6 October 2005 Excise Interpretation 63688 - XXXXX

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 facsimile message XXXXX in which you ask about the above matter. Our comments are set out below.

Information Provided

1. An importer imports loose diamonds in packets into Canada. For the purposes of determining whether excise tax applies, to establish the "value by stone", the importer averages the cost of the stones.

2. The following is an example of how the importer is determining the value of each cut and polished diamond:

To determine the value of each stone, the following calculation is made:

70.15/1405 = .0499 carats x 35.00 = $1.75

The importer contends that, based on this calculation, each stone is valued at $1.75 and is under the $3.00 administrative exemption and, therefore, is not subject to excise tax.

Question

Is the importer's method of calculating the value of each diamond acceptable for the purposes of applying the $3.00 administrative exemption for excise tax ?

Answer

The only valuation method permitted under the Excise Tax Act ("ETA"), is to determine the "duty paid value" of each diamond, as that term is defined in subsection 22(1) of the ETA. Further, because "duty paid value" is based on valuations under the customs law and the Customs Tariff, it is within the purview of the Canada Border Services Agency ("CBSA") to determine this value, rather than the Canada Revenue Agency ("CRA"). In this case, therefore, the CBSA would decide whether the importer's method for calculating excise tax on the imported diamonds is acceptable. (Please note that this interpretation will confirm our comments made in our E-mail XXXXX, which we sent in response to your initial inquiry in this matter.)

Explanation

General rules

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 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 the Schedule 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 items having a manufacturer's sale price or a duty paid value of less than $3.00: articles made in whole or in part of semi-precious stones; jewellery; precious and semi-precious stones; and goldsmith's and silversmith's products.

On February 23, 2005, the Minister of Finance announced 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 will drop from 10% to 8%, and continue to drop by 2% every March 1 thereafter, until March 1, 2009, when the excise tax 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 excise tax owing.

Pursuant to subsection 23(2) of the ETA, the excise tax is payable by the manufacturer or producer of domestically produced Schedule I goods or the importer of Schedule I goods imported into Canada.

Pursuant to subsection 23(1) of the ETA, the excise tax is payable on the sale price of domestically manufactured taxable goods and on the duty paid value of imported taxable goods.

The definition of "duty paid value" is set out in subsection 22(1) of the ETA and it is as follows:

"'duty paid value' means the value of the article as it would be determined for the purpose of calculating an ad valorem duty on the importation of that article into Canada under the laws relating to the customs and the Customs Tariff whether that article is in fact subject to ad valorem or  other duty or not, plus the amount of customs duties, if any, payable thereon."

Subject case

As indicated above, it is within the purview of the CBSA to determine the "duty paid value" of each diamond and, consequently, whether the importer's valuation method conforms to the applicable Customs laws.

You have asked if there is a definition of "inexpensive jewellery". There is no definition of the word "inexpensive" in the ETA or in any administrative publication. The phrase "inexpensive jewellery" is generally used in CRA publications to describe those Schedule I goods listed above that are within the $3.00 administrative exemption for jewellery, etc., which also was described above. (Please note that this exemption applies regardless of the materials from which the jewellery, etc. is made.)

Finally, you have asked about the inclusiveness of the $3.00 administrative exemption. It applies to all items listed in sections 5.1 and 5.2 of Schedule I to the ETA, which may generally be described as follows: articles made in whole or in part of semi-precious stones; jewellery; diamonds and other precious or semi-precious stones; and goldsmiths' and silversmiths' products (excluding gold-plated or silver-plated ware for the preparation or serving of food or drink.) In the case of precious and semi-precious stones, the $3.00 administrative exemption applies on a per stone basis.

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 CRA 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 Duties and Taxes Division
Excise and GST/HST Rulings Directorate
Canada Revenue Agency

2005/10/26 — RITS 64175 — Small Manufacturers Under the Excise Tax Act