GST/HST Election for Closely Related Corporations and Canadian Partnerships
Does your corporate group have intercompany transactions? How are you treating GST/HST on these transactions? Generally, when taxable goods and/or services are supplied within your corporate group to a related party, GST/HST is payable on the actual selling price. The recipient of those goods and services is permitted to claim an input tax credit (ITC) for the GST/HST paid, if they are registered for GST/HST, and the goods or services are for use in commercial activities. The company providing the goods and services is also required to collect and remit the GST/HST on these transactions assuming they are not a small supplier. As a result, it may negatively affect your related group’s cash flow.
Under the Excise Tax Act (ETA), Section 156 allows certain corporations and partnerships to treat supplies between them as if they were made for nil consideration. This election eliminates cash flow issues arising from intra-group supplies if the transactions are between ‘closely related corporations and Canadian partnerships’. These are defined terms under the ETA and can be very complex. More information on the definition can be found at http://www.cra-arc.gc.ca/E/pub/gm/14-5/14-5-e.html. This election is made using prescribed form GST 25 – http://www.cra-arc.gc.ca/E/pbg/gf/gst25/gst25-08e.pdf, and for 2014 and prior, was not required to be filed with the CRA. As a result of changes outlined in the 2014 Federal budget, this election must now be filed with the Canada Revenue Agency. If the election is in effect now, or comes into effect before 2015, the election must be filed after January 1, 2015 and before January 1, 2016. It cannot be filed prior to the 2015 calendar year. If an election takes effect on or after January 1, 2015, the filing deadline is the earliest of the GST/HST filing deadlines of the parties making the election.
A common mistake we see is when companies are using this election between two sister companies owned by an individual. This type of common structure is not defined as closely related by the ETA, and if your corporate group has relied on the election for your intercompany transactions, you may have exposure. If your corporate group is complex, it will be worthwhile to review all of your intercompany transactions to ensure GST/HST is being properly applied, especially given the fact the election form will now be on file with the CRA starting in 2015.