Transfer of Assets Between Related Persons

RST Guide 214
Published: May 2007
Content last reviewed: August 2010
ISBN: 1-978-1-4249-4381-4 (Print), 1-978-1-4249-4383-8 (PDF), 1-978-1-4249-4382-1 (HTML)

  • The Information in this Guide explains how Retail Sales Tax (RST) applies to transfers of tangible personal property (TPP) between related persons including corporations, partnerships and individuals. Amendments to section 13 of Regulation 1013 under the Retail Sales Tax Act (Act) apply to transfers of TPP occurring on or after July 20, 2004. This Guide also provides information on transfers of TPP that occurred before July 20, 2004.
  • Please note that this Guide replaces RST Guide 210 - Partnerships, dated March 2001.

Table of Contents

Definitions and General Principles

Person

For Retail Sales Tax (RST) purposes, a person includes an individual, a corporation or a partnership.

Sale

Under the Act, a sale includes any transfer of title or possession, and any lease or rental. A sale does not include the transfer of TPP from a corporation to a shareholder as the result of a wind up or dissolution where the corporation has paid RST under the Act as a result of its consumption or use of the TPP.

Eligible Property

Eligible property refers to TPP on which RST has been paid; it does not include real property or services. RST is not considered to have been paid if an exemption was claimed under the Act when the asset was acquired, or if the asset was acquired for resale.

RST must have been paid by the transferor of the eligible property, or by a related person.

Provided the asset qualifies as eligible property, it may be transferred an unlimited number of times within a related group of persons.

Although an asset may qualify as eligible property for a group of related persons, the asset does not acquire permanent RST-paid status. For example, where the person who originally paid RST is no longer part of the related corporate group, the asset is no longer considered eligible property. In order for the asset to acquire eligible property status, RST must be paid by a remaining member of the related group.

Stated Capital

For RST purposes, the stated capital of a corporation is the total contribution of money and other consideration paid into the corporation in exchange for shares.

Member of His or Her family

Member of his or her family means the father, mother, spouse, grandfather, grandmother, son, daughter, grandson, granddaughter, son-in-law, daughter-in-law, father-in-law or mother-in-law.

Spouse

Spouse means either of two persons who:

  • are married to each other, or
  • have lived together continuously for three years or more or are in a relationship of some  permanence and the parents of a child.

Grandfathering

Persons who have entered into an agreement in writing before July 20, 2004 with respect to a transfer of assets that did not occur until after that date, may choose to use the rules that were in place before July 20, 2004 or the rules implemented on July 20, 2004.

Deeming Provision for Share Retention

In order to satisfy the requirements of the exemption for transfers of assets between related parties, the parties must maintain their relationship for a period of 180 consecutive days, following the asset transfer.

If a person sells the shares that it owns in a corporation during the 180-day qualifying period, the shares may be deemed to be continuously held by that person where the shares are transferred to a related person, and this person continues to own the shares for the remainder of the 180-day qualifying period.

Shareholder is an Individual

Where the shareholder is an individual, the individual is deemed to continue to own the share if:

  • the share is transferred to a member of his or her family for no consideration and the family member retains the share for the remainder of the 180-day qualifying period, or
  • the share is transferred to a corporation in exchange only for shares of that corporation, and  the individual either
  1. retains these new shares for the remainder of the 180-day qualifying period, or
  2. transfers the new shares to a member of his or her family for no consideration and the family member retains these new shares for the remainder of the 180-day qualifying period.

Shareholder is a Partnership

Where the shareholder is a partnership, the partnership is deemed to continue to own the share if:

  • the share is transferred to a corporation in exchange only for shares of that corporation and the partnership continues to own the shares for the remainder of the 180-day qualifying period.

Shareholder is a Corporation

Where the shareholder is a corporation, the corporation is deemed to continue to own the share if:

  • the corporation is wholly owned by an individual or partnership and transfers the share to the individual or partnership who retains the share of the corporation for the remainder of the 180-day qualifying period, or
  • the corporation amalgamates with another corporation and the amalgamated corporation retains the share for the remainder of the 180-day qualifying period, or
  • the corporation transfers the share to another corporation pursuant to winding-up, and the other corporation retains the share for the remainder of the 180-day qualifying period.

