virtue of X holding substantially all of the interest in Y.
• Y and Z (a corporation) are closely related under s. 156(1.1)(b)(i)(B) as qualifying voting control and 90% of the shares of Z are owned by a Canadian partnership (namely, X) that is a member of a qualifying group of which Y is a member. Thus, X, Y and Z form a “qualifying group” under para. (b) of the definition.
• X, Y and Z hold 33%, 34% and 33%, respectively, of the shares of L. X (the particular partnership) and L are closely related under s. 156(1.1)(b)(i)(C) because qualifying voting control is held by, and all of the shares of L are owned by, a combination of corporations and Canadian partnerships referred to in ss. 156(1.1)(b)(i)(A) and (B) (i.e., X and members of the qualifying group of which it is a member).
• Similarly, Y also is closely related to L.
• Since Z and L are both closely related to X, they are also closely related to each other under s. 156(1.2).

Where 2 grandchildren of AB Corp each hold a 50% partnership interest in XY, each corporation in that chain, as well as each corporation in another wholly-owned stack, is closely related to XY under s. 156(1.1)(b)(iii)(C)

Example 9

• AB (a corporation) wholly-owns (including having all the voting rights of the shares of) Holdco A and Holdco B. Holdco A so wholly-owns A Co, and Holdco B so wholly-owns X Co and Y Co. These six corporations form a “qualifying group” under para. (a) of the definition.
• X Co and Y Co. each hold a 50% partnership interest in XY.
• XY and A Co are closely related under s. 156(1.1)(b)(iii)(C) since, as per s. 156(1.3), all of the interest in XY is held by a combination of corporations (X Co and Y Co) that are members of a qualifying group of which A Co is a member. Thus, XY is closely related to A Co under s. 156(1.1)(b)(iii)(C), as are the other corporations in the group.