As mentioned in a previous Tax Law Update, the GST/HST joint election available to closely related persons (the "156 Election") under section 156 of the federal Excise Tax Act (the "ETA") saw significant amendments after the last federal budget was tabled last February. Quebec followed suit in its 2014-2015 budget, announcing similar amendments in respect of the QST election for closely related persons provided for in the Act respecting the Québec sales tax (the "AQST") (collectively with the 156 Election, a "Related Party Election").
Generally speaking, a Related Party Election may be made by qualifying members of a qualifying group (i.e., certain closely related corporations and partnerships). It allows corporations resident in Canada (or, for the purposes of the AQST, resident in Quebec), as well as partnerships each member of which is: (a) a corporation or partnership and is resident in Canada (or Quebec); (b) a GST/HST (or QST) registrant; and (c) engaged exclusively in commercial activities, to make supplies to other similar corporations or partnerships in the same closely related group without being required to collect or remit any GST/HST (or QST). Under a Related Party Election, supplies between related persons are deemed to be made for nil consideration.
Mandatory filing in 2015
The first major change related to Related Party Elections is that as of January 2015, to be effective, these elections must be filed with the tax authorities (the Canada Revenue Agency or the Québec Revenue Agency, as the case may be). In practice, this means that "retroactive" elections (where the parties acted as if an election had been made, but did not sign the required form) will likely no longer be valid without the approval of the relevant tax authority. Historically, these forms did not have to be filed, and could often be completed retroactively so long as the parties acted as if the election had been made.
A Related Party Election will have to be filed on or before the first day on which the particular specified member, or the other specified members, must file a GST/HST or QST return, as the case may be, for the period that includes the effective date of the election.
For related parties that currently have a Related Party Election in effect, the election will have to be filed by 2016. However, the parties are not allowed to file the election prior to January 1, 2015 (otherwise it is deemed not to have been filed). Taxpayers who have a Related Party Election in effect should ensure that they file their elections in 2015 (preferably in January, 2015); otherwise, they will no longer be valid.
Changes to the definition of "Qualifying Member"
Under the current legislation, a "qualifying member" of a "qualifying group" must be a GST/HST (or QST) registrant that is a corporation resident in Canada (or Quebec) or a partnership each member of which is a corporation or partnership resident in Canada (or Quebec), as the case may be, that "last manufactured, produced, acquired or imported all or substantially all of its property (other than financial instruments) for consumption, use or supply exclusively in the course of commercial activities of the registrant or, if the registrant has no property (other than financial instruments), [if] all or substantially all of the supplies made by the registrant are "taxable supplies"."
Prior to the budget amendments, the wording of the ETA and the AQST was problematic when attempting to make a Related Party Election with a newly established corporation (or a newly formed partnership) that had not yet acquired any assets and had not yet made any taxable supplies. In fact, such a corporation or partnership would not, strictly speaking, be considered a "qualifying member."
In order to deal with the issue, the definition of "qualifying member" in the ETA and the AQST has been amended for periods commencing on or after January 1, 2015 to allow the Related Party Election to be made even if the registrant has no property (other than financial instruments or "property of nominal value") and has not made taxable supplies, if it is reasonable to expect that:
- the registrant will be making supplies throughout the next twelve months;
- all or substantially all of these supplies will be taxable supplies; and
- all or substantially all of the property (other than financial instruments and property of 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 its commercial activities.
It is important to note that, according to the Explanatory Notes Relating to the Income Tax Act, Excise Tax Act, Excise Act, 2001 and Related Legislation, where it is anticipated that a registrant who is a party to a Related Party Election "will be merged, amalgamated or wound up within the next twelve months and section 271 or 272 of the [ETA] applies to the merger, amalgamation or wind-up and where it is reasonable to expect that the corporation resulting from the merger or amalgamation - or the parent in the case of a wind-up - will meet the three above conditions throughout the remainder of the twelve months, the registrant would still be regarded as having met those three conditions for the purposes of this definition." Even though the explanatory notes are intended for information purposes only and have no official value, the Amalgamations and Windings-Up Continuation (GST/HST) Regulations (SOR/91-33) lend legislative support to this interpretation. However, where a corporation will cease to operate, or will not be making any taxable supplies for the next twelve months, technical issues could arise as a consequence of which the Related Party Election might not apply.