GST/HST is generally applicable when property and/or services destined exclusively for commercial purposes are supplied by a closely related party who is registered for that tax. To simplify tax accounting and improve cashflow, certain closely related Canadian corporations and partnerships can elect under subsection 156(2) of the Excise Tax Act, via Form RC4616, to treat certain supplies by a closely related person as if they were made without consideration.

Closely related corporations

In making a section 156 election, the term “closely related” differs from the definition of “related” for Canadian income tax purposes. Generally, one corporation is closely related to another corporation at a particular time when one corporation owns shares of the other corporation, representing 90 per cent or more of the votes and value of the issued and outstanding shares. Sister corporations can also be closely related when both companies are closely related to a common parent company.

Changes to making section 156 elections

How the election is made has changed over time. Prior to Jan. 1, 2015, the election was made using Form GST25, which did not need to be filed with the Canada Revenue Agency (CRA). After the 2015 implementation date, Form RC4616 had to be filed with the CRA within one year and the old Form GST25 was no longer valid. Some companies did not ⁠–⁠ and may still not ⁠–⁠ know the rules have changed, and the new Form RC 4616 is actually required.

Completing Form RC 4616

Filing the election may be done through the online CRA “My Business Account” or “Represent a Client” portal and involves completion of two parts.

Part A ⁠–⁠ Identification

This requires the Business Number of each party making the election and self‑identification as a qualifying member or a temporary member of the group making the election. Each must also indicate the reporting period linked to the effective date of the election. For example, if the effective date of an election is Jan. 15, 2023, and the member is a monthly filer with a calendar year‑end, the reporting period would be Jan. 1 ⁠–⁠ 31, 2023.

Part B ⁠–⁠ Election

This requires the effective date of the election. The election must be filed by the earliest date a GST/HST return is due from a member who intends to make the election. The online portal only accepts elections filed on time.

Relief for late‑filed elections

Subparagraph 156(4)(b)(ii) of the Excise Tax Act (ETA) allows the Minister of National Revenue discretion to accept late‑filed section 156 elections. This discretion is administered by the CRA on a case‑by‑case basis within the context of the following guidelines from the GST/HST Policy Statement P-255.

1. There must be a written request to the Assistant Director of Audit of the CRA tax services office by the first party making the election. This request must be paper filed and cannot be electronically filed.
2. The written request must clearly explain why the group members have filed the election late and must include a completed and signed paper copy of Form RC4616. The first member must sign the form and include an undertaking whereby the first member will notify the other members whether or not the CRA has accepted the late‑filed election.
3. The written request must indicate all group members meet all conditions for making the election, as of the requested effective date. 
4. The written request must include a statement that, as of the requested effective date of the election, all parties to the election must have consistently treated the applicable supplies made between them as having been made for no consideration (i.e., no GST/HST was charged and no input tax credit was claimed). GST/HST returns for both the supplier and recipient must have been completed accordingly, with no GST/HST rebates claimed. All parties to the late‑filed election must have no outstanding GST/HST returns, all amounts owing must have been remitted and all parties must be fully compliant with the Excise Tax Act. Records must also exist for the CRA to verify parties acted as if the election was in effect.

CRA audit activities

CRA acceptance of a late‑filed section 156 election does not verify compliance with legislative requirements under the ETA. Prior to the pandemic, CRA auditors sometimes audited parties to a late‑filed election to ensure they were closely related, resulting in a valid election. Even with an accepted late‑filed election, the CRA can assess the parties for any GST/HST (including interest and penalties) that should have been collected if the parties are in fact not closely related.

Recently, we have seen the CRA take a more proactive approach, whereby late‑filed elections are reviewed by the GST/HST Refund Integrity Program of the Audit Division prior to approval. The CRA appears to be examining its own corporate ownership records to determine if parties to a late‑filed election are indeed closely related.

Judicial review is not always friendly

The Minister’s administrative allowance for late‑filed section 156 elections is discretionary and decided by CRA officials at the local level. As adverse decisions can and do occur, how does one appeal an unfavourable outcome? The Tax Court of Canada can hear appeals over tax assessments but cannot hear taxpayer appeals on administrative matters. Challenges to CRA administrative decisions can be made by judicial review at the Federal Court, with further appeal available at the Federal Court of Appeal.

The courts have been less than sympathetic with late‑filed section 156 elections. In the Denso Manufacturing Canada, Inc. case (FCA 2021 236), the appeals court held that Form RC4616 is a simple form and not difficult or time consuming to complete, and in the absence of extenuating circumstances, the late‑filed election was denied. In the Castle Building Group Ltd. case (FC 2021 947), the court held that oversight and lack of awareness of legislative amendments is not a valid excuse for late filing, again denying a late‑filed section 156 election.

Filing late is possible

It is always advisable to file a GST/HST section 156 election on time. However, when that is not possible, administrative relief may still be available. Extenuating circumstances preventing timely filing may need to be shown before the CRA or courts will accept a late‑filed election.

Before applying to the CRA for approval of a late‑filed election, contact your local Baker Tilly firm for assistance.