A taxpayer who ceases to be GST/HST registrant can be hit with a hefty tax bill due to subsection 171(3) of the Excise Tax Act (the “ETA”), which in effect triggers a deemed disposition, which with other provisions in the ETA, forces the person ceasing to be a registrant to self-assess GST/HST on the fair market value of any remaining property.

This is an often over-looked consequence of the wind-up of commercial activities, and is aimed at putting such a business on the same footing as any other person acquiring property for non-commercial activities: to effectively have acquired that property on a fully GST/HST paid basis.

A recent case illustrates this concept, as well as the trouble that can come with pre-mature cancellation of one’s GST/HST registration number (which does not necessarily equate to ceasing to be a “registrant”).

In Restaurant Loupy’s Inc v The Queen, 2016 TCC 260 (“Restaurant Loupy’s”), the Tax Court of Canada (“TCC”) had to determine whether the premature or mistaken cancellation of a business’s GST registration number automatically triggers a deemed disposition pursuant to subsection 171(3) of the ETA, particularly where the business continues to engage in commercial activity.  

In Restaurant Loupy’s, the Appellant was evicted and forced to close its restaurant after the land on which it was located was sold to a third party. Around this time, the Appellant’s accountant mistakenly asked the CRA to cancel the Appellant’s GST registration number, which the CRA did. Upon learning that its GST registration number had been cancelled in error, the Appellant applied for and received a new GST registration number retroactive to its original registration date.

The CRA subsequently reassessed the Appellant for GST that it failed to remit on a $57,000 sale of equipment to a Boston Pizza restaurant. The CRA also assessed tax on a deemed disposition of the Appellant’s remaining assets as it took the position that the Appellant’s cancellation of its GST registration number triggered a deemed disposition pursuant to subsection 171(3) of the ETA. The CRA asserted that the subsequent retroactive GST registration did not alter this scenario.

The Appellant accepted that tax was owed on the $57,000 equipment sale. However, the Appellant argued that there was no deemed disposition under subsection 171(3) because despite de-registering by mistake, it never stopped carrying on business, so it remained a GST registrant during the reporting period. The Appellant therefore appealed the CRA assessment to the TCC.

The TCC held that the sale of equipment following the cessation of normal business activities falls within the definition of “commercial activity” in subsection 123(1) of the ETA such that the Appellant was required to be registered under subsection 240(1).  Since “registrant” is defined in subsection 123(1) of the ETA to include a person “who is required to be registered”, the TCC reasoned that the Appellant remained a registrant under the ETA even after its GST registration number was mistakenly cancelled.

Since the Appellant remained a “registrant”, which is the wording used in subsection 173(1) (i.e., the rule does not use the word “registered”, but includes the more encompassing “registrant”), the TCC concluded that there could be no deemed disposition under that subsection.

The TCC therefore allowed the appeal and held that GST was only exigible on the equipment sale.

The TCC’s conclusion that the Appellant remained a registrant even after mistakenly cancelling its GST registration number is clearly consistent with the definitions of “commercial activity” and “registrant” in subsection 123(1) of the ETA.

A key takeaway from this decision is that commercial activity does not end immediately after cessation of normal daily business activities end; it continues throughout the winding down period when a business liquidates its equipment and assets.  

What was unsaid in the decision was that subsection 171(3) will still apply to Restaurant Loopy, once the business is completely wound down, with commercial activities ceased, and the GST/HST number cancelled.   (Self-assessment obligations could also arise at other points in the wind-down, particularly where capital property is converted to non-commercial uses prior to the final termination of commercial activities).

Have you been reassessed by the CRA on the basis of a deemed disposition? If so contact us here.

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