Introduction
The Excise Tax Act has a couple of “closely related” provisions, which ameliorate the effects of the GST/HST, namely those found in sections 150 and 156 of the ETA. Amendments to the ground rules for how these provisions operate were announced in the 2016 federal budget, and more recently came into force on March 22, 2017.
These amendments add a new “qualifying voting control” test for both elections.
Other changes found in the amendments also limit eligibility for the subsection 228(7) offset provision, which is relevant to corporations that have been reducing their tax payable or remittable, by absorbing the tax refunds or rebates of their closely related corporations.
Sections 150 & 156 relieving provisions
Section 150, section 156 and subsection 228(7) of the ETA all allow for certain tax relief between members of a “closely related group,” as defined in subsection 123(1) and described in section 128 of the ETA.
The operation of each of these provisions may be summarized as follows:
- Section 150 allows closely related groups which contain at least one listed financial institution to make a joint election whereby intra-group supplies of property by way of lease, licence or similar arrangement that would otherwise be taxable, are deemed to be a supply of an exempt financial service. Notably the section 150 election applies only to corporations. As a result of such an election, no GST/HST is payable in respect of supplies between the various members of the closely related group, but input tax credit claims by the members of the closely related group are also affected.
- Section 156 allows members of a commercial closely related group to jointly file an election, pursuant to which taxable supplies between the filing parties are deemed to have been made for no consideration, provided they meet certain tests themselves with regard to the degree of commercial activities amongst the members . As a result, no GST/HST is payable. Notably, because the intra-group supplies are made for “no consideration,” there is no impact on ITCs. The section 156 election applies to corporations and partnerships.
- Subsection 228(7) allows a corporation to offset its taxes owed or remittable by absorbing the tax refund or rebate of a closely related corporation. The Offset of Taxes (GST/HST) Regulations provide that they only apply to corporations.
Prior to the amendments, entities qualified as “closely related” when a parent corporation or partnership held at least 90 per cent of the value and number of the issued and outstanding shares with full voting rights of a subsidiary corporation. Under that criterion, the shortcuts provided for in section 150, section 156 and subsection 228(7) were available to a parent corporation (or partnership in the case of section 156) and its subsidiary, even if the parent corporation (or partnership in the case of section 156) did not hold at least 90 per cent of the voting rights attached to the subsidiary’s shares.
The new amendments are targeted at that result, and change it.
Amendments to the closely related test
The recent amendments to section 128 of the ETA replace the 90 per cent of shares criterion with a stricter test: the “qualifying voting control” test. Now, in order to make an election under section 150, an election under 156, or an offset under subsection 228(7), the parent corporation (or partnership in the case of section 156) must own shares of the subsidiary which include not fewer than 90 per cent of the votes.
There are only two exceptions to this new test, each of which is discussed further below.
But first, let’s illustrate the main change: consider two corporations, a parent company Jco and its subsidiary company Rco. Rco has one issued class A share, and nine issued class B shares. Class A shares have 100 votes per share, and class B shares have one vote per share.
Under the previous test (90 per cent of shares criterion), in order for Jco and Rco to be closely related, Jco would need to own at least nine of the 10 Rco issued shares. Jco could own the one class A share, and eight class B shares, or it could own all nine class B shares – as the respective voting power of the shares was inconsequential in assessing whether the corporations were closely related.
Under the new “qualifying voting control” test, in order for Jco and Rco to be closely related, Jco must own the class A share, because even if Jco owned all nine class B shares, it would only own 8.26 per cent of the votes (9/109).
Finally, note that the closely related test operates transitively, so that when Xco is closely related to Yco, and Yco is closely related to Zco, then Xco is closely related to Zco. This transitivity remains unaffected by the amendments.
The two exceptions
As indicated, there are two exceptions to the new “qualified voting control” test.
The first exception applies when a statute (i) requires an adjustment to the nature or scope of the voting rights of any shareholder of the subsidiary, or (ii) allows that holders of a class or series of shares are entitled to vote separately as a class or series. For example, this exception applies in the context of subsection 176(1) of the Canada Business Corporations Act, which provides that holders of shares of a class or series are entitled to vote separately as a class or series on a proposal to amend the corporation’s articles relating to specific matters. Under the exception, subsection 176(1) is not considered when determining whether a person holds qualifying voting control of a corporation.
The second exception applies in prescribed circumstances, although currently no circumstances have been prescribed.
Commentary
Notably, the new test only affects corporate relationships in which the owned corporation has a multiple voting share structure. For corporations in which there is one vote per voting share, the changes have no impact.
CRA described the amendments as strengthening the test for determining whether two corporations, or a partnership and a corporation, can be considered closely related (see Excise and GST/HST News, November 2016). A better word would have been “limiting,” but in this day and age of government double-speak, perhaps “strengthening” now means “limiting.”
What is clear is that the amendments will limit certain MVS corporations from realizing the benefits of the section 156 and 150 elections, and the subsection 228(7) offset. With an estimated 20 – 25 per cent of companies listed on the TSX having some form of dual-class structure or special voting rights (including Canadian Tire, Magna, and the technology company Shopify), this change could be far-reaching. Historically, MVS structures have been viewed favourably because they allow corporations to maintain family or founder control.
Recently, however, as this type of corporate structure has become more popular, it has been criticized for undermining corporate governance standards and the rights of minority shareholders, who end up carrying the financial risk of the corporation without having any corresponding power (see Anita Anand, “Offloading the Burden of Being Public: An Analysis of Multi-voting Share Structures” (2016) Virginia Law and Business Review).
(One wonders if there is a political element to this innocuous GST/HST change!)
A final word about application
Finally, the new test applies to all new elections made under sections 150 or 156, made on or after March 23, 2016.
In other words, they will otherwise be invalid. Elections made on or before March 22, 2016, and meeting all of the old rules, including the 90 per cent of of shares criterion, will continue to be valid.
To summarize:
- As a result, an election made on March 23, 2016 must meet the new closely related test (i.e., the “qualifying voting control” test).
- All elections made on or prior to March 22, 2016 are unaffected by the amendments, and will still be valid if meeting all of the old rules, including the old test (i.e., the “90 per cent of shares criterion”).
Registrants that have filed section 150 or section 156 elections in the past year – or that have been offsetting taxes owed under subsection 228(7) – need to reassess how their business groups meet the new closely related test, especially where the business group has participants with MVS structures.
Since January 1, 2015, all new section 156 elections have been subject to mandatory filing, and since January 1, 2016 all pre-2015 elections have been subject to mandatory filing requirements, which are part of other changes to these rules which came into place in 2015.
Robert G. Kreklewetz is with Millar Kreklewetz LLP