Section 156 of the Excise Tax Act (the "ETA") provides an election that relieves certain related parties from having to collect Harmonized Sales Tax ("HST") on the goods and services sold between them. The election deems qualifying supplies of goods and services to be made for nil consideration which means that there is no HST to be collected on such supplies. 

GENERAL REQUIREMENTS

The election applies to "qualifying members" of a closely related group. Qualifying members refers to a corporation resident in Canada or a partnership each member of which is a corporation or a partnership resident in Canada. Please note that a qualifying member does not include an individual. In addition, each member must meet the following requirements: 

  1. It is an HST registrant and is not a party to an election made under section 150 of the ETA (which relates to intra-group supplies which include a financial institution).
  2. Either, all or substantially all of its property was last manufactured, produced, acquired or imported for consumption, use or supply exclusively in the course of commercial activities or if it has no property, all or substantially all of its supplies are taxable supplies.

Corporations will be closely related to each other for purposes of the election if one corporation owns 90% or more of the voting shares of the other corporation or if 90% of the voting shares of each corporation are owned by a third corporation. Two corporations which are closely related to the same corporation are closely related to each other. Partnerships will generally be closely related with other partnerships or corporations where the 90% threshold is met (either through voting shares in the case of corporations or partnership interests in the case of partnerships). 

Currently, it is not necessary for this election to be filed with Canada Revenue Agency ("CRA"). To be effective, all that is necessary is that the election be made in written prescribed form and maintained by the parties to the election – preferably somewhere it can be produced if requested by the CRA. 

The election is extremely useful to relieve the HST on most supplies of goods and services in many corporate groups. It is worth noting that the relief is only on cash flow (as input tax credits would be available if not for the election). However, cash flow impacts can be significant in certain circumstances. It is also worth noting that the election does not apply to taxable supplies by way of sale of real estate. However, HST generally needs to be collected in such circumstances where the sale of real estate used in a commercial activity is concerned. 

PROPOSED CHANGES

The most recent federal budget of February 11, 2014 proposes significant changes to this election. While some are welcome, there are some issues raised by other proposed changes. 

FILING REQUIREMENT

As noted, there is presently no requirement to file the election with the CRA. However, the proposed amendments will introduce a filing requirement for new elections effective January 1, 2015. The election will need to be filed by one of the parties to the election no later than the date of the first return to be filed by either party which includes the effective date of the election. 

The new filing requirement will also apply to existing elections. These must be filed before January 1, 2016 to maintain eligibility for HST relief. All existing elections are deemed never to have been filed regardless of whether it was ever filed with the CRA. Some may recall that a filing requirement for the election was in effect when the GST was first introduced. 

We understand that discussions with the federal Department of Finance ("Finance") suggest that the new filing may be made electronically but nothing definitive has been released. Also, note that the election is made between two members of a qualifying group. There is no provision in the legislation for an election covering multiple members of a qualifying corporate group. Where there are a number of members in a group, the multiple filing requirement may be cumbersome. We further understand that the discussions with Finance also include the possibility of having a group election filed by a single member of the group. 

NEW QUALIFYING MEMBERS

The election will now apply to members of a group who had not previously acquired any property at the time the election is made. There has always been some concern surrounding this since, arguably, a party without property might not be engaged in a commercial activity. The issue has largely been ignored by CRA for audit purposes but was always the subject of some debate. 

The issue often manifested itself in the context of a corporate reorganization where a new entity was formed to participate in the reorganization in some fashion. To address this concern, it was sometimes suggested that the new entity acquire property of nominal value (e.g., a pencil or some other form of office supplies or equipment) prior to the reorganization such that the new entity would become a qualifying member. This step served no purpose in the reorganization except to ensure that the new entity had property acquired for use in its commercial activities. 

Finance has proposed to amend the definition of "qualifying member" to make it clear that no intermediate (and perhaps artificial) steps are needed. A registrant that has no property and has not made any taxable supplies may qualify for the election where: 

  1. The registrant will be making supplies throughout the next twelve months.
  2. All or substantially all (which CRA normally considers to mean 90% or more in value) of these supplies will be taxable supplies.
  3. All or substantially all of the property (other than property having a nominal value) to be manufactured, produced, acquired or imported by the registrant within the next twelve months will be for consumption, use or supply exclusively in the course of the registrant's commercial activities.

The requirement that the registrant make supplies "throughout the next twelve months" may be problematic. The eligibility requirements for the new registrant are prospective which is helpful if the new entity is being formed for the purpose of continuous operation. However, it is not uncommon for new entities to be formed for temporary purposes. In other words, the reorganization may intend that the new entity acquire property and then transfer the property to another entity or that the entity be amalgamated with another entity. In either circumstance, it may be difficult to say that the new entity will make supplies "throughout the next twelve months". 

The requirement for a qualifying entity to have property valued in excess of a "nominal value" may also be problematic. To date, there is no guidance as to what will constitute more than a "nominal value". For example, will the expression be interpreted in absolute terms or in relative terms (i.e., a percentage of some value)? 

JOINT AND SEVERAL LIABILITY

There will also be new joint and several liability between group members for any HST liability which may arise on or after January 1, 2015 as a result of any issues with the election arising either because the parties are not eligible for the election or, for some reason, the parties are behaving in a manner consistent with an election but no election has actually been made.