16 February 1994 GST/HST Interpretation 11585-13[1] - Application of ETA 141(5)(c), 141.01 and 141.1

This is in reply to the E mail of October 20, 1993 from XXXXX of your office to Noreen Staple concerning the above-noted provisions.

We will address the specific questions in the order submitted.

Q.1. (a) Are there any restrictions on the types of activities that may be considered to have been done in connection with the termination of a commercial activity pursuant to paragraph 141(5)(c) for the period January 1, 1991 to September 30, 1992? It appears the subsection 141.1(3) excludes making a supply effective October 1, 1992.

(b) For purposes of paragraph 141(5)(c) would the following activities be included in termination activities:

Collecting receivables

Preparing f/s for prior years

Completing outstanding income tax returns

Reporting to the Court in the case of receivership

Selling capital assets

Selling inventory

(c) If a company involved in commercial activity is placed in receivership by the Court, is everything done by the receiver considered to be in connection with the termination of the commercial activity, even if it takes 5 or 6 years for the receiver to complete the wind up of the business?

A.1. Paragraph 141(5)(c) prior to October 1992 and paragraph 141.1(3)(a) after September 1992 are in the legislation to provide greater certainty that activities done in connection with the acquisition, establishment, disposition or termination (and reorganization in the case of paragraph 141(5)(c)) of a commercial activity are done in the course of that commercial activity. It is our view that even in the absence of such provisions, activities done in connection with the acquisition, establishment, disposition or termination (and reorganization in the case of paragraph 141.1(3)(c)) of a commercial activity are still part of the commercial activity. However, to the extent there is doubt, the above provisions clarify that the activities are part of the commercial activity.

The legislative changes made by the addition of paragraph 141.1(3)(a) ensures that an activity associated with the acquisition, establishment, disposition or termination of a commercial activity is a commercial activity only of the person who is undertaking the acquisition, establishment, disposition or termination. It also requires, where appropriate, pro-rating of inputs for input tax credit purposes in connection with the acquisition, establishment, disposition or termination of a commercial activity. While paragraph 141(5)(c) does not expressly require pro-rating of activities where something is done in connection with the establishment, acquisition, reorganization, disposition or termination of a commercial activity, we interpret paragraph 141(5)(c) as requiring such pro-rating.

The wording of paragraph 141(5)(c) does not tie the commercial activity in question to the person engaging in the establishment, acquisition, reorganization, disposition or termination of the commercial activity. As a result, it may be possible to argue that a corporation's activities of establishing a new business can constitute a commercial activity of that new business. However, we do not agree with this interpretation since such an interpretation is not contemplated in the scheme of the Act.

The inclusion of the phrase "other than a supply" in paragraph 141.1(3)(a) is to ensure that the provision applies only to inputs. For activities that are supplies, e.g. sale of capital assets and inventory, even though they are excluded under paragraph 141.1(3)(a), their status and eligibility for input tax credits would be subject to the other provisions of the Act, i.e. if it is a taxable supply GST is exigible and input tax credits may be claimed. The activities listed under (b) above are in connection with the termination of a commercial activity and therefore are part of the commercial activity. Once it is established that the activities are in the course of the commercial activities of the person, input tax credits may be claimed with respect to property and services acquired for consumption, use or supply in the course of those activities subject to the normal rules concerning input tax credits and the use of property and services, e.g. subsection 169, section 185, section 198, section 199.

There is no time limit on the activities done by the receiver for such activities to be considered part of the termination of the commercial activity. However, the activities done by the receiver may not all relate to the "termination" of the commercial activity since the receiver is likely to try and operate the business for a period of time. If this is the case, since paragraph 266(2)(a) deems the receiver to be acting as agent for the person, all provisions that would apply if the person was still carrying on the commercial activity apply to the receiver who is carrying on the commercial activity.

Q.2. (a) If termination activities occur prior to October 1, 1992 are applicable ITCs restricted in any way by section 141.01?

(b) If termination activities occur subsequent to September 30, 1992 are applicable ITCs restricted in any way by section 141.01?

A.2. Proposed section 141.01 deals with the determination of the extent inputs are used in a commercial activity versus use in an exempt activity. It does not say anything about what constitutes a commercial activity but merely reinforces the requirement to allocate inputs between taxable and exempt supplies.

It should be noted that proposed section 141.01 is retroactive to January 1, 1991, therefore whether the termination occurs before October 1992 or after September 1992 is not an issue for purposes of that section. In addition, that part of proposed section 141.01 which deals with the requirement to allocate inputs does not reflect a change in policy or administration but is added to clarify existing provisions.

Q.3. (a) Could a company voluntarily register for GST effective January 1, 1991 if its only activities are in connection with the termination of its commercial activities as described in paragraph 141(5)(c)? Would the answer be the same if all of the assets and inventory had been sold before January 1, 1991 and the activities during 1991 involved preparing financial statements and collecting outstanding receivables and there was no intention to make supplies on or after January 1, 1991?

(b) Could a previously unregistered company voluntarily register for GST effective October 1, 1992 if its only activities are termination activities pursuant to subsection 141.1(3)?

A.3. As noted above, paragraph 141(5)(c) and paragraph 141.1(3)(a) are for greater certainty that activities with respect to the termination of a commercial activity are part of that commercial activity. As a result, the person could register in the circumstances described above since it would be engaged in a commercial activity. Eligibility for input tax credits would be subject to the normal rules in the Act.

It should be noted that the Department's policy with respect to registration under subsection 240(3) is that registration is normally effective the date the application for registration is received by the Department.

If you have any additional questions, please contact P. Roach at (613) 952-9214 or J. Sitka at (613) 952-9219.

J. Daman
Director
Financial Institutions/Corporate Reorganizations
Policy and Legislation
Excise/GST