Settling GST/HST accounts on death

When a business owner dies, a key question for her estate is how to handle the company’s HST/GST account with CRA.

A business’s GST/HST account doesn’t cease to exist when the owner dies. There will be property in the business, and the estate can continue the business and charge GST/HST.

Normal rules continue to apply to the individual’s GST/HST registration, and while CRA may try to convince the executor that the deceased’s account must be closed as of the date of death, this isn’t necessarily correct. So, make sure your client’s executor understands the impact of closing the account before agreeing to do so.

Generally, when a GST/HST account closes, any property used in taxable activities associated with the account is deemed disposed. This could create significant tax liabilities. And, your client may want her business to continue after her death. If so, the executor should inform CRA that the GST/HST account should now be in the name of “The estate of [CLIENT]” to reflect the fact that the estate’s now the registered entity.

Normal rules apply on the transfer of property used in commercial activities. The estate is responsible for collecting and remitting applicable taxes, as the property is considered taxable. In some cases, beneficiaries will experience a short-term cash flow crunch if they have to remit GST/HST upon inheriting the property.

After paying GST/HST to the estate, they can claim a refund from CRA. Often, this can be managed by using a unique election to eliminate some or all of the GST cash-flow problems. But beneficiaries must be registered for GST/HST at or before the date they receive the property (they needn’t be registered as of the date of death). No GST/HST is payable to the estate on the property transfer—it’s avoided with the election.

The beneficiary is deemed to have acquired the property for 100% taxable use by way of the election. On some property, such as real property, she must be careful for changes in use. If she only uses, say, 70% of the real property in taxable activities, she only has to report GST directly to CRA on the 30% decreased change in use.

To get relief from this election:

• the deceased had to have been registered for GST/HST at the time of death; and
• immediately before death, the individual had to have held the property for use, consumption or supply in the course of commercial activities.

The estate then gives the property to the beneficiary in accordance with the deceased’s will (or intestacy laws). The beneficiary must be a GST/HST registrant and must be getting the property for use, consumption or supply in the course of their commercial activities.

The estate and beneficiary jointly elect to have the relief apply. When these conditions are met, no GST/HST will be either collected or remitted under this transfer. There are no forms to file with CRA, but the intent should be documented. It’s similar to the business sale election (Form GST44), and the transfer occurs GST-free.

However, there is no requirement that the business transfer all its property, nor that the business supply the property to a single recipient. The election is broad, providing it falls within the conditions outlined above.

GST/HST registration should be put in place when or before the beneficiary is to receive the property. The executor should then close the deceased’s GST/HST account when all property has been transferred and the executor is certain that no more commercial activity will be taking place in future.

New deadlines for GST/HST closely related election

The “closely related” election (sec. 156 of the Excise Tax Act) provides that related corporations and partnerships can sell certain goods and services to other members of the group without having to collect GST/HST.

To make the election, all members of the group must be engaged exclusively in commercial activities and their revenues must be taxable for GST/HST purposes. The election simplifies compliance and facilitates cash flow.

Before 2015, the election didn’t have to be filed with CRA; rather, your client would fill out Form GST25 and keep it on file in case CRA wanted to see it. That’s changed.

Beginning in 2015, the election must be filed to cover the period prior to 2015, and continue with the election. Elections made prior to 2015 will not be valid if simply kept on file: the new election form must have been filed before 2016. Clients can file a hard copy or do it electronically through CRA’s My Business Account. Form RC4616 replaces Form GST25.

Due dates for new elections (those not made before 2015) depend on GST/HST return due dates. Elections must be filed by the earliest due date of the GST/HST return. For example, if a member of the group files monthly based on calendar months and the effective date of the election is to be July 15, the election must be filed before the end of August.

– John Frim, senior manager at MNP LLP in Waterloo, Ont.

by Jeff Harrison, senior manager at MNP LLP in Regina, Sask.