GST/HST Elections: Why Being Late Is Not Always Fashionable

• Published date: 06 July 2020
• Subject Matter: Tax, Compliance, Sales Taxes: VAT, GST
• Law Firm: Stikeman Elliott LLP
• Author: Mr Jean-Guillaume Shooner and Vanessa Clusiau

In the recent decision Denso Manufacturing Canada Inc. v. Canada (National Revenue), 2020 FC 360, the Federal Court ruled that the Minister of National Revenue ('Minister') had acted reasonably in exercising its discretionary right to deny a late-filed GST/HST election between two closely related Canadian corporations, Denso Manufacturing Canada, Inc. ('Denso Manufacturing') and Denso Sales Canada, Inc. ('Denso Sales', and collectively with Denso Manufacturing, 'Denso Corporations').

• A joint election under section 156 of the Excise Tax Act (Canada) ('ETA') deems all taxable supplies made between closely related corporations to have been made for nil consideration so that no GST/HST is collectible on such supplies ('156 Election').
• Ignorance of the law is not a valid excuse for the late filing of a 156 Election and, in the absence of an explanation that does not amount to negligence or carelessness the Minister may exercise its discretion to deny such late filings.

Background

Denso Manufacturing and Denso Sales are closely related corporations for purposes of the 156 Election. Prior to the amendments to section 156 effective January 1, 2015 ('Amendment')¹, the Denso Corporations made the election by completing Form GST25 and keeping it with their records. However, as a result of the Amendment, parties to an existing 156 Election were required to file the new prescribed Form RC4616 before January 1, 2016 for the election to continue to be in effect in 2015. The Denso Corporations failed to file Form RC4616 on time.

In January 2016, the Canada Revenue Agency ('CRA') reviewed the Denso Corporations' GST/HST returns for the November and December 2015 periods and later informed them of their non-compliance with the new filing requirements of section 156 of the ETA.

Discussions with their tax advisors led the Denso Corporations to believe that their existing 'unfiled' 156 Election already covered the 2015 period and so, on February 22, 2016, they filed a new 156 Election, using Form RC4616, with January 1, 2016 as the effective date ('New 156 Election'). As of that date, the CRA had not yet published its Policy Statement P-255 (dated July 22, 2016 and effective January 1, 2015) ('Policy') which states that a request to late-file a 156 Election is subject to the CRA's discretion and must include a clear explanation (that does not show negligence or carelessness on the taxpayer's part) for not filing the election in a timely manner.

When the CRA later audited...