- Without the election, an intercompany transaction between related corporations is treated like any other supply: the corporation making the supply must charge HST, and the recipient…
- Two conditions generally have to be met before a corporate group can rely on this election: 1.
- The election is broad but not unlimited.
Many Ontario businesses operate through more than one corporation — an operating company and a holding company, or several related entities that share staff, equipment, and services. Every time one of those companies invoices another for a management fee, a lease payment, or a shared service, that internal transaction can technically trigger HST, even though the money never leaves the corporate family.
The closely related corporations election under the Excise Tax Act exists for exactly this situation. It lets qualifying related corporations (and certain partnerships) agree to treat many of their internal supplies as though no consideration changed hands for HST purposes — meaning no tax needs to be charged, collected, or remitted on those specific transactions.
This article explains what the election does, who can use it, and where corporate groups most often get it wrong.
What the Election Actually Does
Without the election, an intercompany transaction between related corporations is treated like any other supply: the corporation making the supply must charge HST, and the recipient corporation must pay it and then claim it back as an input tax credit (ITC) if it is entitled to a full credit. On paper, the tax is a wash — but in practice it creates a cash-flow drag (HST goes out before it comes back) and a paperwork burden (every intercompany invoice needs to track and report the tax).
The election removes that friction for eligible transactions by deeming them to occur for nil consideration — no GST/HST is exigible, and neither party needs to report tax on that specific supply. It does not exempt the corporations from HST generally; it only applies to qualifying supplies made between the electing parties.
Who Can Make the Election
Two conditions generally have to be met before a corporate group can rely on this election:
- The parties must be "closely related." The Excise Tax Act sets out a specific common-ownership and voting-control test for what counts as closely related — it is a demanding threshold, not a loose "under common management" standard. Because the exact test can be technical (and applies slightly differently to corporations, partnerships, and trusts), don't assume your group qualifies without confirming against the current statutory wording or with a tax advisor.
- Both parties must be GST/HST registrants engaged exclusively (or almost exclusively) in commercial activities. A corporation that makes mostly exempt supplies — a residential landlord, for example — generally cannot be part of the election for that reason alone.
The election is made jointly. Both corporations complete and sign the prescribed election, and — depending on when the election is made — it may need to be filed with the CRA rather than simply kept on file. Confirm the current filing requirement before assuming you only need to keep the paperwork in your own records.
What the Election Does Not Cover
The election is broad but not unlimited. Certain categories of supplies are carved out under the Excise Tax Act and remain taxable even between electing parties — this commonly includes some types of real property transactions and a handful of other specified supplies. Don't assume a transaction is automatically covered just because the corporations have a valid election on file; check whether the specific supply falls within an exclusion before deciding not to charge HST on it.
With the Election vs. Without It
| Without the election | With a valid election | |
|---|---|---|
| HST charged on qualifying intercompany supply | Yes | No (nil consideration) |
| Paperwork per transaction | Invoice + tax tracking + ITC claim | Simplified — no tax line to track |
| Cash-flow impact | Temporary (HST paid out, then recovered) | None on the qualifying supply |
| Applies to every intercompany transaction? | N/A | No — excluded categories still taxed normally |
| Ownership changes | N/A | Election can fail if the closely related test is no longer met |
Common Pitfalls Corporate Groups Run Into
- Assuming the election covers everything. It only covers supplies between the specific electing parties, and only supplies that aren't carved out by the exclusions above.
- Letting the ownership structure drift. A reorganization, a new investor, or a change in voting shares can quietly take a corporation below the closely related threshold — at which point the election no longer applies, even if nobody remembered to revoke it.
- Forgetting non-corporate members of the group. Related partnerships and certain trusts can sometimes participate too, but the eligibility test is not identical to the corporate test — don't assume it transfers automatically.
- Skipping the paperwork because "everyone knows we're related." CRA does not infer the election from ownership alone; the joint election has to actually be made and, where required, kept or filed correctly.
Frequently asked questions
Do we need to notify the CRA every year that our election is still in effect?
Not typically — once validly made, the election generally continues until it is revoked or the parties stop meeting the closely related test. That said, filing and record-keeping requirements have changed over time, so confirm the current CRA expectations for your specific election date.
What happens if we relied on the election but didn't actually qualify?
If the CRA determines the parties were never closely related, or that a transaction fell outside the election's scope, it can reassess the supplying corporation for the HST that should have been charged, plus interest. This is a common trigger for a CRA-side dispute.
Can a holding company with no employees use this election?
Often yes, provided it meets the commercial-activity and closely related tests — a pure holding company's eligibility depends on the nature of what it holds and supplies, so this needs a case-by-case review.
We restructured last year — do we need a new election?
If the restructuring changed who owns or controls the corporations, you should re-confirm eligibility rather than assume a prior election still applies. A lapsed election that keeps being relied on is one of the more common ways groups end up under-remitting HST.
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