Issuing Corporation Winds up or Amalgamates

A shareholder will be deemed to continue to own a share if the corporation that issued the share

  • amalgamates with one or more corporations related to the corporation, or
  • is dissolved during the 180-day qualifying period and, as a result of the dissolution, the corporation's assets are transferred to another corporation.

Amalgamation, Wind up and Dissolution

When two or more corporations amalgamate, each of the amalgamating corporations is viewed as continuing to exist. An amalgamation does not trigger Retail Sales Tax (RST).

Where RST was previously paid on the acquisition of assets by any of the amalgamating parties, the assets will be considered RST-paid by the amalgamated company.

A sale of the shares of a corporation is not a sale of TPP and does not attract RST. However, because related party transactions require that the relationship be maintained for 180 consecutive days, a sale of shares during the 180-day qualifying period may trigger an RST liability.

In certain circumstances, where shares are transferred to another person during the 180- day qualifying period, the shares will be deemed to be continued to be held for purposes of determining exemption eligibility.

Sale Between Related Persons

Exemption

No RST is payable on a sale of eligible property between

  • an individual and a corporation that the individual wholly owns, or
  • a partnership and a corporation that the partnership wholly owns, or
  • related corporations.

Related Corporations

A corporation is related to another corporation if one corporation wholly owns the other corporation or if both corporations are wholly-owned by the same person.

Wholly Owns

A person wholly owns a corporation if the person owns shares representing at least 95 per cent of the sum of the stated capital of all classes and series of shares of the corporation,  directly or indirectly.

An individual wholly owns a corporation if shares representing at least 95 per cent of the sum of the stated capital of all classes and series of shares of the corporation are owned by the individual or by the individual and one or more members of his or her family.

Directly or Indirectly

Wholly-owned includes ownership through one or more subsidiary corporations.

In example 1 below, Corporation A wholly owns Corporation B and Corporation D directly. Corporation A wholly owns Corporation C and Corporation E indirectly.

Example 1

Example 1: Corporation A wholly owns Corporation B and Corporation D directly. Corporation A wholly owns Corporation C and Corporation E indirectly

Eligibility Criteria

Corporation A may transfer assets to B, C, D or E without payment of tax provided all other conditions for exemptions are met. To be eligible for the exemption, the asset must be eligible property. Retail Sales Tax (RST) is not considered to have been paid if an exemption was claimed under the Act when the asset was acquired, or if the asset was acquired for resale.

The corporations must remain related, or the shareholder must continue to wholly own the corporation, for a minimum of 180 consecutive days after the date of sale.

Example 2

Example 2: Eligible property may be transferred among corporations A, B, C, D, E, F and H without attracting RST because of the unbroken chain of at least 95 per cent share ownership between each of the corporations.

In Example 2, eligible property may be transferred among corporations A, B, C, D, E, F and H without attracting RST because of the unbroken chain of at least 95 per cent share ownership between each of the corporations.

Also, because of the chain of 95 per cent ownership, eligible property can be transferred between corporation G and each of these corporations without attracting RST.

For transfers made before July 20, 2004, a particular asset could be transferred only once within a related group using the related party exemption.  The parties were not required to remain related after the transfer. In addition, 'wholly owns' for a corporation meant the beneficial ownership, either directly or through another wholly-owned corporation, of at least 95 per cent of the total issued and outstanding share capital of the corporation.

Sale between Corporation and Shareholder

Exemption

A corporation may purchase assets from, or sell assets to, one of its shareholders.  The RST payable may be pro-rated based on the shareholder's ownership of shares in the corporation immediately prior to the sale.

Eligibility Criteria

To be eligible for the exemption, the asset must be eligible property. Retail Sales Tax (RST) is not considered to have been paid if RST was not payable under the Act when the asset was acquired, or if the asset was acquired for resale.

The shares used to calculate the portion on which no RST is payable must continue to be held by the shareholder or a related person for 180 consecutive days after the transfer.

