Anonymised, illustrative composite. A platform company folded a new acquisition into its shared-services model the way it always had — management fees, IT, HR, finance, charged monthly. What it forgot to do was extend its own standing GST/HST election to cover the newest member of the group.
At a glance
Platform Co ran several subsidiaries under one shared-services model: a central team billed each operating subsidiary monthly for management, IT, HR and finance support. Among Platform Co's existing subsidiaries, none of those charges carried HST — the group had a standing joint election in place for years covering exactly that. When Platform Co acquired Target Co in a straightforward 100% share purchase, the integration team folded Target Co into the same billing model on the same terms as every other subsidiary, on day one.
A joint election under the Excise Tax Act is not automatic and it is not corporate-wide — it has to be made between two specific registrants, and a newly acquired subsidiary is not a party to an election it was never added to. Fourteen months went by before a routine reconciliation of the intercompany invoices surfaced that Target Co's management-fee invoices carried HST while every other subsidiary's did not, and nobody could explain why.
$195,000 a month in intercompany management fees and shared services, over 14 months: $2,730,000 in charges, carrying $354,900 of Ontario HST at 13% — charged by Platform Co, remitted to the CRA, and separately claimed back by Target Co as an input tax credit, since Target Co's own operations were fully engaged in commercial activities. The retroactive review and the election filing itself cost roughly $28,000 in professional fees, and the group carried the cash-flow drag of remitting and reclaiming the same $354,900 rather than never touching it at all.
ETA s.156(2) provides that where a person that is a specified member of a qualifying group files a joint election with another specified member, “every taxable supply made between the person and the other specified member at a time when the election is in effect is deemed to have been made for no consideration”. Target Co was not a party to the group's existing election, so every management-fee supply to it remained a taxable supply for GST/HST purposes until an election naming Target Co specifically was filed.
Getting Target Co into a qualifying group turns on which closely-related test applies, and this is where the file's own working papers first pointed to the wrong subsection. ETA s.156(1) defines a qualifying group as “a group of corporations, each member of which is closely related, within the meaning assigned by section 128, to each other member of the group”. Section 128(1) is the corporation-to-corporation test: two corporations are closely related if “not less than 90% of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of the capital stock of the other corporation are owned” by the particular corporation or a qualifying subsidiary of it. Platform Co owned 100% of Target Co's shares, comfortably past 90%, and s.128(1) is what qualifies them — s.156(1.1) and (1.2) are a separate closely-related test that applies only where at least one of the two entities is a specified partnership, not a corporation, and has no application to a straightforward parent-subsidiary acquisition.
The election is not blanket even once filed. s.156(2.1) carves out real property sales, property or services not acquired for use exclusively in the recipient's commercial activities, and certain temporary-member supplies — the group confirmed the management and shared-service fees were used exclusively in Target Co's commercial activities before relying on the election going forward.
And electing is not free of downside. s.156(5) makes the two parties “jointly and severally, or solidarily, liable for all obligations” under Part IX that result from a failure to account for or remit net tax correctly — a real, ongoing exposure the group weighed and accepted before filing, not an incidental footnote.
This is a standing group election for ongoing intercompany supplies, and it is a different mechanic from the one-time election on the sale of a business itself under ETA s.167(1) — the point at which a business changes hands is not the same transaction as the ongoing intercompany billing that follows once it has.
Platform Co and Target Co filed a joint s.156(2) election within weeks of the reconciliation flagging the gap, specifying an effective day going forward per s.156(4)'s filing mechanics. Intercompany charges from that date carried no HST. The 14 months of HST already charged were not written off — Target Co had already claimed the input tax credits as it went, so there was no unrecovered tax, only the cash-flow and administrative cost of having moved money through the system that never needed to move at all.
Had Target Co not been fully engaged in commercial activities — if any material part of its activity had been exempt, or its input tax credit entitlement had been restricted for any other reason — the same 14 months of HST would not have been a cash-flow cost at all; it would have been a genuine, unrecoverable tax cost of roughly $354,900, embedded permanently in the group's post-acquisition numbers because nobody checked whether the new subsidiary had ever been added to an election everyone assumed already covered it.
The integration checklist had a line for “set up intercompany billing” and no line for “confirm GST/HST group election coverage”. The billing got set up on day one. The election question only surfaced because someone in accounts payable noticed an inconsistency between two subsidiaries' invoices that should have looked identical.
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