‘Nil Consideration’ Election for GST and HST

“After December 31, 2015, all unfiled elections will be invalid.”

The GST/HST rules provide for tax not to apply on transactions between “closely related corporations” in many circumstances. To be “closely related” for purposes of the election, 90% or more of all voting shares of one corporation must be owned by the other, or 90% or more of all voting shares of both corporations must be held by a third corporation or a partnership made up only of corporations.  (Group control also qualifies in certain cases).  Accordingly, the election does not apply to transactions between individuals and corporations they own.

Historically, the election was made by both parties signing Form GST25 and keeping it on file (each should have a copy) rather than filing it with the CRA (this will change as noted below). The election form had to be provided to the CRA on request. The CRA has accepted backdated elections, if the parties had acted as though the election was in place (i.e. they did not charge GST or HST on intercompany transactions but neglected to sign the election form).

The election cannot be used for a sale of real property. It also cannot be used where the person receiving the taxable goods or services cannot claim a full ITC. Thus, you cannot use it to avoid paying GST/HST where the payor would not be able to recover all the tax paid.

The election is intended to provide cash flow relief by not requiring one corporation to collect and remit the tax when the other closely related corporation can claim the same tax back as an input tax credit on its GST/HST return.

In the past, there has been confusion and some taxpayers have used the election when it did not apply. Since the election is not filed with the CRA, an error would be first discovered by the CRA during a GST/HST audit. Large assessments of GST/HST would result and even where ITCs could be claimed by the party receiving the taxable goods or services, the party that failed to collect the HST might face significant interest and potentially penalties (although in many cases relief is available through the CRA’s so-called “wash transaction” policy).

The 2014 federal Budget introduced new rules that were enacted in June 2014 that make changes to this election, effective January 2015.

Firstly, the election could only be used where both parties had made taxable supplies previously or had acquired property to be used in making taxable supplies. This meant that the election was not available to new corporations created in some reorganizations. In certain circumstances, a new corporation will now be able to make the election.

The second significant change is joint and several liability for any tax, interest and penalties for all parties to the election if the net tax is not properly reported. This change will apply to tax created after 2014 and will allow the CRA to assess whichever party it believes has the ability to pay, as opposed to one that may have failed to collect tax under an invalid election.

Finally, and most importantly, the election form will have to be filed with the CRA on new Form RC4616, which will be available in January 2015 (an electronic filing option will be available as of April 2015). Additionally, all existing elections that were made with the Form GST25 must be updated by filing the new form between January 1 and December 31, 2015 inclusive. After December 31, 2015, all unfiled elections will be invalid — and the new form cannot be filed until January 2015.

So if you are involved with related corporations that do not charge tax to each other on intercompany supplies, make a note to file the new RC4616 form early in 2015!

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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