Tax & Trade Blog
The Buzz around the Section 156 GST Election
Section 156 of the Excise Tax Act (the "ETA") provides GST/HST relief in the context of certain supplies between closely related corporations and partnerships, and is amongst the most important provisions in the GST/HST legislation. Recently enacted changes have created quite the buzz around this election, as among other things, it now needs to be filed with the CRA, and that filing needs to be done in early 2015 for it to be effective for 2015 supplies. Here are some helpful details.
What Does the Election Do? - Section 156 allows for an election between certain closely held corporations and closely held partnerships (effectively, closely related parties), and when in place, excuses the related parties from having to charge and collect the GST/HST in respect of intra-group supplies.
The election operates to deem these supplies, when taxable, to have been supplied for consideration equal to "zero", which leaves nothing on which to charge and collect GST/HST. There are a number of limitations to this relief, however, and taxpayers wishing to take advantage of section 156 should do so only with proper legal advice. For example, the election does not apply to any supplies of real property, and will also not apply to supplies of property or services acquired by the recipient for other than exclusive consumption, use or supply in the course of commercial activities: see subsection 156(2.1) of the ETA.
What are the Election's Requirements? - The main requirement for the section 156 election is that the parties to the election be "qualifying members" of a "closely related" group.
Qualifying members are corporations resident in Canada or partnerships comprised of other partnerships or corporations resident in Canada. Qualifying members would not include individuals. Furthermore, "qualifying members" must all be HST registrants (and not party to a section 150 election - which relates to a similar election for financial institutions). Finally, a "qualifying member" is subject to an "all or substantially all" test which requires that 90% of its property have been last manufactured, produced, acquired or imported for consumption, use or supply exclusively in the course of commercial activities. If the "qualifying member" has no property, the test is whether 90% of its supplies are taxable supplies.
Corporations are closely related if owning 90% or more of the voting shares of any other corporation in the group, or it owned 90% by a third corporation. Other tests also apply, and special rules exist for Partnerships.
Why does the Election Now have to be Filed? When recent changes were made to the requirements for the section 156 Election, the Department of Finance also saw fit to implement a "filing" requirement for all elections. For a number of prior years, the elections did not have to be filed, although when the GST was first implemented in 1991, there was a filing requirement at that time.
Why do ALL Elections have to be filed again in 2015? One suspects that CRA may have lost track of the section 156 elections that were filed in the short window of time in 1991-1992 when section 156 elections were intially required to be filed, and that in order to require filing in 2015, a "system reboot" was required - thus forcing all parties wishing to take advantage of the section 156 election to ensure that their particular elections were filed.
When is the Election required to be filed in 2015? The section 156 election is required to be filed no later than the date of the first return required to be filed by any party to the election, which includes the effective date of the election. So for an election with monthly filers, wishing to have a January 1, 2015 effective date: the election needs to be filed by February 28, 2015. Elections between all quarterly or all annual filers may have later filing deadlines.
What needs to be done to file the Election? The section 156 election needs to be made and filed in a prescribed form (which the CRA is still apparently working on), and also needs to be maintained by the parties to the election. There also remains the possibility of electronic filing. It is also expected that multiple filings may be required (i.e., by each member of each related group). Stay tuned on these logistics, which are within the domain of the CRA!
Should I get legal advice about this? Since all section 156 elections will now be required to be filed with the CRA, is it expected that CRA will have easy access to same for purposes of assessing audit risk requirements, and for desk review purposes. There also remain a number of technical issues with the election, including the treatment of “new members”, and how some of the other requirements are to be properly interpreted. Accordingly, now may be the time to obtain legal advice on one’s GST/HST situation, particular before the election is actually filed with the CRA.