The GST/HST Implications of Changing the Use of Personal Property – How Subsections 199(3), 200(2), and 200(3) Interact

Introduction: Navigating Property Use Changes Under the Excise Tax Act

Registrants under the Excise Tax Act are responsible for collecting and remitting the GST/HST payable for the taxable supplies that the registrant makes. Generally, as a registrant, input tax credits (“ITCs”) are claimable for the GST/HST that is paid for goods and services used in the course of the registrant’s commercial activities.

An important issue is whether there is a tax liability upon changing the use of property. Under subsection 45(1) of the Income Tax Act, a change of use of property from capital property to property that generates income will result in a deemed disposition and capital gains tax may be payable. Another important consideration is the GST/HST treatment of personal property when the use of the property is changed.

Definition of Personal Property for GST/HST

“Personal property” is defined in subsection 123(1) of the Excise Tax Act. Specifically, it is property that is not real property. For provinces other than Quebec, real property includes messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable.

In Quebec, real property means immovable property and every lease associated with real property. Moreover, mobile homes and floating homes are real property. In other words, personal property, for the purposes of the Excise Tax Act, is property that is not what can most easily be described as a house, building or land.

General Rule for the Disposition of Personal Property

Under section 141.1(1) of the Excise Tax Act, when a person makes a supply of personal property that was last acquired for consumption or use in the course of the person’s commercial activities, the person is deemed to have made the supply in the course of the commercial activity. Therefore, if one uses personal property in commercial activities, that personal property is taxable when it is sold.

Change of Use from Capital Property to Use in Commercial Activities

Subsection 199(3) applies to situations where personal property is initially used as capital property and ceases to be used as capital property. This rule states that a registrant who acquires or imports personal property for use as capital property and subsequently begins to use the property in the course of commercial activities is deemed to have received a supply of the property and to have paid the applicable tax. This subsection provides the registrant the opportunity to claim an ITC on personal property that was purchased for use other than in his or her commercial activities.

Thus, registrants may acquire personal property as capital property but then decide to use the property in business. The registrant will have to pay the applicable GST/HST for the deemed supply, but may claim an ITC.

Change of Use From Commercial Activities to Other Purposes

Section 200 of the Excise Tax Act provides the rules for how personal property is treated when there is a change of use of the personal property to a use that is not for commercial activities.

Subsection 200(2) deals with the scenario where a registrant last acquires or imports personal property primarily for the use in his or her commercial activities and the registrant begins to use that property primarily for other purposes. This provision states that the registrant is deemed to have made a supply of that property and simultaneously received a supply of that property. Thus, GST/HST is applicable to the deemed supply.

An ITC is generally claimable on the purchase of a supply of personal property that will be used in the course of commercial activities. When the registrant acquired the property for use in commercial activities, the registrant would have claimed an ITC for the tax paid on the property. This rule essentially obligates the registrant “pay back” the ITC that was claimed because GST/HST will be payable.

Situations Where Personal Property Not Used in The Course of Commercial Activities of a Registrant is Sold

Subsection 200(3) addresses circumstances where a registrant makes a supply of personal property that is not used in the course of his or her commercial activities prior to making the supply. Specifically, if, before the earlier of the time that ownership of the property is transferred and the time that possession of the property is transferred, the registrant was using the supply for purposes otherwise than primarily in commercial activities, then the supply is deemed to have not been made in the course of commercial activities.

For tax to be payable by a recipient of a good or service, the supply must be a taxable supply. A taxable supply cannot be an exempt supply, and it must be made in the course of a commercial activity. Exempt supplies are supplies, such as those listed in Schedule V of the Excise Tax Act and are not subject to GST/HST. Therefore, when subsection 200(3) applies, the sale of personal property is not taxable.

The Interaction Between Subsections 200(2) and 200(3) – Does GST/HST Apply to a Sale of Personal Property After Its Use Has Been Changed?

A situation may occur where a registrant has acquired personal property for the use in a business but discontinues the use of that property for any reason. The registrant is deemed to have made a self-supply of the personal property and must pay GST/HST on the “sale”.

If the registrant later decides to sell the property, there is no applicable tax due to the operation of subsection 200(3). Before the sale, the registrant was not using the property in the course of his or her commercial activities; thus, the registrant is deemed not to have made a supply in the course of commercial activities.

The purchaser of the property may want to claim an ITC because he or she acquired the property for use in a commercial activity. However, because a taxable supply was not made, the obligation under subsection 165(1) for a recipient of a supply to pay GST/HST does not apply. Similarly, the requirement for the registrant to collect tax does not apply. Effectively, the person who purchased the property is not entitled to an ITC.

This provision reflects the general VAT principle by which Canada’s GST/HST system operates. Once tax has been paid and no ITC claimed or the ITC has been “repaid”, no additional tax applies to a later sale of the property.

TAX PRO TIP – Retention of Records and Understanding Obligations as a Registrant

The above rules are examples of common situations that you may face as a registrant. It is important to understand these rules to know when GST/HST is payable and when you can claim ITCs.  Thus, it is imperative to maintain records of how property is being used in a business and, more importantly, if ITCs will be claimed, records on how much tax was paid for supplies used in the business.

This will allow you to avoid situations where you either mistakenly collect tax when it’s not applicable or fail to collect it when it is. Engage with a top Canadian tax lawyer to discuss the types of supplies you are making and the GST/HST obligations that are attached to making those supplies.

FAQ

What is a registrant?

A registrant is defined under section 123(1) of the Excise Tax Act. It is a person who is registered, or who is required to be registered under Subdivision D of Division V of the Excise Tax Act.

Generally, every person who makes a taxable supply in Canada in the course of commercial activity engaged in by the person in Canada must register. If you are a small supplier, your only commercial activity is making a supply of real property by way of sale otherwise than in the course of a business or a non-resident person who does not carry on any business in Canada, you are not required to register. Even if you do not register when you are required to, you will be considered a registrant.

To be considered a small supplier, the total gross revenue from your worldwide taxable supplies from all businesses must be $30,000 or less in any calendar quarter and in the last four consecutive calendar quarters. If the revenue exceeds $30,000, then you will be required to register. Therefore, if your business revenue from the provision of taxable supplies is greater than $30,000, you will be a registrant.

When am I obligated to collect GST/HST?

You are obligated to collect GST/HST on a supply of taxable supplies. It is important to understand the difference between taxable supplies, exempt supplies and zero-rated supplies. When a supply is exempt or zero-rated, there is no tax is payable on those supplies. The most important difference between a zero-rated and exempt supply is the ability to claim ITCs on zero-rated supplies. If you are a registrant, you are required to collect and remit the GST/HST payable on the provision of taxable supplies that you make.

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.