26 October 2005 Excise Interpretation 55698 - Application of Excise Tax to Modular Links

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 regard to an Advance Ruling ("ruling") issued from your office to XXXXX (copy attached). This ruling has been in general circulation and several persons have contacted the Canada Revenue Agency ("CRA") to confirm that it is correct.

We have reviewed the ruling. We wish to advise you that we do not characterize modular links as jewellery findings (to which excise tax does not apply). Rather, the modular links are jewellery and, pursuant to section 5.2 of Schedule I to the Excise Tax Act ("ETA"), are subject to excise tax on importation into Canada. Our reasons for this are set out below.

Description of Item

The Customs ruling does not refer to a particular type of modular link that is being imported. However, we have noted modular links that are currently available in retail jewellery stores, and, for the purposes of this letter, we will assume that these are the same item that was referred to in the ruling. The links are made of stainless steel and have various designs on them. The 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.

General rules regarding excise tax

Pursuant to subsection 23(1) of the ETA, there is an excise tax on the manufacture or production in Canada or importation into Canada of goods listed in Schedule I to 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 to 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 thereof.

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, the excise tax rate would drop from 10% to 8%, and continue to drop by 2% every March 1, 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, etc. There will be no change with respect to the structure or operation of the excise tax on jewellery, etc. 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". That 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

Based on our research into this product, we conclude that the modular links are jewellery, as they are for personal use or for adornment of the person.

A person who imports the modular links, but is not a licensed manufacturer for excise tax purposes, cannot import the modular links excise tax free as partly manufactured goods.

Therefore, unless the modular links fall within the administrative exemptions for jewellery described above (i.e. less than $3.00 in value or having religious significance) they are subject to the 8% excise tax payable by the unlicensed importer on importation into Canada.

(Please note that the fact that the ultimate purchaser of a bracelet and modular links may insert the links into a bracelet - raising the issue of marginal manufacturing - is inconsequential for excise tax purposes because the incidence of tax has passed on importation.)

The foregoing comments represent our views on the application of excise tax to modular links. 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 Duty and Tax Division
Excise and GST/HST Rulings Directorate

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