Indirect Tax Alert (News from Americas Tax Center) | 13 March 2014

Canada proposes changes to GST/HST election for closely related persons

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Executive summary

Canada's 11 February 2014 federal budget proposes a number of changes to the “nil consideration” election that is currently available to relieve the GST/HST that would otherwise apply to certain transactions between members of a closely related group (generally a group with common ownership of at least 90%). Subject to the exception noted below, these changes will take effect for elections made on or after 1 January 2015 and will apply to supplies made between parties to such an election on or after that date.

Detailed discussion

Expansion of availability to new members of related group

Section 156 of the Excise Tax Act (ETA) currently allows registrants that are resident in Canada, exclusively engaged in commercial activities and members of a closely related group to file an election that will relieve them of the requirement to account for tax on certain transactions between them. The election is currently unavailable where a new member of the related group acquires assets from another member of the group and where, before that time, the new member had not yet acquired any other property or made a taxable supply. This restriction will be eliminated to make the election available in these circumstances, provided that it is reasonably expected the new member of the group will be exclusively engaged in commercial activities and will be making taxable supplies throughout the 12-month period following the time when the election is made.

New filing requirement

Under existing legislation, there is no requirement for the parties to an election under section 156 to file the election form with the Canada Revenue Agency (CRA). Instead, the election must simply be completed by both parties and retained with their books and records.

It is proposed that, effective 1 January 2015, the parties to an election under section 156 will be required to file it with the CRA by the earliest date when any of the parties are required to file a return for the period in which the election is to take effect.

Where elections are already in place on 1 January 2015, parties will have until 1 January 2016 to file the election with the CRA.

Expansion of liability

It is also proposed that parties to a new or existing election effective on or after 1 January 2015 will be subject to a new joint and several (or solidary) liability provision with respect to tax that may arise in relation to supplies made between them on or after that date.

Matters requiring clarification

Based on the draft legislation, the following are a few areas of uncertainty that hopefully will be clarified before the provisions become effective:

  • What if the new member intended to exist for 12 months but does not? What evidence will the CRA require to show that the new entity reasonably intended to exist for 12 months?
  • If the new entity acquired a development property and does not end up making any supplies for the 12-month period after the purchase, will the election apply?
  • Will a group of more than two related parties be able to file one election for the group? The draft legislation implies that groups of two parties will have to elect with each other.
  • Where there is a large group of related parties this could get complicated and require a significant number of election forms to be filed.
  • Will the CRA accept elections already on file or will new forms be required to be completed again and filed?

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), East
  • Jean-Hugues Chabot
    +1 514 874 4345
  • Manon Jubinville
    +1 514 874 4391
  • Daniel Legault
    +1 514 879 8176
  • Mary Anne McMahon
    +1 613 598 4266
Ernst & Young LLP (Canada), Central
  • Dalton Albrecht
    +1 416 943 3070
  • Sania Ilahi
    +1 416 941 1832
Ernst & Young LLP (Canada), West
  • Ken Ghag
    +1 604 643 5459
  • David Robertson
    +1 403 206 5474

EYG no. CM4262