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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 closely-related 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.

Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.

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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