26 May 2004 GST/HST Interpretation 48073 - Revocation of Section 150 Election on Retroactive Basis and Application of Section 156 Election for the Retroactively Revoked Period

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST).

Interpretation Requested

You have requested a GST interpretation pursuant to GST Memorandum 1.4 with respect to the revoking of a section 150 election on a retroactive basis and the application of an existing section 156 election for the period in which the section 150 election has been retroactively revoked.

Facts

1. A Co, B Co, and C Co are retailers. D Co is a finance company and a listed financial institution for GST purposes. D Co purchased certain receivables of A Co and B Co.

2. A Co, B Co, C Co, and D Co are a "closely related group" of corporations as defined in subsection 123(1) of the Excise Tax Act (the "Act").

3. B Co and C Co jointly executed a section 156 election prior to XXXXX, to relieve the GST on inter-company supplies of goods from B Co to C Co.

4. A Co and D Co filed a section 150 election XXXXX to exempt the GST on administrative services provided by A Co to D Co in respect of A Co's receivables.

5. B Co and D Co filed a section 150 election XXXXX to exempt the GST on administrative services that were intended to be supplied by D Co to B Co in respect of B Co's receivables. These services were to be first supplied by A Co to D Co and then re-supplied by D Co to B Co (using back to back section 150 elections between the parties).

6. The section 150 election filed by B Co and D Co was never used by the companies. Instead, A Co (the originating supplier of the administrative services) directly invoiced B Co for the administrative services plus GST. B Co paid this GST which it was unable to recover as an input tax credit because the services were in respect of financial services provided by B Co to its customers.

7. B Co and C Co also operated as if the original section 156 election continued in effect throughout. Thus, B Co did not charge GST on inter-company supplies of goods to C Co from XXXXX onwards.

8. The original section 156 election executed by B Co and C Co was never revoked by the parties.

9. Assume that A Co, B Co, C Co and D Co met all of the requirements to enter into the sections 150 and 156 elections referred to above.

10. A Co, B Co, C Co and D Co are registered for GST purposes.

Based on the foregoing facts you request that we confirm the following:

1. Pursuant to paragraph 53, GST/HST Memorandum 17.14, B Co and D Co can revoke their section 150 election retroactive to XXXXX.

2. The original section 156 election jointly executed between B Co and C Co prior to XXXXX and never revoked by the parties at any time afterwards, applies to relieve from tax the inter-company supplies of goods between the parties from XXXXX onwards.

3. Alternatively, B Co and Co can jointly re-execute a section 156 election retroactive to XXXXX onwards to relieve from tax their inter-company supplies of goods.

4. That a wash penalty would apply to GST that B Co failed to collect from C Co on inter-company sales during the period XXXXX to XXXXX (the period during which the section 156 election between B Co and Co ceases to have effect due to the section 150 election made between B Co and D Co).

Interpretation Given

Based on the information provided we offer the following comments:

Paragraph 150(4)(c) of the Act provides that the effective date of the revocation that the members specify in a notice of revocation must be at least 365 days after the day specified in the election. Therefore the effective date of the revocation may be retroactive as long as the three hundred and sixty-five day criteria is met. Penalty and interest will, however, be assessed in respect of any outstanding net tax that may result from a retroactive revocation of an election.

The definition of specified member in subsection 156(1) of the Act includes the condition that a specified member be a person that is not a party to an election under subsection 150(1) of the Act. When a person becomes subject to a subsection 150(1) election a section 156 election ceases to have effect since the party no longer fits the definition of specified member. Where a subsection 156(1) election ceases to have effect it cannot be resurrected with the subsequent revocation of a section 150 election.

The Canada Revenue Agency's (CRA) interpretation of section 156 of the Act in relation to the making of a retroactive section 156 election is that the parties may make the election with the effective date prior to the date of the signing of the election if the parties had conducted themselves as if an election were in place since the effective date and all conditions for making the election were met during the time period since the effective date. Therefore, in the above example B Co and C Co could jointly execute a new section 156 election retroactive to XXXXX if this criteria is met.

Decisions related to penalties on wash transactions will be made by the auditor at time of audit based on the fact situation. We have enclosed the GST/HST memorandum 16.3.1 - Reduction of Penalty and Interest in Wash Transaction Situations which outlines the CRA's administrative guidelines for wash transactions.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9220.

Yours truly,

Larry Springstead
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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