Changes to the GST/HST
closely related election
March 2014
On February 11, 2014, as part of the 2014 federal budget, proposed
amendments were announced to the GST/HST election for closelyrelated persons.
The closely related election is found in section 156 of the Excise Tax Act. The current rules
provide that where an election has been made amongst certain closely related corporations
and partnerships that are members of a qualifying group, the members can make supplies
to other members of the group without having to collect GST/HST. To make the
election, all members of the qualifying group must be engaged exclusively in commercial
activities and their revenues are taxable for GST/HST purposes.
Example
Both ParentCo and wholly-owned SubCo are both registered for GST/HST. They engage exclusively in
commercial activities and SubCo sells $1 million of widgets to ParentCo. With the election in place, no
GST/HST has to be collected and remitted with respect to those sales.
Since ParentCo would have been entitled to a full ITC for any GST/HST that would have
been paid to the closely related party (barring the election), the election simplifies
compliance with the rules and facilitates cash flow by avoiding the need to collect and
remit GST/HST that is otherwise recoverable.
Currently, the election does not have to be filed with the Canada Revenue Agency “CRA”,
but must be kept on file in case the CRA wants to see it.
2014 budget changes—need to refile those elections
A significant change to the election is that the proposed amendments require that section
156 elections will now have to be filed with the CRA. This is worrisome for related parties
that currently have a section 156 election in effect. This election will have to be refiled
before 2016 (since elections made prior to 2015 will be deemed never to have been filed).
The proposed rules provide that the election cannot be filed before January 1, 2015.
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There is also a welcome change to a long-standing issue. Under the existing rules, the
election may not be available to a new member of a closely related group if the new
member does not have property or does not have any taxable supplies before the election
is made. In such situations, the new corporation or partnership would not be considered a
"qualifying member” of a qualifying group.
The 2014 federal budget has proposed amendments to the definition of a "qualifying
member" (effective after 2014) so that a new qualifying corporation or partnership should
be able to make the election even if it has no property and has not yet made any taxable
supplies. The election is available so long as it is reasonable to assume that it will be
making taxable supplies throughout the next twelve months, that all or substantially all of
these supplies will be taxable and that the property of the entity for the next twelve
months will being used, consumed or supplied for that purpose.
Another new requirement is that the property “test” will only include property with more
than a nominal value. This applies for all members to qualify to use this election and not
just the “new” members. Also new is the introduction of a joint and several liability
provisions between members that are party to the election attributable to all tax
obligations for supplies between the members.
With all of these changes, taxpayers who have section 156 elections in place prior to 2015
should ensure that they file these elections sometime in 2015 or else the elections will not
be valid. New elections required to be filed after 2014 should be filed on or before the
earliest day on which any of the specified members must file their GST/HST return for
the reporting period that includes the day the election becomes effective. So if one of the
members is a monthly filer, the return for January 2015 is due by the end of February. If
this is a new election, it must be filed with the CRA by the end of February 2015. Given
that there will be a flurry of elections that need to be filed or refiled with the CRA, it will
be important to ensure the elections are filed in a timely manner.
Contact your Grant Thornton LLP sales tax adviser if you have any questions about the
matters discussed in this release.
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