Cost-Sharing for GST: Risks and Rewards

Written by Seth Germsheid, Indirect Tax Associate | Kingston Ross Pasnak LLP

Cost-sharing arrangements continue to be a useful planning tool for GST purposes, particularly where one or more parties are unable to recover all, or any, input tax credits. However, CRA is quick to challenge these arrangements when they don’t align with the facts. This article provides an understanding of cost sharing arrangements and the tax-efficiencies they can generate, outlines CRA’s position, and details some of the most common implementation issues.

What Is a Cost-Sharing Arrangement?

An understanding of cost-sharing arrangements begins with the concept of principal and agent. Under a principal-agent relationship, the agent acts on behalf of one or more principals. Actions taken by the agent within the scope of that authority are treated as actions of the principal. For GST purposes, the agent is a flow-through, with tax paid or collected reported on the principal’s GST return. Critically, no GST applies when the principal reimburses the agent for amounts paid on the principal’s behalf.

A cost-sharing arrangement adapts this framework by introducing multiple principals. Rather than a single principal reimbursing an agent, several principals share costs that are incurred through a common agent. Each principal bears its proportionate share of the expenses, and the reimbursements are not subject to GST.

In practice, the agent may also incur some portion of the expenses in its own capacity as a principal. This structure is common in fifty-fifty arrangements, where one party pays all costs and is reimbursed for half by the other party.

When Are Cost-Sharing Arrangements Useful?

Cost-sharing arrangements are most effective where one or more participants are unable to recover all, or any, input tax credits. This issue commonly arises in industries where space, personnel, or operational functions are shared, and reimbursements risk being characterized as taxable supplies. The following examples illustrate typical scenarios:

• Medical practices. Physicians often share office space while only one practitioner is named on the lease and pays the rent. Without a cost-sharing arrangement, reimbursements from the other physicians may be treated as taxable re-supplies of the space, creating GST registration and compliance obligations.
• Non-profit organizations. Related non-profit organizations may share administrative staff who work for each entity in the group. In the absence of a cost-sharing arrangement, reimbursements from the other organizations may be viewed as consideration for taxable services from one entity to the others, resulting in unrecoverable GST when the receiving entity is not eligible for a full input tax credit.
• Property management structures. Related corporations that own residential rental properties may centralize property management, maintenance, and administrative functions within one entity. Without a cost-sharing arrangement, reimbursements for these costs may be recharacterized as taxable management services, the GST on which would not be recoverable by a corporation supplying residential rentals.

In each of these examples, a properly structured cost-sharing arrangement allows the paying party to incur expenses in part as agent for the others. Where roles, liabilities, and allocation methodologies are clearly defined and consistently applied, reimbursements represent shared costs rather than payment for goods or services which attract unrecoverable GST.

CRA’s View of Cost-Sharing Arrangements

The CRA has acknowledged the validity of cost-sharing arrangements for GST purposes. Policy Statement P-238 expressly recognizes their effectiveness in the medical context. At the same time, the CRA closely scrutinizes these arrangements and will challenge whether the facts support a true principal-agent relationship. In those cases, CRA may be successful in recharacterizing a poorly executed cost-sharing arrangement.

Understanding the circumstances that attract scrutiny is therefore essential.

Common Red Flags

The following issues frequently arise in audits and litigation. Their presence does not automatically invalidate a cost-sharing arrangement, but each increases the likelihood of challenge.

• Absence of a written agreement. Principal-agent relationships arise at common law and do not need to be in writing. Nonetheless, CRA auditors invariably request written agreements. The absence of documentation may not be fatal if the parties’ conduct clearly reflects a cost-sharing arrangement, but proving this in practice can be difficult.
• Undefined roles or liabilities. A defensible arrangement requires clearly defined roles and liabilities. Each party’s responsibility for shared costs must be determinable under a consistent methodology. Contributions need not be fixed, but allocation methods should be objective and supportable, such as square footage, time usage, or headcount.
• Jointly employed individuals. Shared employees present particular difficulty. While the Courts have accepted the concept of joint employment, it remains a question of fact to which CRA applies significant skepticism.  For example, CRA has stated that each principal’s liability to the employee must be clearly specified, and the employee must know who their employers are. We have also seen CRA auditors insist that a separate T4 must be issued by each employer, despite rulings which confirm that this is not the case.

The courts have taken a more flexible view. While employee awareness and separate T4s are not necessarily required, uncertainty around liability remains problematic. In Key Property Management Corporation v. The Queen, 2004 TCC 210, the Tax Court emphasized the absence of certainty as to which entity employed workers at any given time. Predictability of liability is therefore critical.

• Application outside the medical field. Some CRA auditors take the mistaken view that cost-sharing arrangements are limited to medical practitioners because P-238 addresses that sector specifically. However, the policy’s narrow focus reflects the prevalence of such arrangements in healthcare, not a restriction on their broader application. The underlying principles apply equally in non-medical contexts. CRA has acknowledged this fact in several rulings and technical interpretations.

Final thoughts

Cost-sharing arrangements can generate real tax savings when implemented properly. However, for this same reason, CRA is quick to question whether such arrangements are legitimate. A properly structured cost-sharing arrangement is grounded as much in behaviour as in documentation, but lack of documentation, conduct that is inconsistent with the documentation, or documentation that fails to address the correct factors increases the risk that CRA will recharacterize and assess tax. Practitioners should be cognizant of these factors when advising clients who may benefit from these arrangements.

1. See GST/HST Ruling 142436, where CRA confirms that a single company can administer the payroll for jointly employed individuals without tainting the principal-agent relationship.

2.  See GST/HST Interpretation 11585-9, where CRA confirms the tax efficiency of a cost-sharing relationship when used by private corporations.