When CRA Reassesses a Taxpayer after the Agency Accidentally Cancelled his GST Number
When a taxpayer ceases to be a GST/HST registrant, he can face a significant tax liability under subsection 171(3) of the Excise Tax Act (ETA). This provision triggers a deemed disposition, requiring the taxpayer to self-assess GST/HST on the fair market value of any remaining property. Combined with other provisions of the ETA, this rule ensures the taxpayer is treated as though he acquired the property on a GST/HST-paid basis, similar to any other non-commercial property holder.
This often-overlooked consequence of winding down a business is designed to ensure that the final disposition of property aligns with GST/HST rules. A recent case, Restaurant Loupy’s Inc. v. The Queen, 2016 TCC 260 (“Restaurant Loupy’s Inc.”), highlights the implications of premature or mistaken cancellation of a GST/HST registration and underscores that ceasing to hold a registration number does not necessarily mean ceasing to be a “registrant” under the ETA.
CRA Reassessed a Taxpayer GST Due to Accidental Cancellation of GST Number
In Restaurant Loupy’s Inc., the Tax Court of Canada (TCC) examined whether the erroneous cancellation of a business’s GST registration number automatically triggered a deemed disposition under subsection 171(3) of the Excise Tax Act, particularly when the business continued to engage in commercial activities.
The appellant, a restaurant owner, was evicted after the sale of the property on which it operated. During this period, the appellant’s accountant mistakenly requested the cancellation of its GST registration number, which the CRA approved. Upon discovering the error, the appellant obtained a new GST registration number retroactive to the original registration date.
The CRA subsequently reassessed the appellant for two issues:
- GST owing on a $57,000 sale of equipment to a Boston Pizza restaurant.
- GST on a deemed disposition of the appellant’s remaining assets, arguing that the cancellation of the registration number triggered subsection 171(3) of the ETA.
While the appellant agreed GST was due on the equipment sale, it contested the deemed disposition assessment. It argued that despite the mistaken deregistration, it had continued its business operations and thus remained a registrant under the ETA during the reporting period.
The Tax Court Sided With the Taxpayer Based on the Broad Interpretation of the Term “Registrant” Under the ETA
The TCC ruled in favour of the appellant. It held that:
- The sale of equipment during the winding-down of business falls within the definition of “commercial activity” under subsection 123(1) of the ETA, requiring the appellant to maintain GST registration under subsection 240(1).
- A “registrant,” as defined in subsection 123(1), includes a person required to be registered, regardless of whether their registration number was cancelled.
Because the appellant was still a “registrant” under the broader definition in subsection 123(1), subsection 171(3) did not apply. The TCC emphasized that subsection 171(3) uses the term “registrant,” not “registered,” making it clear that the cancellation of the GST number did not negate the appellant’s status.
As a result, the appeal was allowed, and GST was assessed only on the equipment sale.
Pro Tax Tips – Registrant Means Someone Who’s Required to Register
This case underscores that:
- A business remains a “registrant” as long as it engages in commercial activity, even during the winding-down period.
- Premature or mistaken cancellation of a GST registration number does not automatically trigger a deemed disposition under subsection 171(3) of the ETA.
- Commercial activity extends beyond daily operations and includes liquidation of assets during the business’s closure.
This ruling reinforces the importance of understanding the nuances of GST/HST rules and having the proper GST/HST tax advice from a knowledgeable Canadian tax lawyer, especially during the cessation of business activities, to avoid unnecessary tax liabilities.
FAQ:
What is the effect of subsection 171(3) of the ETA?
This provision triggers a deemed disposition, requiring the taxpayer to self-assess GST/HST on the fair market value of any remaining property whenever a taxpayer ceases to be a GST/HST registrant.
How is a registrant defined under the ETA?
Case law indicates the term registrant under subsection 123(1) of the ETA means a person required to be registered for GST/HST regardless of whether his registration number was cancelled.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.