Becoming and Ceasing to Be a Registrant (GST 400-3-1)

Notice to the reader:

Please note that the following GST Memorandum, although correct at the time of issue, has not been updated to reflect any subsequent legislative changes since the date of issue. As a result, some of the technical information this memorandum contains may no longer be valid. Please contact your GST/HST Rulings Centre for assistance.

GST memoranda 400-3-1

INPUT TAX CREDITS
SPECIAL CASES
BECOMING AND CEASING TO BE A REGISTRANT
Ottawa, April 1, 1992

This memorandum does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation or contact any Revenue Canada Excise/GST office for additional information.

This memorandum may reflect amendments proposed to the Excise Tax Act by Notices of Ways and Means Motion tabled on December 18, 1990, March 27, 1991 November 5, 1991 and March 10, 1992. The federal government announced its intention to introduce certain amendments to the Excise Tax Act to effect these changes which were outlined by the Minister of Finance in press releases on the mentioned dates. [Where proposed changes affect information contained in this memorandum, the information is enclosed in square brackets.] At the time of publication, Parliament has not enacted these proposed amendments. Any commentary in this memorandum should not be taken as a statement by the Department that such amendments will in fact be enacted into law in their current form.

This memorandum explains the application of the Goods and Services Tax (GST) and the eligibility for input tax credit (ITC) where persons change their GST status by becoming registrants or ceasing to be registrants.

LEGISLATIVE AND OTHER REFERENCES

Excise Tax Act - sections 123, 148, 169 and 171, subsections 141(5), 240(1), 240(3) and 242(1).

Notice of Ways and Means Motion tabled on March 10, 1992

TABLE OF CONTENTS

Definitions and Interpretations 2 General 5 Becoming a Registrant 5 Treatment of Property 6 Treatment of Services and Rents 7 Restriction 8 Ceasing to be a Registrant 9 Treatment of Property 10 Capital Property 10 Non-Capital Property 11 Treatment of Services and Rents 12

DEFINITIONS AND INTERPRETATIONS

The following are either definitions which have been taken from the Excise Tax Act as amended by S.C. 1990, c. 45 (Bill C-62), or departmental interpretations of terms relevant to the administration of that Act.

"Act" means the Excise Tax Act;

"amount" means money, property or a service, expressed in terms of the amount of money or the value in terms of money of the property or service;

"Canada"

(a) "Canada" includes:

(i) the sea bed and subsoil of the submarine areas adjacent to the coasts of Canada in respect of which the government of Canada or of a province may grant a right, licence or privilege to explore for or exploit any minerals; and

(ii) the seas and airspace above the submarine areas referred to in paragraph (i) in respect of any activities carried on in connection with the exploration for or exploitation of minerals;

(b) in respect of imports, "Canada" has the meaning assigned by the Customs Act;

"capital property", in respect of a person, means property that is, or would be if the person were a taxpayer under the Income Tax Act, capital property of the person within the meaning of that Act, other than property described in Class 12 or 14 of Schedule II to the Income Tax Regulations;

"commercial activity" means

(a) any business carried on by a person,

(b) any adventure or concern of a person in the nature of trade, and

(c) any activity engaged in by a person that involves the supply of real property or of a right or interest in respect of real property by that person,

but does not include

(d) any activity engaged in by a person to the extent that it involves the making of an exempt supply by the person,

(e) any activity engaged in by an individual without a reasonable expectation of profit, or

(f) the performance of any duty or activity in relation to an office or employment;

"exclusive", in respect of the consumption, use or supply of property or a service, means all or substantially all of the consumption, use or supply of the property or service, and "all or substantially all", in respect of the consumption, use or supply of property or a service by a financial institution, means all of the consumption, use or supply of the property or service;

"fair market value" of property or a service supplied to a person means the fair market value of the property or service without reference to any tax excluded by section 154 of the Act from the consideration for the supply;

"input tax credit" means a credit claimable by a registrant for the Goods and Services Tax paid or payable by the registrant in respect of the acquisition or importation of any property or service for consumption, use or supply in the course of commercial activities of the registrant;

"person" means an individual, partnership, corporation, trust or estate, or a body that is a society, union, club, association, commission or other organization of any kind;

"property" means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money;

"registrant" means a person who is registered under section 241, or who is required to apply to be registered under section 240 of the Act;

"reporting period" of a recipient means

(a) where the recipient is a registrant, a reporting period of the recipient as determined under sections 245 to 251 of the Act; and

(b) in any other case, a calendar quarter;

"royalty" means compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an amount per unit produced;

