20 May 2004 GST/HST Interpretation 50859 - Application of Subsection 272.1(1) of the Excise Tax Act

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

This is in response to your e-mail XXXXX regarding the definition of specified person in section 225 of the Excise Tax Act (the Act) and the time limitation for a specified person to claim a deduction from net tax under the provisions of section 231 of the Act.

A person has commenced business in year 1 and became a registrant on June 1st of that year. The person has a fiscal year that is the calendar year and a monthly reporting period. In addition, the person had no revenues until December of year 1 and did not file returns for the monthly reporting periods from June through to November of year 1. The person filed only the GST/HST return for the month of December to cover the reporting periods from June 1st to December 31st for that part of the fiscal year for which the person was registered.

Interpretations Requested

1. Can a person be a specified person under the definition in 225(4.1)(b) of the Act in its first fiscal year or are the results of operations for another fiscal year required to make that determination?

2. In determining the person's threshold amount in paragraph 225(4.1)(b), what constitutes the base year in subsection 249(1)? In determining the value for element B in the formula in paragraph 249(1)(a), should the number of days in December or the number of days from June 1st to December 31 be used?

3. Subsection 231(4) of the Act provides that a person may not claim a deduction from net tax for a bad debt written off in a particular reporting period unless the deduction is claimed in a return filed within four years after the due date of the return for the particular reporting period. However, element B (input tax credits and all other amounts that may be deducted) in the net tax formula in subsection 225(1) of the Act appears to limit ITCs and all other amounts that may be deducted from net tax to two years for a specified person. Is the time limitation for a specified person to write off a bad debt two years or four years?

Interpretations Given

Interpretation 1

For purposes of subsection 225(4) [i.e., ITC time limitations], subsection 225(4.1) provides that a person is a specified person during a reporting period of the person if:

(a) the person is a listed financial institution (LFI) described in any of subparagraphs 149(1)(a)(i) to (x) during the reporting period, or

(b) the person's threshold amounts determined in accordance with subsection 249(1) of the Act exceed $6 million for both the particular fiscal year of the person that includes the reporting period and the person's previous fiscal year, unless

in the case of a person that is not an LFI described in any of subparagraphs 149(1)(a)(i) to (x) during the reporting period, the person is a charity, or all or substantially all of the person's supplies (other than supplies of financial services) are taxable supplies in either of the person's two fiscal years immediately preceding the particular fiscal year.

Pursuant to subsection 249(1) of the Act, the threshold amount for a fiscal year of a person is an amount equal to the total of the amount determined by the formula (A x 365/B) + (C x 365/D) where

A is the total consideration (other than consideration attributable to the sale of goodwill of a business) paid or payable to the person in the immediately preceding fiscal year (referred to as the base year) for taxable supplies (other than supplies of financial services, supplies by way of sale of capital real property, and zero-rated exports) made in Canada; and

B is the number of days in the base year.

A similar formula adds the taxable supplies made by other persons who are associated with the particular person to the particular person's own taxable supplies.

Under paragraph 225(4.1)(b), a person's threshold amounts are determined using the amounts for the particular fiscal year that includes the reporting period (year 3) and the person's previous fiscal year (year 2). These threshold amounts are determined in accordance with subsection 249(1) of the Act. Under subsection 249(1), the threshold amount for a particular fiscal year (year 3) is based on the consideration for taxable supplies in the immediately preceding fiscal year (year 2). Therefore the threshold amount for year 2 is based on the consideration for taxable supplies in the immediately preceding fiscal year (year 1).

Consequently, as the threshold amount for year 3 is based on the consideration for taxable supplies in years 2 and 1, it can be concluded that a person cannot be considered to be a specified person under the definition in paragraph 225(4.1)(b) of the Act in a reporting period in its first fiscal year.

In summary, the results of operations for the two fiscal years immediately prior to the particular fiscal year that includes the reporting period are required to determine if a person is a specified person pursuant to paragraph 225(4.1)(b) of the Act. It is important to note that a person is not a specified person if all or substantially all of the supplies made by the person during either of the person's two fiscal years immediately preceding the particular fiscal year (other than supplies of financial services) are taxable supplies.

Interpretation 2

When calculating a person's threshold amount for a particular fiscal year of the person pursuant to paragraph 225(4.1), the base year in subsection 249(1) is the immediately preceding fiscal year.

For a particular fiscal year of a person, element B in the formula in paragraph 249(1)(a) is the number of days in the base year (which is the immediately preceding fiscal year to the particular fiscal year). Therefore, in determining the threshold amount for a particular fiscal year when the immediately preceding fiscal year is a "short" fiscal year (e.g., from June 1 to December 31), the number of days in the short fiscal year and not the number of days in the monthly reporting period should be used.

Interpretation 3

Subsection 225(1) essentially defines net tax for a reporting period of a person as the positive or negative amount determined by the formula A - B. Subsection 225(1) applies to all persons (including specified persons). Element A is the total of all amounts that became collectible and all other amounts collected as or on account of tax in the particular reporting period. Element B is the total of all amounts each of which is an ITC for a particular reporting period or a preceding reporting period and all other amounts that may be deducted (such as a bad debt deduction) in determining net tax and that are claimed in the return filed for the particular reporting period.

The two-year ITC time limitation for specified persons is found in subsection 225(4). This limitation refers only to ITCs but does not refer to other amounts that may be deducted in determining net tax.

Subsection 231(4) provides that a person may not claim a deduction in respect of an amount written off in its books of account as a bad debt unless the person clams it in a return filed within four years after the day on or before the due date of the return for the reporting period in which the debt is written off. Therefore, a specified person is required to claim a deduction for a bad debt written off in its books within the four-year limitation period.

Should you require further assistance with this matter, please do not hesitate to contact me at (613) 954-7931.

2004/06/10 — RITS 51064 — [Determination of XXXXX as a Municipality]