Canada: GST/HST Closely Related Election Amendments – Tips & Traps

Last Updated: December 1 2014
Article by Jamie M. Wilks and Carl Irvine

Nature of the Election

To streamline their GST/HST compliance and improve their GST/HST cash flow, two "closely related" GST/HST registrants can relieve GST/HST on taxable transactions between them by entering into a joint election (the "Election") pursuant to subsection 156(2) of the Excise Tax Act (the "ETA"). In addition to the benefits of the Election for ongoing transactions, the Election can be useful to improve cash flow in the context of reorganizations or "one-off" transactions with significant dollar values.

The Election is generally available between two parties that are:1

(a) GST/HST registrants,

(b) engaged exclusively in taxable commercial activities,

(c) corporations resident in Canada or "Canadian partnerships"2 or a combination of each, and

(d) "closely related" for GST/HST purposes.

To determine whether two corporations are closely related, the criteria in section 128 of the ETA should be considered.3 As a straight-forward example, where a parent corporation owns not less than 90% of the value and number of the issued and outstanding shares of the capital stock of another corporation, having full voting rights under all circumstances, the two corporations are closely related.

To determine whether two Canadian partnerships, or one such partnership and a corporation, are closely related to each other, the detailed rules in subsection 156(1.1) of the ETA should be consulted. If, in the example above, a Canadian partnership were substituted for the parent corporation, then the partnership and corporation would be closely related.

To determine whether a registrant is engaged exclusively in a commercial activity under the existing rules in effect until January 1, 2015, a registrant must satisfy one of the two following tests (the "Commercial Activity Test"):

a) all or substantially all4 of the registrant's property (other than financial instruments) was acquired (or manufactured, produced or imported into Canada) for consumption, use or supply exclusively for use in the registrant's commercial activity, or

b) if the registrant has no property (other than financial instruments), all or substantially all5 of the supplies previously made by the registrant were taxable supplies.

In practice, due to the restrictiveness of the Commercial Activity Test, a newly formed partnership or corporation ("Newco"), without any history of making supplies and without any property,6 is restricted from entering into the Election with a closely-related supplier and thereby from obtaining GST/HST relief on the taxable acquisition of business assets from the supplier.7 This restriction denies access to the Election in circumstances where it would appear to be appropriate to allow the Election (i.e., to relieve the GST/HST compliance and cash flow burden for closely related registrants, to the extent that they engage in taxable transactions between them, where doing so would not result in any tax loss to the government).

To overcome this restriction and satisfy the Commercial Activity Test, parties have used a two-step planning technique (the "Two-Step Technique"). In the initial step, Newco would acquire an asset of nominal value and pay GST/HST (recoverable by input tax credit ("ITC") claim) on the nominal value. Once this initial transaction is completed, the closely-related supplier could then transfer assets to Newco under the Election without GST/HST applying.

Amendments to Take Effect on January 1, 2015

To respond to these concerns about the limitations on the availability of the Election, the federal government announced amendments in its February 2014 budget (the "Amendments") to change the criteria for qualifying for the Election effective January 1, 2015. The amendments became law on June 19, 2014.8

By adding "forward-looking" criteria to the Commercial Activity Test, the Amendments are intended to allow Newco to access the Election without using the Two-Step Technique. Newco would satisfy these criteria if it were reasonable to expect that:

a) Newco will make taxable supplies throughout the next 12 months,

b) all or substantially all9 of those supplies will be taxable supplies, and

c) all or substantially all10 of the property (other than financial instruments and property having nominal value) to be manufactured, produced, acquired or imported by Newco within the next 12 months will be for consumption, use or supply exclusively in the course of Newco's commercial activities.

While elements of the prior Commercial Activity Test are preserved by the Amendments, the Two-Step Technique will no longer be available for Newco to qualify for the Election. Assets of nominal value will be specifically excluded from consideration under the Commercial Activity Test.

As of January 1, 2015, closely related persons entering into the Election will be required to file the jointly completed and signed prescribed Election form with Canada Revenue Agency ("CRA"). Formerly, the Election form had to be maintained on file for audit purposes, but not actually filed with CRA.11

In addition, the Amendments introduce joint and several liabilities for the parties to an Election, or purported Election.12

Concerns Arising From the Amendments

While the intention of the Amendments - to permit Newco to make the Election without resort to the Two-Step Technique - is commendable, and other changes may improve (at least from the CRA's perspective) the administration of the Election, they, nevertheless, raise a number of concerns.

There remains considerable uncertainty regarding the proper interpretation of the new "forward-looking" Commercial Activity Test. Could it exclude a start-up business or a business in an initial research and development phase? Such a business might not have any taxable supplies during its first 12 months. What is meant by the requirement that Newco make taxable supplies throughout the first 12 months? Could the election be denied if Newco sells all its business assets within the first 12 months? Would it be sufficient for Newco to make taxable supplies at any time during the next 12 months (e.g., in the 12th month)? Unfortunately, at this time it is not clear how CRA intends to address these questions.

