26 October 2005 Excise Interpretation 55567 - Application of Excise Tax to Jewellery

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.

Dear XXXXX:

This is in reply to your telephone inquiry and facsimile message XXXXX. You asked about the application of excise tax to imported modular links for modular bracelets. Our response is set out below.

Information Provided

1. You are the proprietor of a retail jewellery store and you do not hold a manufacturer's excise tax license.

2. You import modular bracelets and modular links for sale in your store. The bracelets are designed so that the modular links can be fitted into them by the purchaser. (The modular links are also called bracelet links, link pieces, charms or charm links.)

3. In discussions with the Canada Revenue Agency, you have not described specific modular links that you are importing. However, we have noted modular links that are currently available in retail jewellery stores, and, for the purposes of this interpretation, we will assume that you are importing essentially the same item. The links are made of stainless steel and have various designs on them. These designs are made of gold with enamel or gold and semi-precious stones incorporated into them. Also available are links with pendants attached to them, the design being on the pendant, rather than on the link itself. There are a broad range of designs, including flags, numbers, letters, signs of the zodiac, etc.

4. On importation, you pay excise tax on the modular bracelets.

5. A Customs ruling on modular links was recently issued to a foreign company, a copy which has came into your possession. In this ruling, Customs describes the modular links as "jewellery findings". You indicate that the jewellery retailers rely on this ruling as authority that the modular links are not subject to the excise tax on importation.

Question

Does excise tax apply on the importation of the modular links?

Answer

The modular links are subject to the excise tax of 8% on importation into Canada, unless an administrative exemption for inexpensive jewellery or religious items applies.

Explanation

General rules

Pursuant to subsection 23(1) of the Excise Tax Act ("ETA"), there is an excise tax on the manufacture or production in Canada or importation into Canada of goods listed in Schedule I of the ETA. Goods listed in Schedule I include clocks and watches having a value of $50 or more, articles made in whole or in part of semi-precious stones, jewellery, precious and semi-precious stones and goldsmiths' and silversmiths' products. (This last category excludes gold-plated and silver-plated ware for the preparation or serving of food or drink.)

In particular, section 5.2 of Schedule I of the ETA imposes the excise tax on "the following articles, commonly or commercially known as jewellery, whether real or imitation, including diamonds and other precious or semi-precious stones, for personal use or for adornment of the person ...".

However, as a matter of administrative policy, excise tax is not imposed on the following:

•   inexpensive items of jewellery having a manufacturer's sale price or a duty paid value of $3.00 each or less; and

•   articles of a religious nature or significance such as crosses, including crosses which incorporate precious or semi-precious stones or imitations therof.

On February 23, 2005, the Minister of Finance proposed in his Budget that the excise tax on jewellery, etc. would be phased out over a four year period. Effective February 24, 2005, the excise tax rate would drop from 10% to 8%, and continue to drop by 2% every March 1 thereafter, until March 1, 2009, when the excise tax rate on jewellery would be 0%.

It must be emphasized that this Budget proposal affects only the rate of excise tax on jewellery. There will be no change with respect to the structure or operation of the excise tax on jewellery during the four-year phase-out period. During this period, licensees

must comply fully with their legal obligations under the ETA. That is, they must self-assess on their taxable sales, file regular returns and remit regular returns.

Pursuant to subsection 23(2) of the ETA, the tax is payable by the manufacturer or wholesaler or by the importer of the goods on importation into Canada.

"Manufacturing" is not defined in the ETA. However, the courts have provided guidelines that help define those activities that would be affected. The courts have stated that any activity that gives new forms, qualities or properties to raw or prepared materials is considered manufacturing.

Further, in the ETA, a "manufacturer or producer" includes what is known as a "marginal manufacturer". This is a person, who, by himself, or through another person acting for him, prepares goods for sale by assembling, blending, mixing, cutting to size, diluting, bottling, packaging or repacking the goods, other than a person who so prepares goods in a retail store for sale in that store exclusively and directly to consumers.

As a general rule, persons who manufacture goods that are subject to excise tax are required to operate under a manufacturer's excise tax license when the sales value of the taxable goods is over $50,000 per calendar year.

Licensed manufacturers may purchase or import "partly manufactured goods" excise tax free. "Partly manufactured goods" are goods that are to be incorporated into and form a component part of articles that are subject to excise tax.

Application of Excise Tax to Modular Links in Issue

From the information you have provided and our research into similar products available in the market, we conclude that the modular links are jewellery, as they are for personal use or for adornment of the person.

Further, from the information provided, we conclude that you are not engaged in manufacturing, (either traditional or marginal), would not be required to be licensed and could not import the modular links excise tax free as partly manufactured goods.

Therefore, unless the modular links fall within administrative exemptions for jewellery described above, they are subject to 8% excise tax payable by the importer on importation into Canada.

(Please note that the fact that a purchaser of a bracelet and modular links may insert the links into a bracelet is not relevant for excise tax purposes because the incidence of tax has passed on importation.)

Customs Ruling

We have reviewed the Customs ruling you sent to us and note that it refers to the modular links as jewellery findings, which are not subject to the 8% excise tax on jewellery. We advise that the determination that the modular links are jewellery findings is incorrect and we have contacted the Customs office that issued the ruling and advised them of this. You should refer to this interpretation from the Canada Revenue Agency as your authority for the correct application of excise tax to the modular links.

The foregoing comments represent our views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance, with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memorandum series do not bind the Canada Revenue Agency with respect to a particular situation.

If you have any further questions or require clarification of the above matter, please do not hesitate to contact me at telephone number (613) 957-1140 XXXXX.

Yours truly,

Pauline Greenblatt
Rulings Officer
Excise Taxes and Special Levies Unit
Excise Duties and Taxes Division
Excise and GST/HST Rulings Directorate
Canada Revenue Agency

2005/10/26 — RITS 55698 — Application of Excise Tax to Modular Links