The section 156 election: nil consideration between related corporations

If you run two related companies — an opco and a company that owns the equipment, or a management company that charges the opco a fee — you are probably invoicing GST or HST back and forth every month. The tax nets out, but it still has to be funded, tracked and filed. Section 156 exists to stop that circulation.

What the election does

Subsection 156(2) of the Excise Tax Act provides a joint election that permits two specified members of a qualifying group to treat certain taxable supplies between them as having been made for nil consideration. The supplier then does not need to account for GST/HST on those supplies while the election is in effect.

This is not a loss of relief elsewhere. The CRA is explicit that the election has no effect on the members’ ability to claim input tax credits under the general rules: subsection 141.01(7) makes sure that deeming a supply to be made for no consideration does not shrink the extent to which the supplier’s inputs count as acquired for making taxable supplies. You stop charging tax to each other; you keep recovering tax paid to everyone else.

Who can elect

Three definitions stack on top of each other.

A qualifying group

Either a group of corporations, each member closely related within the meaning of section 128 to each other member; or a group of Canadian partnerships, or of partnerships and corporations, each closely related within the meaning of section 156.

Closely related

For corporations, paragraph 128(1)(a) requires that qualifying voting control in the other corporation is held by, and not less than 90 per cent of the value and number of the issued and outstanding shares having full voting rights under all circumstances are owned by, the particular corporation or a defined chain of qualifying subsidiaries. Common ownership by the same individual is not, on its own, enough — the test looks at ownership within the corporate chain.

A specified member

A specified member of a qualifying group is either a qualifying member or a temporary member. A qualifying member is a registrant that is a corporation resident in Canada or a Canadian partnership, is a member of the group, is not a party to an election under subsection 150(1), and meets one of three property-and-supply tests: it has property and last acquired all or substantially all — generally 90 per cent or more — of it for use exclusively in its commercial activities; it has no such property and all or substantially all of its supplies are taxable; or it is a new entity reasonably expected to meet those conditions over the next twelve months.

A temporary member is a narrow category tied to a butterfly reorganisation under subparagraph 55(3)(b)(i) of the Income Tax Act, and only a corporation can be one. A specified member must in every case be a corporation or a Canadian partnership — a trust or an individual cannot be one, which rules the election out for many family structures.

What the election does not cover

Even with a valid election in place, subsection 156(2.1) keeps three categories outside it:

• a supply by way of sale of real property;
• a supply of property or a service that is not acquired by the recipient for consumption, use or supply exclusively in the course of its commercial activities; and
• a supply made to a temporary member in the course of a butterfly reorganisation where the supply is not made in contemplation of the distribution.

The GST/HST treatment that would otherwise apply continues to apply to those supplies as if no election existed. The middle bullet is the practical trap: if the recipient uses the property or service partly for something other than commercial activity, that supply falls outside the election even though the election itself is valid.

Filing Form RC4616

The election is made jointly, in prescribed form, and must specify the day it becomes effective. The parties give notice by filing Form RC4616. The form permits multiple elections to be filed together by appending a list of specified members, and every combination of members named is then treated as having elected for supplies between them.

The deadline is precise. Form RC4616 must be received by the CRA on or before the earliest day on which an electing specified member is required to file a GST/HST return for the reporting period that includes the effective date. Where one party has an earlier return due date — a quarterly filer electing with an annual filer, say — that earlier date governs.

Late filing is not routine

Where the form is filed late, the CRA will not accept and process the election except in exceptional circumstances where it exercises the discretion in subparagraph 156(4)(b)(ii). Requests are considered case by case, on a written submission to the Assistant Director of Audit at the tax services office of the first specified member named on the form. It is not a process to rely on.

The liability that comes with it

Subsection 156(5) makes the two members jointly and severally liable for GST/HST obligations arising from a failure to account for or pay tax on a supply between them — including where the election has ceased to be in effect but the parties carried on as though it were. The election shares the benefit and the risk.

Is it worth doing?

For a two-company structure with regular intercompany charges, usually yes: it removes a cash-flow swing and eliminates a category of error. Where one company is not fully engaged in commercial activity, or a trust sits in the ownership chain, the answer may be no — and an invalid election is worse than none. Check ownership, then the exclusions, then the deadline. If you are still designing the structure, see when a holding company makes sense and the GST/HST registration guide.

This article is general information, not tax advice for your specific situation. Tax rules and CRA administrative positions change — confirm anything that affects a decision with the CRA or with us first.