Calculating RST-Exempt Portion

Sale From a Shareholder that is a Corporation to a Corporation

No RST is payable on the following portion:

A × B / C

Where,

A is the fair value of the eligible property

B is the sum of the stated capital of all classes and series of shares of the purchaser owned directly or indirectly by the transferor corporation immediately before the sale

C is the sum of the stated capital of all classes and series of shares of the purchaser immediately after the sale

Sale From a Corporation to a Shareholder that is a Corporation

No RST is payable on the following portion:

A × D/E

Where,

A is the fair value of the eligible property

D is the sum of the stated capital of all classes and series of shares of the transferor owned directly or indirectly by the purchaser immediately before the sale

E is the sum of the stated capital of all classes and series of shares of the transferor immediately after the sale

Sale between a Corporation and an eligible Shareholder

An eligible shareholder is either an individual or a partnership that owns shares in a corporation, directly or indirectly, but that does not wholly own the corporation.

No RST is payable on the following portion:

A × F/G

Where,

A is the fair value of the eligible property

F is the sum of the stated capital of the corporation owned directly or indirectly by the eligible shareholder immediately before the sale

G is the sum of the stated capital of all classes and series of shares of the corporation

Example 3

Example 3: A wishes to transfer a Retail Sales Tax (RST) - paid asset to G. A would transfer the asset to D, without the payment of RST since A indirectly owns D. D's 30 per cent interest would be transferred to G. Since D only owns 30 per cent of G, G would be required to pay RST on 70 per cent of the fair value of the asset.

A wishes to transfer a Retail Sales Tax (RST) - paid asset to G. A would transfer the asset to D, without the payment of RST since A indirectly owns D. D's 30 per cent interest would be transferred to G. Since D only owns 30 per cent of G, G would be required to pay RST on 70 per cent of the fair value of the asset.

For transfers made before July 20, 2004, where a person purchased TPP from a corporation that the person did not wholly own, RST was payable on the portion of the fair value equal to the proportion of the share capital not owned by the purchaser.  RST was not pro-rated in any other situation. (i.e., there was no pro rata exemption available on a transfer from a shareholder to a corporation.) Prior to July 20, 2004, a particular asset could be transferred only once using the related party exemption. 

Sale to Corporation In Exchange For Shares

Exemption

Where eligible property is transferred to a corporation, and the corporation issues shares in consideration, RST is payable only on the value of any consideration that exceeds the value of the shares transferred. The value of the shares transferred is the sum of the stated capital of all classes and series of shares of the corporation issued by the corporation as consideration for the sale. If shares are issued for the full value of the purchase price, then no RST is payable.

Eligibility Criteria

The asset must be eligible property (i.e., an RST-paid asset). RST is not considered to have been paid if an exemption was claimed under the Act when the asset was acquired, or if the asset was acquired for resale.

The shares must continue to be held by the transferor or a related person for the 180-day qualifying period.

Calculating RST-Exempt Portion

No Retail Sales Tax (RST) is payable on the following portion:

A × H/I

Where,

A is the fair value of the eligible property

H is the sum of the stated capital of all classes and series of shares of the corporation issued by the corporation as consideration for the sale

I is the sum of the total consideration paid by the corporation on the sale

Example 4

Assume Corporation A wishes to acquire an RST-paid asset from B. The fair value of the asset is $5,000.  In consideration, Corporation A issues shares with a stated capital of $4,000 to B, and also gives B $1,000 in cash. No RST is payable on the following portion:

                                                                        $5,000 ×  $4,000 = $4,000
                                                                                       $5,000                              

RST would be calculated on $1,000.

For transfers made before July 20, 2004, the shares issued in exchange for the assets had to be retained for a minimum of 6 months. The shares were deemed to be retained if:
a) the shareholder transferred them for no consideration to a member of his or her family or same-sex partner who retained them for the remainder of the 6 month period, or
b) the shareholder transferred them to another corporation for shares of that corporation at least equal in value to the transferred shares and the shareholder retained the new shares for the remainder of the 6-month period.

Sale Between Partner and Partnership

Definition

A partnership may be made up of one of the following:

  • two or more individuals
  • one or more individuals and one or more corporations, or
  • two or more corporations.

Exemption

Partner to a New Partnership

On the creation of a new partnership, RST is not payable by the partnership on taxable assets transferred into the partnership by the partners provided the asset is eligible property, and the only consideration received is an interest in the partnership.

If the transferor receives consideration in addition to an interest in the partnership, the partnership must pay RST on this additional value.

The assumption of liabilities of the transferor would be viewed as consideration in addition to a partnership interest.

One or more persons (i.e., individuals, partnerships, corporations) may purchase an interest in an existing partnership. For Retail Sales Tax (RST) purposes, this is viewed as the creation of a new partnership.