By excluding property of "nominal value" from the Commercial Activity Test, the Amendments leave open the issue of how "nominal value" will be interpreted and applied by CRA. Will nominal value be interpreted in absolute or relative terms? That is, if Newco initially has a $20,000 asset, but will subsequently acquire business assets with a value of $1 million, would the $20,000 asset be considered to have nominal value?

This uncertainty could increase the risk of CRA disallowing GST/HST relief claimed under an Election for an acquisition of assets by Newco. If CRA disagrees with parties relying on an Election made, or purported to be made, to relieve GST/HST, then, in view of the Amendments to impose joint and several liabilities against the parties, CRA could assess either or both of the parties for the uncharged and unremitted GST/HST, plus any applicable interest and penalties.13

There are new filing requirements for the Election. If these requirements are not met after 2014, then the Election would be invalidated and CRA could assess either or both parties for uncharged, uncollected and unremitted GST/HST, plus any applicable interest and penalties.14

Practical Tips - Addressing Concerns with the Amendments

Given the uncertainty and limitations of the "forward-looking" test, Newco could be worse off under the Amendments than under the existing rules. The Amendments eliminate the ability to implement the Two-Step Technique discussed above to access the Election. Where Newco is acquiring business assets from a closely related supplier, consider whether a variation of the Two-Step Technique (the "Planning Technique Variation") could be utilized to access the Election on the transfer of the assets (or at least most of the assets).

Under the Planning Technique Variation, to qualify for the Election, Newco could acquire property of greater than nominal value, pay GST/HST (recoverable by ITC claim) on that preliminary acquisition (whether from the closely related supplier or a third party) and subsequently acquire any property from the closely related supplier GST/HST-free under the Election. Again, if what constitutes nominal value were measured in relative terms, then the Planning Technique Variation could be problematic, particularly in view of the exposure to joint and several liabilities under the Amendments.

Given these concerns and limitations, another consideration to be borne in mind is that the joint election on the sale of a business or part of a business under section 167 of the ETA could be available to obtain GST/HST relief on the transfer of business assets to Newco from a closely related supplier. Nevertheless, if Newco and the closely related supplier were to have ongoing transactions between them, consideration could be given to entering into the Election to relieve those transactions from GST/HST.

A sale of real property is excluded from the application of a closely related Election jointly made under subsection 156(2) of the ETA.15 However, the same GST/HST cash flow relief as under the Election could be achieved by the vendor being relieved from charging and collecting the GST/HST on the taxable sale of the real property and the purchaser having to self-assess GST/HST and claiming an offsetting ITC on the same return.16

Finally, as of January 1, 2015, jointly completed and signed Election forms will have to be filed with CRA on a timely basis to be valid. Parties to an existing Election in place before January 1, 2015 will have to file the jointly completed and signed Election form in 2015.17 Even if the Election form had been filed before January 1, 2015, the Election form would have to be filed again.18


1 Definitions of "qualifying member" and "qualifying group" in subsection 156(1) of the ETA.

2 The definition of "Canadian partnership" is in subsection 156(1) of the ETA. Each partner of a Canadian partnership is either a corporation or partnership resident in Canada.

3 Paragraph (a) of the definition of "qualifying group" in subsection 156(1) of the ETA.

4 CRA has administratively interpreted "all or substantially all" to mean at least 90%, although the jurisprudence suggests a lesser proportion could suffice, depending on the particular circumstances. See, for example, Ruhl (W.) v. Canada [1998] G.S.T.C. 4 (TCC).

5 Ibid.

6 Other than financial instruments within the meaning of subsection 123(1) of the ETA.

7 Does not satisfy paragraph (c) of the definition of "qualifying member" in subsection 156(1) of the ETA in effect until January 1, 2015.

8 S.C. 2014, c. 20, (Bill C-31, Royal Assent June 19, 2014), section 40.

9 Supra, footnote 4.

10 Ibid.

11 ETA, ss. 156(2) and (4)(b).

12 ETA, subsection 156(5). CRA can cancel or waive interest in excess of 4% of the uncollected taxes pursuant to CRA's GST/HST Memorandum 16-3-1 – Reduction of Penalty and Interest in Wash Transaction Situations.

13 Ibid.

14 Ibid.

15 ETA, paragraph 156(2.1)(a).

16 ETA, subsections 169(1) and (4), 221(2), and 228(4) and (6).

17 ETA, ss. 156(2) and (4)(b).

18 ETA, subsection 156(2.01).

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jamie M. Wilks
Carl Irvine
Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions