Changes to the GST/HST election may impact real estate and construction

April 14, 2015

In the 2014 federal budget, the Canadian government introduced changes regarding the GST/HST “Closely related election”, which can have a significant impact on companies operating in the real estate and construction industry.

It is common practice for related corporations to transact with one another, and make GST/HST taxable supplies such as leases of real property, leases of equipment, leases of vehicles, or the provision of management and other services. The GST/HST rules provide for an election that allows certain transactions to take place between closely related entities without a requirement that GST/ HST be collected, provided certain conditions are met. The purpose of the election, which was kept on file by all electing entities, is to provide cash flow relief where one member of a qualifying group provides goods or services to another member of the group.

One major change to the election is the requirement to file the new election form with the Canada Revenue Agency (CRA), rather than the entities just keeping it on file. Parties to a new election executed on or after January 1, 2015, will be required to file the election with the CRA by the first day on or before the particular day in which any of the two specified members are required to file a GST/ HST return. For example, where two corporations enter into an election on January 1, 2015, and one of the qualifying members is a monthly filer, the election must be filed with the CRA by February 28, 2015. For existing elections (i.e., those that are in effect prior to January 1, 2015), the election must be filed before January 1, 2016. It is important to note that if an election is made prior to January 1, 2015, and filed with the CRA prior to this date, the election will be deemed by the CRA to never have been filed. The new election form RC4616 “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” can be found on the Canada Revenue Agency's website.

In addition to the requirement to file the election, parties to an existing or new election are now subject to joint and several (or solidary) liability provisions with respect to the GST/HST liability that may arise. This will apply in relation to supplies made between them on or after January 1, 2015, and where specific conditions are satisfied.

Another notable change includes the government's extension of what is considered a closely related group. This extension will allow the election to be made by new members that have not yet acquired property or made taxable supplies, as long as they will be making taxable supplies throughout the following 12 months and are engaged exclusively in commercial activities. For example, a corporation that does not have assets, and will receive a transfer of taxable assets through a rollover from a closely related corporation to be used exclusively in commercial activities throughout the next 12 months, will be able to make the election. The rules will also apply to registrants that are merged, amalgamated or wound up before 12 months, as long as the resulting registrant meets the same conditions. You should note that these changes came into force on January 1, 2015.

The Québec Minister of Finance announced in the 2014 Québec budget that any changes dealing with GST/HST and closely related persons would be harmonized for purposes of the QST with the same effective dates as those that apply for GST/HST purposes. The new election form for those Registrants that file their GST/HST and QST returns with Revenu Québec is FP-4616-V, and can be found on the Revenue Québec website.

If you are a party to an existing election for nil consideration or are considering a future election and have any questions about the changes, contact your BDO advisor.

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To learn more about how BDO can help your real estate and construction business company with these and other challenges, contact your local BDO office.

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