"service" means anything other than

(a) property,

(b) money, and

(c) anything that is supplied to an employer by a person who is or agrees to become an officer or employee of the employer in the course of or in relation to the office or employment of that person;

"small supplier", at any time, means a person who is at that time a small supplier under section 148 of the Act;

"supply" means, subject to sections 133 and 134 of the Act, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;

"tax" means the Goods and Services Tax imposed under Part IX of the Act;

"tax payable" by a person in respect of property or service includes

(a) tax deemed under subsection 171(3) or 200(2) of the Act to have been collected by the person in respect of the property or service, and

(b) an amount in respect of the property or service that is required under paragraph 171(4)(b) of the Act to be added in determining the net tax of the person for a reporting period,

but does not include an amount that the person has claimed or is entitled to claim as an input tax credit in respect of the property or service;

"taxable supply" means a supply that is made in the course of a commercial activity, but does not include an exempt supply.

GENERAL

1. An input tax credit (ITC) may be claimed by a registrant for the tax paid or payable in respect of property or a service acquired or imported for consumption, use or supply in the registrant's commercial activities. Section 169 of the Act governs the claiming of an ITC which, depending on the circumstances, may be full or apportioned.

2. Subsection 169(1) of the Act provides that, subject to Part IX of the Act, a registrant is eligible to claim a full ITC (100 per cent of the tax payable) if the property or service is acquired or imported for consumption, use or supply exclusively in the registrant's commercial activities.

3. More information on full ITCs is available in GST MEMORANDUM 400-1-1, FULL INPUT TAX CREDITS.

4. Subsection 169(2) of the Act provides for an apportioned ITC when property or a service is acquired or imported by a registrant for consumption, use or supply (in this subsection referred to as "intended use") partly in the registrant's commercial activities. The registrant may be eligible to claim an apportioned ITC for part of the tax paid or payable based on the intended use of the property or service.

5. More information on apportioned ITCs is available in GST MEMORANDUM 400-1-3, APPORTIONED INPUT TAX CREDITS.

6. A person that is not registered is ineligible to claim ITCs for the tax paid or payable on property or services for consumption, use or supply in that person's commercial activities.

7. Section 171 of the Act outlines the rules that apply with respect to ITCs where a person becomes a registrant or ceases to be a registrant.

BECOMING A REGISTRANT

8. A person's status as a small supplier is determined under section 148 of the Act by reference to a $30,000 threshold of taxable supplies over a specified period. When a person's commercial activities exceed the $30,000 threshold, subsection 240(1) requires the person to apply to be registered.

9. Where a person's commercial activities are less than $30,000, the person is not required to apply to be registered. However, subsection 240(3) of the Act permits the voluntary registration of a person engaged in a commercial activity in Canada.

10. GST MEMORANDUM 200-4, WHEN A PERSON IS REQUIRED TO APPLY TO BE REGISTERED, contains detailed information about registration and GST MEMORANDUM 200-3, CALCULATION OF THE SMALL SUPPLIERS' THRESHOLD, contains detailed information concerning the rules for determining whether a person is a small supplier.

11. A registrant is obligated to collect and remit tax on taxable supplies. A registrant is also eligible to claim ITCs for the tax paid or payable on the acquisition or importation of property or a service for use in commercial activities.

Treatment of Property

12. The Act sets out the rules which enable a small supplier who registers to claim an ITC for certain property held for consumption, use or supply in the person's commercial activities immediately before registration. The small supplier who registers voluntarily is subject to the same rules governing ITCs as other registrants, which were explained in paragraphs 1 to 7 of this memorandum.

13. For the purpose of determining ITC eligibility at the time of registration, a small supplier who becomes a registrant is deemed, under subsection 171(1) of the Act,

(a) to have acquired, immediately after becoming a registrant, each property held for consumption, use or supply in commercial activities, and

(b) to have paid tax on the property.

14. The tax deemed to have been paid on this property is the lesser of

(a) the total of all tax actually paid on the property on which the person had not previously claimed an input tax credit or a rebate, and

(b) the amount of tax that the person would be required to pay if the property were acquired at its fair market value from a registrant.

15. The tax which the new registrant is deemed to have paid may be claimed as an ITC on the registrant's first return. Where the new registrant is claiming actual tax paid, the person must be able to provide appropriate documentary proof that tax was paid on the property. If the new registrant is using the fair market value, tax must be calculated on this valuation. For example, such property would be purchased after 1991, possibly from a non- registrant that would not have charged tax. However, if no tax was paid on any given property (e.g., if it was purchased before implementation of the tax), then an ITC cannot be claimed.

