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Indirect Tax: Using the Section 156 Election to Save on GST

19/05/2020


As your business navigates COVID-19, maintaining and improving cashflow is critical to sustaining operations. In a three-part video series, our Indirect Tax team outlines cashflow strategies you can use to support your business.

  1. GST / HST Filing Frequency
  2. Intercompany Transactions (RC4616)
  3. Bad Debt Recovery

If you have intercompany transactions, such as management or rent, with closely-related Canadian corporations (or partnerships) that are GST-registered, you may be able to take advantage of the Section 156 election. This election allows you to treat certain transactions with your closely-related entity as being made for nil consideration.

By utilizing this election, you would not need to charge GST on an otherwise taxable supply.

Here’s an example. ABC Ltd. and XYZ Inc. are in a parent-subsidiary relationship. ABC Ltd. leases its commercial building to XYZ for $50,000/month plus $2,500 of GST. When the election is in effect, ABC Ltd. would only charge $50,000 instead of $52,500 to XYZ Inc. for the monthly rent.

By reducing the payment amount by $2,500, XYZ Inc. can allocate the amount towards necessary expenditures. Although XYZ Inc. may have received the amount as an input tax credit, XYZ Inc. no longer needs to wait for the refund from the Canada Revenue Agency.

Please note that the election must be filed to the Canada Revenue Agency.

If you have any questions about the topics discussed, or any sales tax questions, contact:

Angela Chang, CPA, CGA
Partner, Indirect Tax 
[email protected]
778.374.2121

Norma Orellana
Senior Manager, Indirect Tax
[email protected]
604.949.2116

Eddy Burello, FCPA, FCA
Partner
[email protected]
647.943.4081

Learn more at MNP's COVID-19 Business Advice Centre

Strategies and tools to help your company navigate the coronavirus crisis, stay resilient and take the next steps towards recovery.