Claiming ITCs on Pre-Registration Expenses

Except as provided in ETA subsections 171(1) and (2), a GST/HST registrant cannot claim input tax credits (ITCs) for expenses incurred before it became a registrant. ITCs can be claimed on such expenses only if a registrant can successfully "backdate" its effective date of registration. There are two methods of accomplishing this.

The first method is to follow the CRA's well-known policy with respect to voluntary registrations. When a person who carries on business as a small supplier voluntarily registers under ETA subsection 240(3), the CRA will allow that person to backdate its effective date of registration by up to 30 days, calculated from the date of the application. The person will then be able to claim ITCs relating to expenses incurred in the 30 days prior to the application date (Guide RC4022). In some cases, the CRA has accepted a backdated registration beyond 30 days if the person has provided evidence that GST/HST had been collected from the date requested on a regular and consistent basis (Excise & GST/HST News No. 66, Fall 2007).

The second method is to prove that a "mandatory registration" occurred on a previous date. A mandatory registration occurs when a person ceases to be a small supplier and subsequently makes a taxable supply. A private corporation ceases to be a small supplier when its total revenues from taxable supplies exceed $30,000 in either (1) a single calendar quarter or (2) cumulatively over four consecutive calendar quarters. For the purposes of determining whether the $30,000 threshold has been met, ETA section 148 provides that the total revenues of a person and all related persons are taken into account. Accordingly, if a person does not meet the $30,000 threshold on its own, it may still be subject to a mandatory registration by virtue of its association with another person.

When a mandatory registration occurs, the registrant becomes responsible for collecting and remitting GST/HST from the date of registration. For some registrants, however, this obligation may be immaterial. If a corporation earns little or no revenue but incurs expenses (for example, on behalf of a related corporation), the corporation will be able to claim ITCs on its expenditures while having little or no GST/HST to collect and remit. In such cases, it will be advantageous to establish a mandatory registration as far back as possible.

Regardless of when a person ceases to be a small supplier (which may be immediately upon incorporation in some cases), a mandatory registration will not be recognized until the person has made at least one taxable supply otherwise than as a small supplier (1992 CICA Commodity Tax Symposium, "Revenue Canada Round Table," question 3). For the purpose of determining when a taxable supply has been made, ETA section 133 provides that "the entering into of [an] agreement [to provide property or a service] shall be deemed to be a supply of the property or service made at the time the agreement is entered into." Accordingly, if a person can establish that it agreed to make a supply on a certain date, then the effective date of the mandatory registration will be the date of that agreement, and the person will be able to claim ITCs from that date forward.

Lane Zabolotney
MLT Aikins LLP, Saskatoon
[email protected]

Canadian Tax Focus
Volume 8, Number 2, May 2018
©2018, Canadian Tax Foundation