“Nil Consideration” Election For Members Of A Closely Related Group – New Filing Requirement And Other Changes
Group Relief Election: Canadian corporations and partnerships that are members of the same closely related group can, in certain circumstances, make an election under section 156 of the Excise Tax Act (Canada) (ETA) to treat certain taxable supplies made between the members as being made for nil consideration. As a result, transactions covered by the election are not subject to the goods and services tax/harmonized sales tax (GST/HST). In the past, the election form did not have to be filed with the Canada Revenue Agency (CRA), but had to be maintained in the parties’ records for audit purposes. As a result of recent amendments to the ETA, the election form for new elections that take effect on or after January 1, 2015, and for previously-made elections that remained in effect on that date, will have to be filed with the CRA (or with Revenu Québec (RQ), in the case of Québec-based registrants). If, prior to 2015, any election form for a continuing election had been filed with the CRA or RQ, the election will have to be re-filed using the new prescribed form. The filing deadlines and other changes relating to the election are discussed below.
Elections that become effective on or after January 1, 2015 – The specified filing deadline is the earliest date that any of the electing parties is required to file a GST/HST return for the reporting period in which the election becomes effective – i.e., February 28, 2015 should be the earliest possible filing deadline.
Elections that became effective before January 1, 2015 and remained in effect on that date – These elections will not be effective for supplies made after 2014 unless they are filed (or re-filed) in the new prescribed form after 2014. The specified filing deadline is December 31, 2015.
Under the amended election provision, the CRA (or RQ, where applicable) has discretion to accept late-filed elections.
New Prescribed Form: The election is now made using CRA Form RC4616 entitled, “Election or Revocation of an Election for Closely Related Corporations and/or Canadian Partnerships to Treat Certain Taxable Supplies as Having Been Made for Nil Consideration for GST/HST Purposes.” Form RC4616 replaces Form GST25.
Consolidated Election: New CRA Form RC4616 permits a group of closely related entities making the election to consolidate their election in a single form.
Joint and Several Liability: The amended election provisions provide that parties to this group relief election (or persons that conduct themselves as if such election were in effect) are subject to a joint and several (or solidary) liability provision with respect to the GST/HST liability that may arise in relation to supplies made between the parties on or after January 1, 2015.
Québec Sales Tax (QST) Election: A similar group relief election exists under the QST legislation. The February 20, 2014 Québec Budget announced that changes will be made to the QST election rules to parallel the ETA changes.
Changes Regarding Newly-Established Members: The recent amendments to the election provisions included changes (generally applicable to supplies made after 2014) affecting the eligibility of certain entities to make the election, particularly in the case of newly-established members of the closely related group. Relative to the pre-amended rules, the revised eligibility conditions could be more difficult to meet in some cases, and less restrictive in other cases.
Various Factors to Consider: In preparing new elections, and before choosing to file pre-2015 elections to maintain them in force, the following factors should be carefully examined:
whether the various conditions for the election are clearly met;
whether or not it remains beneficial to have the election in place for all electing members;
whether transactions that occurred after the chosen effective date of the election have been treated in accordance with the election;
whether any of the special rules for financial institutions apply; and
whether any changes to ownership structures and supplies made by members of the group may affect the group’s ability to use the election.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.