Many corporations continue to expose themselves to significant potential tax consequences.
It has been one year now since Canada Revenue Agency (CRA) changed the election reporting requirements for the GST/HST election for closely related companies, and it seems that many corporations are not abiding by the new rules.
What is the election?
Certain Canadian corporations and partnerships of a ‘qualifying group’ can elect to treat many taxable supplies between them as having been made for nil consideration. However, all conditions under section 156 of the Excise Tax Act (ETA) must be satisfied.
Benefits of filing the election
Filing the election facilitates cash flow (i.e., GST/HST does not need to be collected and paid on many transactions) and CRA compliance requirements are satisfied.
Changes in 2015
Prior to 2015, the old election form (GST25) did not have to be filed with CRA, but it did have to be maintained in company records. However, elections that took effect on or after January 1, 2015, and for previously made elections that remained in effect until at least that same date, it was now required that the election actually be filed with CRA. Additionally, any elections that were already previously filed with CRA prior to 2015 had to be made, again, using the new form (RC4616)
The above changes in place as of last year are still in place today..
Many of the deadlines have now passed, and this poses potential issues for many corporations.
1. New elections were to be made no later than the earliest day on which any of the specified members were required to file their GST/HST return for the reporting period that included the day the election became effective. More specifically:
2. Elections effective on or after January 1, 2015 – Deadline was the earliest date that any of the electing parties was required to file an GST/HST return for the reporting period in which the election became effective. More specifically, February 28, 2015 was the earliest possible deadline (i.e., for GST/HST remittances for the period ended January 31, 2015 and due February 28, 2015).
3. Elections effective on or before December 31, 2014 and still in effect after that date – Elections previously made (actually filed with CRA or kept internally in company records) were no longer effective and were to be re-filed with the new form.
At the time of the announcement, the ETA provided the Minister of National Revenue with discretionary authority to accept late filed elections.
A common situation where the election is incorrectly made is between two sister companies (i.e., an individual owns two corporations (e.g., an operating company, and a holding company)). The corporations in this situation are not considered to be closely related by the ETA.
In this situation, either intentionally or unintentionally, it is likely that GST/HST would not have been collected and paid between the corporations when it should have been. For obvious reasons, this poses serious potential issues for the group of companies.
Possible situations and problems
There are at least two situations that immediately come to mind when thinking about possible scenarios where there could be potential issues:
1. The new election form has not yet been filed (for existing or new situations) when it should have been, and it is now late.
2.Corporations were incorrectly thought to have qualified as closely related, and the election has incorrectly been made.
The implications of either situation can be negative and severe.
What to do now?
By now, enough time has passed where, if you are in a situation with two or more qualifying corporations, the filing deadline for election has probably passed.
Anyone involved in a group of two or more corporations should seek professional advice to determine whether the GST/HST on their intercompany transactions is being appropriately applied.
We would be pleased to assist you in assessing your situation, and help you mitigate any negative tax consequences.
Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.