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.
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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 120380
Business Number: XXXXX
Attention: XXXXX
June 14, 2010
Dear XXXXX:
Subject:
GST/HST RULING
Entitlement to Input Tax Credits in Respect of Goods Imported into Canada
Thank you for your letter of XXXXX concerning the entitlement of XXXXX to input tax credits (ITCs) in respect of goods imported into Canada.
The Harmonized Sales Tax (HST) currently applies at the rate of 13% in Nova Scotia, New Brunswick, and Newfoundland and Labrador. Effective July 1, 2010, HST will apply at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. The Goods and Services Tax (GST) will continue to apply at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
Based on the information in the letter including, the accompanying sample invoices; Customs import documents and Firm Reports; our telephone conversations of XXXXX; and supplementary documentation (including invoices for inbound and outbound shipping charges, and additional warehousing invoices) submitted by XXXXX on XXXXX, we understand the following:
1. XXXXX is a non-resident corporation that manufactures XXXXX ("the products") XXXXX. All the manufacturing for these products are done in XXXXX.
2. XXXXX supplies its products worldwide; however all its North American customers are located in the USA. XXXXX does not have any customers in Canada, it does not solicit business in Canada, nor does it deliver products to any person in Canada for consumption, use or supply in Canada.
3. XXXXX is a Canadian corporation that provides XXXXX services and warehousing services.
4. XXXXX entered into an agreement with XXXXX whereby XXXXX would provide XXXXX services and warehousing services. XXXXX ships products to Canada for storage at XXXXX warehouse until orders are received for the products from clients in the USA. As part of the arrangement, XXXXX set up an XXXXX System that automates the process so that when XXXXX receives an order from a customer in the USA, the products may be shipped from XXXXX warehouse to that customer. XXXXX arranges for the shipment of the products to the clients in the USA.
5. XXXXX engages non-resident carriers to transport the products in containers from XXXXX to Canada - the carriers are not registered for purposes of the GST/HST.
6. XXXXX acts as the importer of record and pays GST on the importation of the products into Canada. The arrangement between XXXXX and XXXXX has been ongoing since XXXXX and XXXXX has paid tax on the importation of the products into Canada from that period until XXXXX.
7. XXXXX has not claimed ITCs or otherwise recovered the GST paid by XXXXX on importation of the products into Canada during that period.
8. XXXXX was not registered for purposes of the GST/HST, nor did not make any taxable supplies in Canada during the period identified above. XXXXX has a Business Number XXXXX.
9. XXXXX invoices XXXXX monthly for storage; this charge includes a warehousing charge for leftovers from the prior month, a storage charge for incoming products and other miscellaneous charges.
10. In on our telephone conversation of XXXXX, you indicated that there is no written agreement between XXXXX and XXXXX for the supply of the services provided to XXXXX by XXXXX.
Ruling Requested
You would like confirmation of the following:
1. XXXXX may claim ITCs to recover the GST paid by XXXXX on the importation of the products into Canada pursuant to section 169 and 180 of the ETA.
2. XXXXX will not be required to charge the GST to XXXXX in respect of the products, provided the products are exported from Canada to XXXXX customers in the USA and XXXXX retains documentary evidence to substantiate the export of the products from Canada.
Ruling Provided
1. Provided that XXXXX provides XXXXX with satisfactory evidence that the tax has been paid on the importation of the products, XXXXX is entitled to claim ITCs for the GST that is deemed under section 180 of the ETA to have been paid equal to the GST paid by XXXXX on the importation of the products.
2. Based on the application of subsection 179(3) of the ETA, XXXXX is not required to charge the GST to XXXXX in respect of the storage service in respect of the products, and the general drop-shipment rule will not apply to that supply, provided the products are exported from Canada to XXXXX customers in the USA and XXXXX retains satisfactory documentary evidence of the exportation of the products.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Section 180 allows for the flow-through of ITCs to allow a registrant to recover the amount of tax that is paid by an unregistered non-resident on the importation of goods where the non-resident has paid tax on the importation of goods, the physical possession of which is caused by the non-resident to be transferred in Canada to the registrant, in order for the registrant to make a taxable supply of a commercial service in respect of the goods to the non-resident.
For the purpose of determining an input tax credit of the registrant under section 169, once the non-resident provides the registrant in the circumstances described above with satisfactory evidence that the tax has been paid on the goods, the registrant is deemed at the time the non-resident paid the tax, to have paid tax in respect of a supply of the goods to the registrant equal to the tax paid by the non-resident.
The registrant described above who acquires physical possession of the goods to perform a commercial service in respect of the goods is also deemed to have acquired the goods for use exclusively in its commercial activities, resulting in the registrant satisfying all of the conditions to become entitled to an ITC for the tax that the registrant is deemed to have paid.
As a result of the application of section 180 and 169, XXXXX is entitled to claim an ITC to recover an amount equal to the tax paid by XXXXX on the importation of the products.
The second part of your enquiry concerns the application of the drop-shipment rules in section 179, particularly the exception in subsection 179(3) to the general drop-shipment rule in subsection 179(1).
Generally, a drop-shipment occurs where a registrant, under an agreement with an unregistered non-resident person, acquires physical possession of tangible personal property (TPP) of the non-resident for purposes of making a supply of a commercial service in respect of the TPP, and subsequently transfers physical possession of the TPP in Canada to another person or to the non-resident. Pursuant to subsection 179(1) the registrant is deemed to have made a taxable supply of the TPP for its fair market value to the non-resident and not to have supplied its service in respect of the TPP.
An exception to the general rule under subsection 179(1) occurs where the goods are directly exported or transferred to a third person who intends to export the goods. Pursuant to subsection 179(3) the supply of the commercial service is deemed to be made outside of Canada if, after the registrant acquires physical possession of the property for purpose of making a taxable supply of a commercial service in respect of the property to the non-resident person, the property is exported in accordance with the requirements of subsection 179(3). In particular, the registrant must either:
• cause physical possession of the property to be transferred to a person at a place outside Canada, or
• cause physical possession to be transferred to a carrier, or mail the property, for export and delivery to a person at a place outside Canada, or
• cause physical possession of the property to be transferred at a place in Canada to the non-resident person or any other person (each referred to as an "exporter") for export in the following circumstances:
- after physical possession of the property is transferred to the exporter, the exporter exports the property as soon as is reasonable given the circumstances surrounding the exportation and, if applicable, in accordance with the normal business practices of the exporter and the owner of the property,
- the property has not been acquired by the non-resident person or any owner for consumption, use or supply in Canada at any time after physical possession of the property is transferred to the exporter and before it is exported,
- after physical possession of the property is transferred to the exporter and before the property is exported, it is not further processed, transformed or altered, except to the extent reasonably necessary or incidental to its transportation, and
- the registrant maintains satisfactory evidence that the property has been exported, will be exported.
Subsection 179(3) would deem the supply of storage services provided in Canada by XXXXX to XXXXX to be made outside of Canada where the products are exported to XXXXX clients in the USA, and XXXXX retains satisfactory documentary evidence to substantiate the export of the products. As such, XXXXX would not be required to charge the GST to XXXXX on the supply of the storage service in respect of the products. Subsection 179(3) would also deem the general drop-shipment rule under subsection 179(1) not to apply to the supply.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 957-7841. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Dwayne Moore
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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