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 arrangements might be set up for tax purposes, or for creditor proofing, to ensure that an operating company does not have too many assets in case of an unexpected lawsuit.
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 in addition to the cash flow.
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 own all the shares of both Xco and Yco, they are not “closely related” (as this term is defined in the GST legislation).
From 1991 when the GST was first introduced, this “closely related corporations election” did not require 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 to complete Form GST25 and keep it in their records in case of audit.
Since 2015, however, the election must be completed on Form RC4616 (available from canada.ca), and filed with the CRA. Any old elections on Form GST25 are no longer valid.
If you have corporations that charge fees or rent to each other without GST applying, make sure to have them complete a Form RC4616 and file it with the CRA. 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.
If you have an existing arrangement with corporations that are not charging GST or HST and have not filed the election, but the CRA has not yet found the problem, it may be possible to avoid all interest and penalties with a Voluntary Disclosure, combined with the CRA’s policy on “wash transactions”. You will need professional advice on this.