September 2015 Newsletter

If you have more than one corporation under your control, what happens for purposes of the Goods and Services Tax (GST), Harmonized Sales Tax (HST) or Quebec Sales Tax (QST), if they charge amounts to each other?

(GST, HST and QST all follow the same rules. This discussion does not apply to the provincial retail sales taxes in B.C., Saskatchewan and Manitoba. For simplicity, we will refer simply to “GST” below.)

For example, Xco might charge Yco management fees, or Xco might charge Yco rent for use of Xco’s office building. These charges might be done for tax purposes, or for creditor proofing, to ensure that an operating company does not have too many assets in case of unexpected liabilities.


In most cases, except for interest paid on a loan, such fees are subject to GST.

Provided Yco is carrying on a business of making supplies that are taxable (or “zero-rated”) under the GST, and is GST-registered, Yco can claim input tax credits to recover all GST it pays to Xco, so the GST cost is really just a temporary cash-flow cost. Nevertheless, there is still a cost, and the GST requires extra paperwork and accounting.

However, for “closely related” corporations, an election is available to not have to charge this GST. “Closely related” basically means under common corporate control. For example, if Xco owns all the shares of Yco, or Zco owns both of them, then they are closely related. However, if you personally owns all the shares of both Xco and Yco, they are not “closely related” as the term is defined in the GST legislation.

Since 1991 when the GST was first introduced, this “closely related corporations election” has not required the corporations to file anything with the CRA. It was enough for them to simply agree between them that no GST would apply to the intercorporate charges, and complete Form GST25 and keep it in their records in case of audit.

Since January 1, 2015, however, the election must be completed on new form RC4616 (available from the CRA web site), and filed with the CRA. Any pre-2015 elections on Form GST25 are valid only until the end of 2015.

If you have corporations that charge any fees or rent to each other without GST applying, make sure to have them complete a Form RC4616 and file it with the CRA no later than December 31, 2015. Otherwise, if it is ever audited, the corporation charging the fees or rent will be assessed by the CRA for the unremitted GST plus interest and possibly penalties.

Also, make sure that you are not using the election for corporations that are not “closely related” as defined in the legislation.

Last modified on September 15, 2015 12:00 am
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