Non-Arm’s Length Supplies
It is not uncommon for a supply to be made for nil consideration or for consideration that is lower than the fair market value of that supply. When nil consideration (or consideration less than market value) is received, there would not typically be a requirement to charge GST/HST. However, section 155 (1) of the Excise Tax Act (ETA) provides a deeming provision on transactions of this nature where the supply being provided is with a non-arm’s length party as this treatment may not be consistent with treatment offered to an arm’s length party.
Under section 155 (1) of the ETA, the transaction above may be subject to GST/HST based on the fair market value of the consideration when it is provided to a non-arm’s length party. There is an exception to this deeming provision where the recipient of the supply is also a GST/HST registrant acquiring the property or service for consumption, use or supply exclusively in the course of a commercial activity. This is due to the fact that the recipient would be eligible to claim back the full GST/HST Input Tax Credit (ITC).
An example where the section 155 deeming provision may be applicable occurs when a GST/HST exempt company (such as an insurance brokerage, doctor, financial institution, etc) rents a building from its GST/HST registered holding company, which owns a commercial property. The holding company is providing commercial rent, is registered for GST/HST, and is required to charge GST/HST on the related rental income received. Where the actual rent charged is less than the fair market value for rental of the property, section 155 deems the rent received for GST/HST purposes to be made at the respective fair market value. This deeming provision is required to ensure the exempt operating company does not massage the rental amount to avoid having non-recoverable GST/HST within the corporate group as the exempt company has no mechanism to recover the GST/HST paid.