GST-QST: Election between closely related parties – Mark January 1, 2015 in your calendar
Recap of rules
Under subsection 156(2) of the Excise Tax Act (ETA), closely related entities are permitted to make a joint election (Form FP-2025) to eliminate the obligation to collect and remit GST/HSTon certain taxable supplies made between them. Under the terms of this election, the supplies are deemed to be made for nil consideration and, accordingly, there are no taxes to remit. A similar provision exists for the QST.
To be eligible for this joint election, both GST registrants must be specified members of a qualifying group.
The entities must satisfy the following 3 conditions:
- Be resident in Canada;
- Be engaged exclusively in commercial activities;
- Be members of a qualifying group.
Generally, a qualifying group is a group of closely related members consisting solely of corporations or partnerships with a degree of common ownership of at least 90%.
2015: Upcoming changes
In its February 11, 2014 budget, the federal government announced amendments to the application rules for elections provided for under section 156 of the ETA.
New filing requirement
For many years, entities making this election were not required to file a completed form to this effect. They were simply required to keep a record of the election.
Elections after December 31, 2014
For new elections made as of January 1, 2015, the form will have to be filed with Revenu Québec by the first date on which one of the entities is required to file a GST/QST return for which the election becomes effective.
Elections prior to January 1, 2015
Parties to an election made before January 1, 2015 that is in effect on that date will be required to comply with the filing requirement before 2016. In the event of non-compliance, these elections will be deemed not to have been made.
Prior ownership of assets
In order to make the closely related parties election, an entity must have previously owned assets. This criterion ensures that, for example, the election cannot be made in the case of a reorganization involving a new entity. As of January 1, 2015, this entity can make an election jointly with another closely related person if it is reasonable to expect that the assets acquired by this new member in the next 12 months will all or substantially all be used in the member’s commercial activities.
Joint and several liability
As of January 1, 2015, entities that made a joint election will be subject to joint and several liability for the tax that may arise from supplies made between them.
Quebec sales tax
In its February 20, 2014 budget, the Quebec government announced its intention to amend the QST system to include the federal measures regarding elections between closely related persons. These measures will therefore be applied under the Act respecting the Québec sales tax.
Note that currently, we do not know whether the existing form, i.e. FP-2025, will be the one to use in 2015.
Gérard Durocher, CPA, CA
Senior Manager - Taxation and Commodity Taxes
Raymond Chabot Grant Thornton
Member of the Technical working group on taxation and commodity taxes of the Quebec CPA Order