CRA finds that the new ETA s. 179(9) drop shipment rule does not affect whether a non-resident lessor is carrying on business in Canada

Example 1 in Policy Statement P-051R2 indicates that a non-resident lessor (with a leasing business outside Canada) is considered to be carrying on business in Canada by virtue of a sale-leaseback transaction under which it purchases a conveyance from a resident registrant, with delivery under the sale agreement and under the lease-back to the resident (who will use the conveyance partly in Canada) occurring in Canada, notwithstanding no other significant connecting factors to Canada.

ETA s. 179(9), which took effect in 2017, appears to deem this transaction to be subject to the drop-shipment rules, so that the resident is deemed to have sold the conveyance to the non-resident outside Canada, if the non-resident is not registered (so that such supply is not subject to GST/HST), and is deemed to have provided a drop-shipment certificate to the non-resident (so that the resident is subject to tax if it does not use the conveyance in commercial activity). When asked about the impact of s. 179(9), CRA stated that it “reviewed the leasing examples in P-051R2 and has determined that the introduction of new subsection 179(9) … does not impact the rationale or carrying on business conclusions in those examples.”

Although CRA did not discuss this response, there seems to be an element of circularity involved. If CRA indeed considers that the non-resident was carrying on business in Canada, it should have been registered (and, if not, CRA would register it retroactively.) Since the s. 179(9) drop shipment rule only applies where the non-resident is not registered, therefore, it does not apply. If CRA instead started with the proposition that s. 179(9) deemed the non-resident to no longer have any significant transactional connection with Canada, then it could have reached the opposite conclusion.

When also asked about a variation on this example where the equipment is purchased by the non-resident from a third party (rather than the Canadian company) and is leased by the non-resident to the Canadian company, which exports the conveyance immediately after taking possession under the lease in Canada, CRA stated that this also did not change its conclusion that the non-resident is carrying on business in Canada.

Neal Armstrong. Summaries of 27 February 2020 CBA Roundtable, Q.24 under ETA s. 240(1) and s. 179(9).