One of the most commonly used (and misused) GST/HST elections is the election to have GST/HST apply to intercompany charges. This election is made using Form RC4616.
This election, under Section 156 of the Excise Tax Act, provides administrative and cash flow relief as it allows most supplies between members of a closely related group to be made without having to collect GST/HST.
As an example, a corporation renting real property to a wholly owned corporation would not collect GST/HST on the rent payments. GST/HST would also not apply to most other intercompany charges such as management fees.
Of course, there are requirements that must be satisfied for such an election to be valid. In addition, there are exceptions where the election does not apply. It is important to know the conditions that must be satisfied to put this election in place and to make sure it stays valid over time.
Requirements for election
Members of a closely related group
One of the requirements is that the election can only be made between members of a closely related group. For the purposes of the election, a "closely related group" is defined to mean:
- A corporation where at least 90% of all issued and outstanding shares, including voting rights are owned by another corporation. A corporation can also be closely related to a sister corporation if both companies are closely related through a parent corporation.
- A partnership that owns at least 90% interest in another partnership.
- A combination of corporations or partnerships that satisfy the above requirements, or is closely related to another corporation as discussed above.
Each member of the closely related group must be:
- A Canadian corporation or partnership. Note that while the members of the closely related group must be Canadian, it is acceptable that they are related through a non-resident corporation or partnership. An example of this is where a U.S. parent corporation wholly owns two Canadian corporations.
- Registered for GST/HST purposes.
- Making or intending to make all or substantially all (interpreted to mean at least 90%) commercial activities. "Commercial activities" means activities that are taxable for GST/HST purposes.
Effect of election
Generally, when the election is made all taxable supplies made between the members of the group are deemed to be made for nil consideration. This means that no tax will be collected on the intercompany charges.
It is important to note that the election applies to all supplies between the group, not just selected supplies. If a party to the election charges rent and management fees to another member, the election will apply to both charges, not just one of the charges.
As discussed above, the election generally applies to all intercompany charges. However, certain charges are excluded such as the sale of real property.
Filing of election forms
Prior to 2015, no form was required to make this election. It was simply kept on hand until it was required. However, as of January 1, 2015, the Election Form must be filed with CRA on or before the day that the GST/HST return is due for one of the members where the election is in effect.
Issues to watch
There are a number of potential issues to watch for regarding this election.
One such issue is whether the requirements of a closely related group are satisfied. Two corporations that are 100% commonly owned by another corporation satisfy the requirements of the ETA. However, two corporations that are 100% commonly owned by an individual do not.
Another common issue with this election is that the election remains in place until such time that it is revoked. An election may satisfy all of the requirements at the time it is filed. However, changes in an organization's corporate structure over time may result in the election no longer being valid.
Discovering that an election is not valid during a CRA audit may result in penalties and interest being assessed for failing to collect tax. Changes in the corporate structure should be reviewed to ensure that there is no unintended impact on an election.
Late filed elections
The CRA has indicated that it would consider a late-filed election on a case by case basis. In this situation, a written request must be submitted to the CRA. The written request must contain an explanation of the reason why the election Form was not filed on a timely basis and must also demonstrate that the requirements of the election are all satisfied.
It is recommended that all elections be reviewed to ensure that they are valid. Contact us to discuss:
- Filing an election;
- Reviewing whether an existing election is still valid; and
- Requesting that the CRA consider accepting a late-filed election.