Example

During 1991, an accountant made taxable supplies below the $30,000 small supplier threshold. Also in 1991, the accountant purchased a personal computer exclusively for commercial use. An ITC could not be claimed for the tax paid on the computer purchase, since the accountant, as a small supplier, was not a registrant. In the last quarter of 1992, the accountant's taxable supplies exceed the $30,000 small supplier threshold. The accountant is then required to register for GST purposes. Once registered, an ITC may be claimed for the full amount of tax paid on the computer in 1991 or tax paid on the fair market value, whichever is less.

16. Registrants may claim an ITC within four years from the day when the first return on which the ITC could be claimed was required to be filed.

Treatment of Services and Rents

17. Subsection 171(2) of the Act sets out the rules which enable a new registrant to claim an ITC for any tax that became payable prior to registration on services or rent, royalty or similar payment for consumption, use or supply in the registrant's commercial activities attributable to the period after registration.

18. The allowable ITC may be claimed in the person's first reporting period. The rules for determining a registrant's reporting period are found under sections 245 to 251 of the Act.

19. More information on reporting periods is available in GST MEMORANDUM 500-2-1, AUTHORIZED FISCAL PERIODS AND REPORTING PERIODS.

20. To determine the ITC eligibility for a registrant's first reporting period, the registrant may include any tax paid or payable by the person prior to registration for

(a) services to be supplied to the person for consumption, use or supply in commercial activities after the person becomes a registrant, and

(b) rent, royalty or similar payment in respect of property used in commercial activities after the person becomes a registrant.

21. A person may be eligible to claim an ITC for the tax payable on certain start-up expenses under subsection 141(5) of the Act. The person must be able to provide documentary proof that the tax was paid on the services or rental property.

Restriction

22. A person who was a small supplier and subsequently became a registrant may not claim an ITC for tax paid or payable on services and rents consumed, used or supplied and attributable to the period prior to becoming a registrant, regardless of whether the tax was paid before or after registration.

Example

A small supplier prepays 18 months rent for office space for the period January 1, 1992 to June 30, 1993. The person becomes registered on March 15, 1992, and is eligible to claim an ITC for the tax on rent paid for commercial activities from March 15, 1992 onward. The person may not claim an ITC for any tax paid for the rent from January 1, 1992 to March 14, 1992, because that tax is attributable to the period before the person became a registrant.

23. As stated in paragraph 15 of this memorandum, documentary proof is required to confirm that tax was paid on property, services and rental property. For further information, see GST MEMORANDUM 400-1-2, DOCUMENTARY REQUIREMENTS.

CEASING TO BE A REGISTRANT

24. Under subsection 242(1) of the Act, the Minister of National Revenue may cancel the registration of a person where the Minister is satisfied that registration is no longer required. The person must be given reasonable written notice of the cancellation. Thus, GST registration may be cancelled if a person goes out of business or ceases to carry on any commercial activity in Canada.

25. A person may also cease to be a registrant where the person becomes a small supplier. The person may file a request to have registration cancelled if the person has been registered for one year or more, counting from the last day of the fiscal year of that person. The cancellation will be effective on the last day of the person's fiscal year.

26. When cancellation of registration occurs, the registrant will be responsible for remitting any outstanding tax collected or collectible on taxable supplies made during the period of the registration. In addition, the registrant may be required to self-assess and remit tax in respect of property and services that had been used in the registrant's commercial activities. The tax liability on ceasing registration is explained in paragraphs 29 to 39 of this memorandum.

27. GST MEMORANDUM 200-8, CANCELLATION OF REGISTRATION, contains more information on cancellation of registration.

Treatment of Property

28. Subsection 171(3) of the Act establishes the rules for the ITC treatment of capital and non-capital property that were used by a person in commercial activity when that person ceases to be a registrant.

29. The rules set out in subsection 171(3) of the Act provide for a tax liability in respect of capital property and non- capital property (e.g., inventory) that the person was using in a commercial activity. After registration ceases, any property is considered to be for non-commercial use. The person is treated as having disposed of each property at its fair market value immediately before registration ceases and to have collected tax on that amount. The tax deemed collected is remittable on the person's last tax return as a registrant.

30. The tax liability upon ceasing to be a registrant is based on all the property that the person used in commercial activity, whether it was acquired before 1991 or after 1990.