RST is not payable by the former partnership, the continuing partners, and the new partner(s) on the taxable assets transferred into the new partnership, provided the assets qualify as eligible property.

Eligibility Criteria

The asset must be eligible property (i.e., an RST-paid asset). RST is not considered to have been paid if an exemption was claimed under the Act when the asset was acquired, or if the asset was acquired for resale.

Exemption

Partner to an Existing Partnership

Subsequent to its formation, if a partnership acquires taxable assets from one of its partners, RST must be paid. The amount of RST to be paid may be reduced in proportion to the contributing partner's interest in the partnership.

Eligibility Criteria

The asset must be eligible property (i.e., an RST-paid asset). RST is not considered to have been paid if an exemption was claimed under the Act when the asset was acquired, or if the asset was acquired for resale.

Calculating RST-Exempt Portion

 No RST is payable on the following portion:

A × J

Where,

A is the fair value of the eligible property

J is the person's percentage share of the income or loss of the partnership immediately after the sale

Exemption

Partnership to Partner

Subsequent to its formation, a partnership may enter into a sale transaction with one of its partners. RST applies to such transactions as follows:

If a partner re-acquires the taxable assets that it previously transferred into the partnership, RST is not payable provided the partner paid the applicable RST when it originally purchased the assets.

If a partner acquires assets that were originally transferred into the partnership by the other partner(s), RST is payable by the partner on the total fair value of the assets at the time of acquisition from the partnership.

If a partner acquires taxable assets that the partnership originally purchased on a tax paid basis from a third party, the partner must pay RST. The amount of RST to be paid by the partner may be reduced in proportion to the partner's share of the partnership provided the partnership paid the applicable RST when it acquired the assets.

Eligibility Criteria

The asset must be eligible property (i.e., a Retail Sales Tax (RST) - paid asset). RST is not considered to have been paid if an exemption was claimed under the Act when the asset was acquired, or if the asset was acquired for resale.

Calculating RST-Exempt Portion

No RST is payable on the following portion:

A × K

Where,

A is the fair value of the eligible property

K is the person's percentage share of the income or loss of the partnership immediately before the sale

Additional Information

Documentation Required

Documentation is required to confirm the relationship between the parties for the period commencing immediately prior to the date of sale or transfer, and continuing 180 days following the date of sale or transfer.

Examples of acceptable documentation include:

  • Securities Registers
  • Registers of Transfer
  • Stated Capital Accounts for each class or series of shares
  • Articles of Incorporation and any Amendments thereto
  • Partnership Agreements
  • Lawyer/Accountant Statements

Documentation is also required to confirm the fair value of the sale or transfer, such as agreements/contracts between the parties, Securities Registers, etc. (certain records should be kept beyond the required 7 year period to prove that all of the conditions for the exemption have been met).

If the eligible property is a motor vehicle, additional documentation is required when transferring the vehicle at the Ministry of Transportation, Driver and Vehicle Licence Issuing Office. Please refer to RST Guide 209 - Used Vehicle Information Program for more information.

Obtaining a Refund of RST

Refunds may be claimed by completing a General Application for Refund of Retail Sales Tax form [PDF - 400 KB].

All refund claims must be received by the Ministry of Finance within four years of the date the RST was paid.

Payment of RST

Where Retail Sales Tax (RST) is payable based on a pro-rata share, payment should be made by cheque or money order, payable to the Minister of Finance.  The payment, along with details such as the purchaser's name, address and the substance of the transaction, should be sent to the nearest Ontario Ministry of Finance Tax Office, or directly to:

Ministry of Finance
33 King Street West
PO Box 625
Oshawa ON L1H 8E9

More Information

Telephone

  • 1 866 ONT-TAXS (1 866 668-8297)
  • 1 800 263-7776 for teletypewriter (TTY)

Written Interpretation

To obtain a written interpretation on a specific situation not addressed in this publication, please send your request in writing to:

Ministry of Finance
Advisory Services and Program Policy Branch
33 King Street West
Oshawa ON L1H 8H5

Disclaimer and References

The information contained in this publication is provided only as a guideline and is not intended to replace the legislation.

Legislative References

  • Regulation 1013 under the Retail Sales Tax Act, sections 13, 13.1 to 13.7

Related topics

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