A Share Sale Two Years Earlier Quietly Broke an HST Election

The situation

What the trustees were actually afraid of was simple to state and hard to sit with: if the election that had let two companies in their group transact without charging each other HST turned out to be invalid, every one of those transactions going back to the day it broke would need to be unwound, HST added, interest calculated, and the family trust that owned both companies would be the one absorbing the shortfall while waiting months to find out exactly how bad it was. Amalia, a sales director who also served as a trustee of the family trust, and Ines, a pharmacist and co-trustee, held the position because the trust owned a controlling interest in two related operating companies, one a distribution business and the other a services company that supplied it. The two companies had filed a joint election years earlier that allowed them to treat most of their intercompany transactions as though no HST applied, a common and legitimate arrangement between closely related corporations that trade heavily with each other.

The election, once filed, is not something either company needs to renew or re-confirm regularly. It simply remains in effect, assumed valid, unless something changes the relationship between the two companies in a way that no longer meets the ownership threshold the election depends on. Roughly two years before the trustees came to us, the family had restructured how the trust held its interest in the services company, transferring a portion of the shares to a newer holding entity as part of a broader estate planning exercise that had nothing to do with HST at all and was handled by a different advisor at the time.

That restructuring, small as it seemed on its own, was enough to break the closely related test the election depended on. Neither company noticed. Invoices kept being issued the same way they always had, without HST, for two full years, on the reasonable but mistaken assumption that the earlier election was still doing its job.

The problem surfaced during a routine review the trust's accountant, Nirosha, ran ahead of the current year's filings, comparing the group's corporate structure against the conditions the election required. The mismatch was flagged immediately, but by the time it reached Amalia and Ines, two years of intercompany invoicing sat on the wrong side of the line, and neither trustee knew yet how much HST that represented or how quickly they needed to move.

What made this urgent

What made this urgent was not the size of the exposure alone, though a reasonable estimate put the HST that should have been charged and remitted on the two years of intercompany transactions somewhere between roughly $150,000 and $400,000 depending on which invoices fell inside the affected period. What made it urgent was the mechanism for fixing it, and the fact that the mechanism ran on the tax authority's timeline, not the trust's.

Once related parties realize a joint election is invalid, there are two separate problems to solve. First, the companies need to correct their go-forward filings, either by re-establishing a valid election if the ownership structure can support one, or by beginning to charge HST properly on intercompany transactions if it cannot. Second, and more urgent, the two years of transactions that happened under the mistaken assumption need to be addressed, since HST that should have been charged, collected, and remitted was not, and both companies technically had an outstanding liability the moment the election lapsed.

The Excise Tax Act includes a voluntary disclosure process that allows taxpayers to come forward and correct a filing error before the tax authority discovers it independently, often reducing or eliminating penalties that would otherwise apply on top of the tax and interest owing. The process depends heavily on timing: a disclosure made proactively, before any audit or inquiry has begun, is treated far more favourably than the same disclosure made after the authority has already started looking. The trustees had a genuine advantage here, since the issue was self-identified through an internal review rather than flagged by an audit, but that advantage had a shelf life. The longer the correction took to prepare and submit, the greater the risk that some unrelated trigger, a routine HST filing from either company, a request for records on another matter, could cause the tax authority to open its own inquiry first and close the more favourable disclosure window.

Compounding the pressure, the process itself moved on the tax authority's own institutional schedule, not the trust's. A disclosure of this size and complexity, involving a family trust structure and two related corporations, typically requires the authority to review the submission, confirm its completeness, and issue a formal acceptance before the reduced-penalty treatment is locked in. That review routinely takes several months, and during the entire waiting period, the trustees had to keep both companies' current filings correct going forward without knowing for certain how the historical period would ultimately be resolved.

What we did

1. Confirmed the exact date the election became invalid. We reviewed the share transfer documentation from the estate restructuring to pin down precisely when the ownership change occurred and tested it against the closely related test the election depended on, establishing a firm start date for the affected period rather than relying on an estimate. Getting this date right mattered because every calculation and every disclosure argument that followed depended on it.
2. Quantified the intercompany transactions across the full affected window. Working with Nirosha and the two companies' accounting records, we identified every intercompany invoice issued between the ownership change and the date the error was discovered, calculating the HST that should have applied to each and arriving at a reliable total rather than the rough estimate the trustees had started with. Nirosha's own review had caught the mismatch in the first place, so her records became the starting point for the full reconstruction.
3. Assessed whether a new election could be filed to restore the exemption going forward. We reviewed the current ownership structure to determine whether the two companies still met, or could be restructured to meet, the conditions for a valid closely related election, since restoring that status going forward would prevent the ongoing accumulation of unremitted HST while the historical period was being resolved.
4. Prepared a full voluntary disclosure submission before any external trigger could pre-empt it. Because the trustees had identified the issue internally, we moved quickly to prepare a complete disclosure package covering the full affected period, reasoning that a proactive, complete submission gave the file the best chance of qualifying for the reduced-penalty treatment the process allows for genuinely voluntary corrections.
5. Negotiated an interim filing position for both companies while the disclosure was under review. Rather than leaving both companies exposed to further errors while the historical disclosure worked through the authority's process, we set both companies up to charge HST correctly on all intercompany transactions immediately, ensuring the go-forward filings were clean regardless of how the historical period ultimately resolved.
6. Maintained regular contact with the authority's disclosure unit throughout the review period. Given how much the trustees' cash flow planning depended on knowing the outcome, we followed up periodically over the several months the review took, both to confirm the submission remained complete and to flag, as it became relevant, the trust's need for reasonable certainty on timing, relaying each update to Amalia, Ines, and Nirosha so none of them were left guessing about where the file stood.

The outcome

The disclosure unit accepted the voluntary disclosure as substantially complete and, because it was submitted proactively and before any independent inquiry had begun, applied the reduced-penalty treatment the process allows. The trust and the two companies remained liable for the HST that should have been charged and remitted over the affected period, along with interest, but the penalty component that would otherwise have applied on top of that was largely waived.

The final settled figure landed in the lower half of the roughly $150,000 to $400,000 range initially estimated, once the exact transaction-by-transaction calculation replaced the early rough approximation. That was still a real cost to the trust, paid out of funds that would otherwise have supported distributions to beneficiaries, and it is fair to describe the outcome as a negotiated compromise rather than a clean resolution: the underlying HST liability was genuine and had to be paid, and no argument could make it disappear entirely.

What the process did contain was the penalty exposure and the uncertainty that had made the file so stressful in the first place for Amalia and Ines, who had spent months not knowing where the final number would land or how long the wait would last. Because a new election could not be re-established under the current ownership structure without further restructuring the trustees were not prepared to undertake immediately, both companies now charge HST on their intercompany transactions going forward, a modest but permanent change to how the group operates that the trustees have built into their ongoing planning. Nirosha's annual review now includes a standing check against every election the group relies on, so the next restructuring, whenever it happens, gets tested against those conditions before it closes rather than years afterward.

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