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Associated persons is mostly closely connected to the registration process and the small supplier threshold determination. It may be safe to say this is not well understood as to when it applies. This has an impact throughout the registrant's lifecycle. It can bring unwelcome surprises to businesses thinking they are outside the registration system or following annual filing, when they are in fact monthly filers.
When there is substantial common ownership between two or more persons, there will be association. For purposes of the small supplier threshold, the intent is to prevent a number of associated persons from being able to remain a small supplier or utilize a less frequent filing frequency.
Associated persons must be considered when looking at the small supplier threshold and registration requirements for each person. This impacts whether the person is required to be registered, their filing frequency and reporting period. However, this can also bring about an impact to all associated persons and end up changing their filing frequencies.
The small supplier threshold of $30,000 ($50,000 for public sector bodies) includes the worldwide taxable income of the person. However, it also includes the worldwide taxable income of all associated persons. This is the part most often overlooked.
While GST / HST might not be collectible on the taxable income generated outside of Canada, this income is still included in determining this threshold. While the taxable income generated by associated persons is taxed in the hands of those persons, it must be considered for the same purpose.
For example, Parent Co is a corporation resident inside or outside of Canada earning in excess of $30,000 in taxable income. If Parent Co incorporates a subsidiary in Canada or has sufficient common ownership of a corporation in Canada, the worldwide taxable income of Parent Co because they are associated. Any taxable income now earned by the subsidiary has triggered GST / HST registration if that entity is not already registered. The impact can be immediate and trigger registration and filing obligations on the very first transaction.
In practice, we find a person tries to look at the threshold in a silo and not factor in who they are associated with. This can result in unfiled returns and understated net tax, along with additional interest costs.
Reporting periods affected
The filing frequency is affected for the same reason. All associated persons that are registered must have the same minimum filing frequency. This is based on the taxable sales of the associated group. If the cumulative taxable revenues is $6 million or more, no person who is registered and part of the same associated group can have a filing frequency of less than monthly filing. It does happen and comes as a surprise when a GST / HST auditor identifies the filing issue and the penalty and interest impact that follows. It is not offside for a person(s) in the group to have more frequent filing obligations. For example, all associated persons must have as a minimum a quarterly filing obligation, but one or more of the persons elect for a monthly filing obligation. They may be maximizing the recovery of the input tax credits. This is totally fine.
Business ownership changes
When a business restructures itself through changes in shareholders or in its shareholdings, how often is the associated person concept reviewed? I would suggest it's not given a close look in many cases. It becomes a non-factor if all the entities are already on the same minimum filing frequency.
While the transfer of the shares is GST-exempt, did the new shareholder impact the filing frequency as soon as they came on board? The same can be asked if the entity acquires shares of another entity. Did it become associated to that entity by acquiring those shares and impact the filing obligations of the other person(s)?
Associated persons follows the Income Tax definition, but goes further to include persons other than corporations. The GST / HST definition is narrower in scope so that if persons are related for Income Tax purposes, they are not associated for GST / HST purposes. Do not confuse this with the GST / HST application of closely-related. Corporations are associated if they are associated for Income Tax purposes. Corporations that are related are not associated for GST/ HST purposes. Not being associated can be an advantage to plan the GST / HST cash flow impact that may result.
To put this in perspective, a husband and wife who both carry on a business of their own would be considered related for income tax purposes. If each of the husband and wife also own their own corporation that carries on a business, the two corporations would also be related for income tax purposes to the owners respectively. In this example, the husband and wife are each associated to their respective corporations but not the husband and his corporation to his wife and the wife's corporation.
Groups of entities must be careful to consider their entire ownership structure to know and understand what entities are associated and not associated. If A and B are associated and A and C are associated, B and C would be associated unless A elects not to be associated with either for income tax purposes. The GST / HST definition follows the income tax application. This is a crossover effect between the two legislation and must be considered.
What you soon realize is a picture of complexity of both income tax and GST / HST intersecting, as well as having to understand the layers and layers of ownership structures that can present themselves when getting asked the off-the-cuff question of should a person be registered or is there any impact when we sold or bought this new entity. It is not always clear what the answer is. The facts lead us to the solution and more food for thought as a result.
Related Topics:Business Structures; Corporate Tax; GST; HST
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