Inter-corporate charges between companies engaged in commercial activities can cause cash flow and bookkeeping problems, but there is a way to avoid these difficulties.

Generally, when one company buys commercial supplies from another, the buyer pays GST. The seller then remits the tax to the Canada Revenue Agency (CRA) and the buyer claims an Input Tax Credit to get a refund. But it can take as long as a year for the refund to come through and that delay can create a cash-flow crunch.

But closely related, GST registered Canadian corporations or partnerships may be able to avoid the delay by taking a special election under Section 156 of the Excise Tax Act. The election exempts qualifying companies from having to account for otherwise fully recoverable tax.

The determining factor for eligibility is the closeness of the businesses involved.

In general, Canadian corporations are closely related under the Excise Tax Act if both are GST registered, resident in Canada, and

  • Vertical Ownership: One company owns at least 90 per cent of the value and number of issued and outstanding shares of the capital stock having full voting rights of the other company.
  • Triangular Ownership: One corporation owns not less than 90 per cent of the voting stock outstanding of both corporations.

The definitions become slightly more complicated when non-resident corporations are involved. Two Canadian resident corporations are closely related to each other if they are closely related to the foreign company or would be if all of the corporations were resident in this country.

For example, assume U.S. Corporation 1 owns 90 per cent of Canadian Corporation A., and U.S. Corporation 2 owns 90 per cent of Canadian Corporation C, which in turn owns 90 per cent of Canadian Corporation B.

Both A and B are closely related because they would be closely related to C if all the corporations were resident in Canada.

B is closely related to C because C owns not less than 90 per cent of B's voting stock outstanding.

And A would be closely related to C because C is a qualifying subsidiary of U.S. Corporation 1, which owns not less than 90 per cent of A's voting shares. A subsidiary qualifies when it meets the residency and 90 per cent ownership guidelines but it does not have to be GST registered.


Canadian partnerships, on the other hand, must meet the following requirements to be eligible for the exemption:

  • The person, or every member of the group, is a current member of the partnership;
  • The person, or the group, is entitled to receive at least 90 per cent of both the partnership's income for the relevant fiscal period and the total amount that would be paid to members of the partnership if it were wound up.
  • The person or the group is able to direct the business and affairs of the partnership.

A Canadian partnership and a Canadian resident corporation are closely related under the act if:

  • The partnership owns not less than 90 per cent of the corporation's voting shares outstanding or
  • The corporation holds all or substantially all of the interest in the partnership.

Ineligible Instances: The exemption does not apply to the sale of real property or supplies that aren't used for commercial purposes. The exemption also isn't available to related individuals or to two or more corporations that are at least 90 per cent owned by the same individual or group.

It isn't necessary to file an official Section 156 election from, but the corporations or partnerships should keep a form or a statement with the same information as the form in their records.

The regulations and requirements can be complicated. Consult with your accountant to see if you are eligible for this exemption.