Capital Property

31. In the case of capital property, the person is deemed to have ceased using the property in commercial activities immediately before becoming a non-registrant. Capital property change-of-use rules apply. Generally, where a person ceases to use capital property in commercial activities, the property is deemed to have been sold and a tax liability arises. Specific change-of-use rules apply to the disposition of capital personal and real property. The application of these rules depends on the status of the registrant, for example, financial institution, public sector body, etc.

32. [Pursuant to the Notice of Ways and Means Motion tabled on March 10, 1992, effective January 1, 1991, the Act will be amended to clarify that a small supplier who chooses to de- register will not be required to account for the GST on capital property in respect of which the person was not entitled to claim an ITC. Where the supplier was not entitled to claim an ITC in respect of the acquisition of a capital property, but was entitled to claim an ITC in respect of improvements thereto, the small supplier must remit the GST in respect of the proerty equal to the lesser of the total of eligible ITCs in respect of the improvements and the tax calculated on the fair market value of the improved property at the time of de-registration.]

33. For more information on the tax consequences of the cessation of use of capital property, please see GST MEMORANDUM 400-3-9, CAPITAL PERSONAL PROPERTY, and GST MEMORANDUM 400-3-10, CAPITAL REAL PROPERTY. GST MEMORANDUM 700-5-11, CAPITAL PROPERTY, contains more information on the use of capital property with respect to financial institutions.

Non-Capital Property

34. A registered person who acquires non-capital property may claim an ITC for the tax paid or payable on the acquisition or importation of that property. When registration ceases, the person is deemed

(a) to have made a supply of each property (other than capital property) held for consumption, use or supply in the commercial activities of the person, and

(b) to have collected tax in respect of the supply (except in the case of an exempt supply) calculated on the fair market value of each property at that time.

Example

The owner of a video rental business decides to close the business and to cease being a registrant. In 1991, the owner paid $3,210 ($3,000 plus $210 tax) for video cassettes. When the store closes, the owner is deemed to have disposed of the cassettes (which are not capital property) at their fair market value, immediately before registration ceases, and to have collected tax on that value. The fair market value of the cassettes is $1,000, and the owner has to account for the $70 tax ($1,000 x 7%) on the deemed disposition. This $70 will have to be accounted for on the person's last tax return as a registrant.

Treatment of Services and Rents

35. The treatment of services and rents when a person ceases to be a registrant parallels the treatment of property outlined in paragraphs 32 to 34 of this memorandum.

36. Subsection 171(4) of the Act sets out the requirement to apportion service or rental payments which straddle the time at which the person ceases to be a registrant. The purpose of this apportionment is to determine the person's ITC eligibility for tax payable on services or rents. ITCs are claimable for tax payable on services and rental payments consumed, used or supplied in commercial activities while the person is registered.

37. In the final reporting period of a person who ceases to be a registrant, ITCs may be claimed under subsection 171(4) of the Act for tax payable after that time, provided:

(a) the tax is payable for services consumed, used or supplied in the person's commercial activities before registration ceased; or

(b) the tax is payable on a rent, royalty or similar payment attributable to a period before the person ceased to be a registrant, for property used in the course of the commercial activities of the person.

38. When calculating the net tax for the person's last reporting period, the person may not claim ITCs for any tax payable, for either services or rental payments after the registration ceases.

Example

The owner of a video rental business ceases to be a registrant on May 15, 1992. While a registrant, the person signed a prepayment rental agreement covering the period from March 1 to August 31, 1992, for the store's space. The person is eligible to claim an ITC for tax payable on the rent for the period of March 1 to May 15, 1992. If the rent is $1,000 per month plus GST, the calculation for the period of registration is $2,500 (2.5 months x $1,000/month) plus $175 tax. The $175 may be claimed as an ITC. The person may not claim an ITC for the tax payable on the rent for the period from May 16 to August 31, 1992, because this amount is attributable to the period after registration ceases.

39. Paragraph 171(4)(b) of the Act requires that a person make an adjustment on the final tax return if an ITC has been claimed for the tax paid on services or rent, royalty, or similar payments for use in the commercial activities of the person after registration ceases.

REFERENCES
OFFICE OF RESPONSIBILITY:

Policy and Legislation

LEGISLATIVE REFERENCES:

Excise Tax Act

HEADQUARTERS FILE:

N/A

SUPERSEDES GST MEMORANDUM:

N/A

OTHER REFERENCES:

N/A

SERVICES PROVIDED BY THE DEPARTMENT ARE AVAILABLE IN BOTH OFFICIAL LANGUAGES.

THIS MEMORANDUM IS ISSUED BY TECHNICAL INFORMATION, EXCISE/GST BRANCH UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE, CUSTOMS AND EXCISE.

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