Section 156 election for closely-related parties

As the last quarter of 2015 approaches, it is important for advisors and registrants to be aware of the new requirement to file elections in respect of any previously-made section 156 "nil consideration" elections (section 156 election) with the Canada Revenue Agency (CRA) on the recently released Form RC4616 before January 1, 2016.

Recent amendments to the Excise Tax Act (the ETA) impose new filing requirements on corporations and Canadian partnerships. Previously, registrants were not obligated to file a section 156 election with the CRA and were only required to keep a copy of the completed form or a statement containing certain prescribed information in their records. Now, parties are required to file newly-made section 156 elections with the CRA and will have until December 31, 2015 to file new form RC4616 for their section 156 elections to remain valid. For new elections, parties must ensure that form RC4616 is filed prior to the earliest required return filing date for the period in which the election is intended to be effective.

Background on the section 156 election

Section 156 of the ETA is aimed at relieving the administrative cost and cash flow problems that can arise in certain transactions involving closely related corporations and partnerships. This is achieved by deeming certain taxable supplies made to each related registrant to be made for no consideration. As a result, "closely related" parties transacting among one another that have filed a section 156 election will not be required to account for GST/HST in these transactions, and this will alleviate the cash flow and administrative cost of collecting GST/HST and claiming input tax credits on inter-group transactions.

To qualify for the section 156 election, parties are typically required to be "qualifying members" of a "qualifying group". In general, this requires parties to be "closely related" within the meaning of the ETA. Generally, parties are closely related when one party owns at least 90 percent of the other party. Two parties can also be closely related if they are each closely related to the same party. In addition, to be a "qualifying member" a corporation or partnership must have: (i) acquired property to be used exclusively in the course of commercial activities; (ii) owned no property but made supplies that are all, or substantially all, taxable supplies; or (iii) owned no property but will reasonably be expected to make supplies, all or substantially all of which will be taxable supplies, throughout the next 12 months.

File before the end of 2015

We strongly encourage all GST/HST registrants to review all filing obligations before year's end. Non-compliance may invalidate existing section 156 elections which could add unwanted costs and administrative burdens for you or your clients.

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