Budget 2014 contains a number of GST/HST changes, including changes to:
- enhance access to the election under section 156 of the Excise Tax Act (the "ETA") to relieve GST/HST on taxable supplies between members of a "closely related" group,
- enhance access to the election made under section 273 of the ETA to allow more joint ventures to simplify the reporting, accounting and administration of GST/HST, and
- extend GST/HST exemptions or "zero-rating" tax-free status to certain health-related services and assistive devices.
Expanded Availability of the Closely Related Election
Under section 156 of the ETA, two (or more) corporations or partnerships that are:
- GST/HST registrants,
- resident in Canada,
- engage exclusively in commercial activities (i.e., making taxable supplies for consideration), and
- members of a "closely related" group of corporations or partnerships ("Eligible Registrants")
can generally elect with each other to deem most taxable supplies of property and services among the members of the group ("Intra-Group Taxable Supplies") to occur for nil consideration, effectively relieving these transactions from GST/HST (the "Closely Related Election").
This Closely Related Election relieves Eligible Registrants from having to pay, report, account for, recover and remit GST/HST on Intra-Group Taxable Supplies. In addition to simplifying GST/HST compliance and administration, the Closely Related Election can provide GST/HST cash-flow relief (whether to the supplier or the recipient that would otherwise be required to claim input tax credits ("ITCs") to recover the GST/HST payable on Intra-Group Taxable Supplies).
Until Budget 2014, the Closely Related Election was generally unavailable to an Eligible Registrant that had not previously acquired property or made taxable supplies. This restriction precluded, or at least complicated, the use of the Closely Related Election in the context of certain transactions, such as corporate reorganizations or acquisitions, involving newly formed entities. Budget 2014 recognizes that this result is inappropriate and, therefore, proposes to allow, effective January 1, 2015, entities that have not previously acquired property, or made taxable supplies, to make the Closely Related Election, provided that it is reasonable to expect that such entities:
- will make supplies within the subsequent 12-month period, all or substantially all of which will be taxable, and
- all or substantially all of the property (other than financial instruments) to be manufactured, produced or acquired by such entities within that 12-month period will be consumed, used or supplied exclusively in the course of their commercial activities.
This change is a welcome one, although given its merits, it is unfortunate that the government is delaying its implementation until 2015.
While Budget 2014 extends the availability of the Closely Related Election, it does increase the compliance obligations associated with making such election. At present, Eligible Registrants who make the Closely Related Election are not required to file the election form with the Canada Revenue Agency (the "CRA"). Rather, they retain the election form in their records for presentation to the CRA in the event of an audit. However, starting in 2015, Eligible Registrants entering into the Closely Related Election will be required to file the completed and jointly signed prescribed election form with the CRA on or before the earliest GST/HST return due date of the Eligible Registrants for the period in which the election becomes effective.
In addition, parties to a Closely Related Election made before 2015, but in effect on January 1, 2015, will be required to file the form with the CRA before 2016. Although this obligation should not be onerous, the parties to an existing Closely Related Election should take care to file the prescribed election form on time.
While the CRA will have the discretion to permit late-filed Closely Related Elections, it would be prudent not to have to rely on the exercise of that discretion.
Expanded Availability of the Joint Venture Election
Under section 273 of the ETA and the Joint Venture (GST/HST) Regulations, GST/HST registrants engaged in joint ventures in certain industries are allowed to make an election (the "JV Election") that permits one member of the joint venture to report, account for and remit the GST/HST and claim ITCs of the joint venture. Without this election, each member of a joint venture would have to account for its proportionate share of the GST/HST collected by the joint venture and claim its proportionate share of any ITCs. As a result, the JV Election generally significantly simplifies the GST/HST compliance obligations of participants in a joint venture.
By permitting participants in a joint venture to make a JV Election as long as the joint venture activities are exclusively commercial and the participants are engaged exclusively in commercial activities, Budget 2014 extends the availability of the JV Election to a broader range of activities. Joint ventures in a wide variety of industries will benefit from this change. The government has not provided any guidance as to when this proposed change will come into effect, although it has committed to release draft legislative proposals containing this change later this year.
Health Care Services and Assistive Devices
Basic health care and health-related services are generally exempt from GST/HST, while medical and assistive devices (such as eye-glasses) are generally "zero-rated", or taxed at a 0% rate (that is, registrant suppliers do not charge and collect GST/HST, but would be entitled to claim ITCs to recover GST/HST on their related business inputs).
Budget 2014 proposes to extend the existing GST/HST exemption that applies to specialized training to help individuals with a disability to cope with such disability to apply to the services of designing a plan for such training, subject to satisfying certain conditions.
In addition, the list of health care professionals whose professional services are exempt will be expanded to include acupuncturists and naturopathic doctors. These changes could affect these professionals' GST/HST status as well as trigger GST/HST liabilities as a result of the change in use of their assets for GST/HST purposes.
Finally, acknowledging recent technological developments, Budget 2014 proposes to add eyewear designed to enhance an individual's vision through electronic means (as opposed to traditional eyeglasses or contact lens) to the list of medical and assistive devices that are zero-rated if supplied on the written order of a physician or optometrist.
These changes will apply to supplies made after February 11, 2014.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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