Limitation on ITC Eligibility where Person becomes a Registrant

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-018R

Date of Issue

Issued September 4, 1992
Revised March 29, 2000

Subject

Limitation on ITC Eligibility where Person becomes a Registrant

Legislative Reference(s)

Subsections 169(1), 171(1), 171(2), 171.1(2) and 225(4) of the Excise Tax Act ¹

National Coding System File Number(s)

11650-1

Effective Date

January 1, 1991

April 1, 1997 - HST

Issue and Decision

As a general rule, when a person who is a small supplier becomes a registrant, the person is eligible to claim an input tax credit (ITC) in respect of the GST/HST paid or payable on property and certain services acquired prior to becoming a registrant.

In the case of property, subsection 171(1) deems the person to have acquired, by way of sale, each property held by the person for consumption, use or supply in the course of the person's commercial activities immediately before becoming a registrant. In addition, the person is deemed to have paid tax equal to the basic tax content² of the property at that time. As a result, the person may claim an ITC for the amount of tax deemed to have been paid, subject to the normal ITC restrictions.

In the case of small suppliers who are engaged in a taxi business and other commercial activities, the other activities are deemed not to be commercial activities pursuant to subsection 171.1(1) where the registration of the person applies only to the taxi business. Therefore, such persons may not claim an ITC in respect of property that was held by the person for consumption, use or supply in the course of those other activities. However, when the registration of the person begins to apply to those other activities, subsection 171.1(2) deems the person to have acquired each property held by the person at that time for consumption, use or supply in the course of those activities. The person is also deemed to have paid tax equal to the basic tax content of the property at that time. Therefore, the person may claim an ITC for the amount of tax deemed to have been paid, subject to the normal ITC restrictions.

In the case of services for consumption, use or supply in the course of a person's commercial activities, subsections 171(2) and 171.1(2) provide that an ITC may be claimed for the tax that became payable, before the person becomes a registrant, in respect of services to be supplied after the person becomes a registrant. The same applies to the tax payable in respect of rent, royalty or a similar payment that relates to property used in the course of the person's commercial activities after the person becomes a registrant. Under these provisions, the amount of tax may be included in determining the ITCs of the person for the first reporting period of the person that ends after the person becomes a registrant.

However, subsections 171(2) and 171.1(2) also provide that no amount of tax should be included in determining the person's ITCs to the extent that the tax became payable after the person becomes a registrant and the services to which the tax relates was supplied to the person before the person became a registrant. Similarly, tax in respect of rent, royalty or a similar payment attributable to a period before the person became a registrant cannot be included in determining the person's ITCs.

Subsection 225(4) provides a limitation on the time within which an ITC for a particular reporting period may be claimed. Generally, a person must claim the ITC in a return filed by the due date of the return for the last reporting period that ends within four years after the end of the reporting period in which the ITC could have first been claimed. In the case of a specified person³ , the ITC must be claimed in a return filed by the due date of the return for the last reporting period that ends within two years after the end of the person's fiscal year that includes the reporting period in which the ITC could have first been claimed.

With respect to services and rent, royalty or a similar payment, subsections 171(2) and 171.1(2) provide that amounts, as discussed above, may be included in determining the ITCs of a person for the first reporting period of the person that ends after the person becomes a registrant. It is the CCRA's position that amounts that may be included in determining the person's ITCs for the first reporting period of the person that ends after the person becomes a registrant are subject to the ITC time limitations provided under subsection 225(4). In other words, amounts that may be included in determining ITCs under subsections 171(2) and 171.1(2) may be claimed as ITCs in subsequent reporting periods provided that the amounts are claimed in a return filed by the time limitation imposed under subsection 225(4).

1 All references herein are to the Excise Tax Act, unless otherwise indicated

2 The term "basic tax content" is defined in subsection 123(1)

3 "specified person" is a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) during the reporting period. In addition, a "specified person" includes a person whose threshold amounts, determined under subsection 249(1), exceed $6 million for both the person's fiscal year that includes the reporting period and the person's preceding fiscal year, except if the person's supplies (other than supplies of financial services) in either of the person's two immediately preceding fiscal years are all or substantially all taxable supplies. Charities, as defined in subsection 123(1), are not included within the definition of a specified person, however municipalities, hospital authorities, school authorities, public colleges and universities may be considered to be specified persons.

Subsection 225(4.1) was amended by 1997, c.10, s.44(1) and came into force on July 1, 1996.