Section 156 Intercompany HST Election Calculator
Management fees between your own companies cycle HST out and back for no net tax. The election stops it, but only if it was actually filed. Test the closely related conditions, price the working capital tied up, and see the exposure if it was assumed rather than filed.
HST cycled each year
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Conditions for the Election
| Condition | What Section 156 Requires | Your Group |
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What the Election Is Worth
| Item | Basis | Amount |
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Exposure Where the Election Was Assumed
| Item | Basis | Amount |
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Points That Decide This
What to Do Next
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Disclaimer: Section 156 of the Excise Tax Act allows specified members of a qualifying group to jointly elect to treat certain taxable supplies made between them as having been made for no consideration. Each party must be a registrant, must be resident in Canada, and must be a specified member of the qualifying group, which broadly requires that all or substantially all of its property be for use exclusively in commercial activities. A corporation is closely related to another where not less than 90% of the value and number of the issued and outstanding shares having full voting rights under all circumstances are held by that other corporation or by members of the qualifying group. Since 1 January 2015 the election must be filed with the Minister on Form RC4616, and the deadline is the earliest day on which any of the electing parties is required to file a return for the reporting period that includes the day the election becomes effective. Members that make the election are jointly and severally liable for GST/HST payable in respect of supplies between them. The election does not apply to every supply: supplies of property by way of lease, licence or similar arrangement, sales of real property and supplies not made in the course of commercial activities are among the exceptions, so the wording of each intercompany arrangement has to be reviewed rather than assumed. HST is applied at the Ontario rate of 13%. Interest is modelled at the prescribed arrears rate of 8% compounded daily. This page is general information, not tax advice.
The Money Goes Out and Comes Back
A holding company charges its operating company a management fee. The holding company adds HST, collects it and remits it. The operating company pays the HST and claims it straight back as an input tax credit. Across the group the net tax is nil, and always was.
What the cycle does cost is cash and administration. The supplier remits in one period, the recipient recovers in another, and the gap is funded by the group in the meantime. On a $180,000 management fee that is $23,400 moving out and back every year for no purpose.
Section 156 exists to stop exactly this. Where the conditions are met and the election is filed, taxable supplies between the electing members are deemed to be made for no consideration. No tax is charged, none is remitted, none is recovered, and the invoices simply carry no HST.
The Conditions Are Strict and All of Them Apply
- Each party must be a registrant. A holding company that never registered because it only earns dividends cannot be a party to the election.
- Each party must be resident in Canada.
- The parties must be closely related, which for corporations means at least ninety per cent of the value and number of the issued shares having full voting rights under all circumstances.
- Each party must be a specified member, which broadly requires all or substantially all of its property to be for use exclusively in commercial activities.
- The election must be filed with the CRA on Form RC4616.
The fourth condition is where holding companies most often fail. A holdco whose only assets are shares in subsidiaries and an investment portfolio is not using its property in commercial activities, and cannot be a specified member. There are rules that assist a holding corporation holding shares or indebtedness of a closely related operating company, but they have their own conditions and have to be applied rather than assumed.
Ninety per cent of value and number of voting shares is the test, not control and not ninety per cent of anything else. Two companies owned by the same individual in equal shares are not closely related to each other under this definition, because neither holds shares in the other. Sibling companies under common personal ownership frequently fail this test while their owner assumes they pass it.
Filing Became Mandatory in 2015
This is the single most common problem on these files. Before 2015 the election was made on a form that the parties kept in their own records and produced only if asked. From 1 January 2015 it must be filed with the CRA on Form RC4616.
A great many groups made the election properly under the old rules, carried on invoicing without HST, and never filed anything. The commercial arrangement did not change, the invoices did not change, and nothing appeared to go wrong. The election, however, is not in effect.
| What Groups Believe | The Position |
|---|---|
| The election is in the minute book, so it is made | Filing with the CRA has been required since 2015 |
| Our accountant set it up years ago | Worth confirming a form was actually filed |
| Both companies are owned by the same person, so we qualify | Common personal ownership is not the test |
| The holdco can be a party because it owns the opco | Only if it meets the specified member conditions |
| There is no tax at stake because it nets to nil | The supplier is assessed for tax it never collected |
The Deadline Is Earlier Than People Expect
The election must be filed by the earliest day on which any of the electing parties is required to file a return for the reporting period that includes the effective date. Where one company files monthly and another quarterly, the monthly filer’s deadline governs the whole election.
| Earliest Filing Frequency in the Group | Period Containing the Effective Date | RC4616 Deadline |
|---|---|---|
| Monthly | The month of the effective date | One month after that month end |
| Quarterly | The quarter of the effective date | One month after that quarter end |
| Annual | The fiscal year of the effective date | Three months after that year end |
What Happens When It Was Assumed but Never Filed
The supplies between the companies were taxable supplies all along. The supplier was required to collect and remit HST on them and did not. On assessment the CRA looks to the supplier for the tax, with interest from each period.
The recipient’s position is the part that turns a wash into a real cost. The input tax credit is generally available only within four years, and it depends on holding an invoice carrying the tax. Where the invoices never showed HST and the periods are old, the credit on the earliest years may be gone while the supplier’s liability for those same years is not.
The mismatch is the exposure. If the supplier is assessed for four years of uncollected tax and the recipient can only recover credits for the most recent periods, the group pays real money on a transaction that should always have netted to nil. Interest accrues on the supplier’s liability from each original due date.
Joint and Several Liability Comes With It
Members who make the election become jointly and severally liable for GST/HST payable in respect of supplies between them. In a group under common control that is usually acceptable, since the same people stand behind every entity. It is worth knowing about before signing, particularly where one company in the group carries more risk than the others or where outside shareholders are involved.
What the Election Does Not Cover
- Sales of real property between the members, which remain outside the election
- Property supplied by way of lease, licence or similar arrangement in the circumstances the provision excludes
- Supplies not made in the course of commercial activities
- Supplies to or from a party that is not a specified member, including a non-registered holding company
- Transactions with parties outside the qualifying group, which are taxable in the ordinary way
- Income tax consequences of the charges, including whether the amounts are reasonable and deductible
An election in place does not make every intercompany invoice tax-free. Each arrangement needs checking against the exclusions, and a group that treats the election as a blanket exemption creates a different problem from the one it solved.
What This Calculator Does Not Cover
- Whether each entity is genuinely a specified member, which is the condition that most often fails
- The closely related rules for partnerships and for corporations held through chains of subsidiaries
- Revocation of the election and the conditions attaching to it
- Whether the management fee itself is reasonable for income tax purposes
- Voluntary disclosure, which may be available where periods are outstanding but only before the CRA makes contact
- Provincial variations outside the Ontario HST rate used here
If you believe an election is in place, the first step is confirming a form was actually filed rather than drafted. Our GST/HST return filing service covers the closely related testing, the RC4616 filing, and the correction of periods where the election was assumed.
Frequently Asked Questions
Common questions on HST between related companies.
Related Calculators and Guides
More tools for owner-managers running several corporations.
Confirm the Election Was Filed, Not Just Drafted
Send us the share registers for each company, a sample intercompany invoice and your GST/HST filing frequency. We will test the closely related and specified member conditions for each pair, file the RC4616, and quantify any periods where the election was assumed but never made.