Loupy's: Deemed self-assessment after GST/HST number cancellation

Introduction

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

When a taxpayer ceases to be a GST/HST registrant, they 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 Tax Court of Canada decision, Restaurant Loupy's Inc. v. The Queen, 2016 TCC 260, 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

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:

1. GST owing on a $57,000 sale of equipment to a Boston Pizza restaurant.
2. 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.

A registrant means someone who is required to register

This case underscores that:

1. A business remains a "registrant" as long as it engages in commercial activity, even during the winding-down period.
2. Premature or mistaken cancellation of a GST registration number does not automatically trigger a deemed disposition under subsection 171(3) of the ETA.
3. 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, especially during the cessation of business activities, to avoid unnecessary tax liabilities.

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.

Read the original article in full on Good Services Tax. Author photo courtesy Rotfleisch & Samulovitch P.C. Title image: iStock (Supreme Court of Canada).