31 January 2006 GST/HST Interpretation 56772 - Tax status of food plates and fajita kits

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:

Thank you for your request XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) with respect to the importation of goods.

Any legislative references below are to the Excise Tax Act, which is the legislative authority for the GST/HST.

Background

Parties

Corp A: non-resident corp. - registered

Corp B: non-resident corp. - not registered

Corp C: Canadian resident processor - registered

Corp D: Canadian resident subsidiary of Corp B - registered - importer of record

Corp X: non-resident manufacturer - not registered

Transactions

1. Corp B agrees to supply tangible personal property ("the goods") to its subsidiary Corp D in Canada.

2. Corp B then orders the goods from Corp A. Corp A then places a purchase order for the goods from the manufacturer, Corp X.

3. In the agreement to supply the goods to Corp D, legal delivery of the goods occurs at the premises of Corp C in Canada where the goods are shipped for processing. After processing, Corp C will deliver the goods to Corp D.

4. In the agreement between Corp A and Corp B, legal delivery of the goods occurs at Corp C's premises in Canada.

5. In the agreement between Corp A and Corp X, legal delivery of the goods occurs at Corp C's premises in Canada.

6. Since it is making a taxable supply in Canada, Corp A includes GST (Division II tax) on its invoice to Corp B, but Corp B refuses to pay the tax.

7. Corp D is the importer of record, accounting for and paying the Division III tax on the importation of the goods.

Interpretations Requested

(1) In the above scenario, is Corp A required to collect and remit GST from Corp B?

(2) If Corp A is required to remit tax with respect to the supply made to Corp B but Corp B refuses to pay to Corp A the GST payable, is there any redress available to Corp A?

(3) What is the impact, if any, of the new constructive importer rules under proposed section 178.8 in the above scenario?

Interpretations Given

(1) In the above scenario, is Corp A required to collect and remit GST from Corp B?

Corp A is required to collect and remit tax on the supply of goods that it makes to Corp B.

A taxable supply that is made in Canada is subject to GST at the rate of 7%, or HST at a rate of 15% where the supply is deemed to be made in a participating province, unless the supply is zero-rated (taxed at 0%). The three participating provinces are Nova Scotia, New Brunswick, and Newfoundland and Labrador.

Based on the information provided, it appears that the supply of goods made by Corp A to Corp B is made in Canada. Generally, a supply of goods is deemed made in Canada under subsection 142(1) if the goods are delivered, or made available, in Canada to the recipient of the supply. This rule is based on where legal delivery of the goods occurs. Based on the information provided, delivery of the goods to Corp B in this case occurred at Corp C's premises in Canada. As a result, the supply of goods made by Corp A to Corp B is deemed to be made in Canada under subsection 142(1).

Pursuant to subsection 165(1), "... every recipient of a taxable supply made in Canada shall pay to Her Majesty in Right of Canada tax in respect of the supply ... on the value of the consideration for the supply ...". As the recipient of the supply of goods made by Corp A, Corp B is required to pay tax on that supply to Corp A.

Generally, pursuant to subsection 221(1) "Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax ... payable by the recipient .... in respect of the supply. As a result, Corp A is required to collect the tax payable by Corp B on the supply of the goods made to Corp B.

Pursuant to subsection 225(1), "all amounts that became collectible and all other amounts collected by the person in the particular reporting period as or on account of tax" are to be included in the calculation of the supplier's net tax for that reporting period.

Pursuant to subsection 228(2), where the net tax for a reporting period is a positive amount, the supplier must remit that amount to the Receiver General "on or before the day on or before which the return for that reporting period is required to be filed."

As a result, Corp A is required to include the tax "collectible" from Corp B (whether or not the tax is actually collected) in the calculation of its net tax and remit the net tax amount by the due date of its GST/HST return for the reporting period in which the tax from Corp B became due.

(2) If Corp A is required to remit tax with respect to the supply made to Corp B but Corp B refuses to pay to Corp A the GST payable, is there any redress available to Corp A?

Section 224 is a provision that may apply in this situation. This section applies where a supplier (i) has made a taxable supply to a recipient; (ii) is required to collect tax from the recipient in respect of the supply; (iii) has properly disclosed the tax to the recipient; and (iv) has accounted for or remitted the tax to the Receiver General, but has not collected the tax from the recipient due to the recipient's refusal to pay the tax. Under these circumstances, section 224 gives the supplier the right to bring an action in a court of competent jurisdiction to recover the tax as though it were a debt due by the recipient to the supplier.

In other words, this provision would allow a registrant such as Corp A to sue a recipient such as Corp B who has refused to pay the tax for an amount equal to the tax. This is the only recourse mechanism under the Excise Tax Act that would allow Corp A to recover the amount from Corp B. There is no provision in the Excise Tax Act that would relieve Corp A from the obligation of having to remit tax on its supply to Corp B.

It should be noted that a non-resident person such as Corp B could voluntarily register under 240(3), in which case it would be a registrant and would consequently be able to claim ITCs to recover the tax it pays on property or services it acquires or imports for use, consumption or supply in the course of its commercial activities. Of course, it would then be required to collect tax on its taxable supplies made in Canada [if Corp B were registered, its supply to Corp D would be deemed to be made in Canada under subsection 142(1)].

(3) What is the impact, if any, of the new constructive importer rules under section 178.8 in the above scenario?

Generally, a registrant is entitled to an ITC under subsection 169(1) with respect to tax on the importation of goods that is paid or payable by the registrant, if the registrant imports the goods for consumption, use or supply in the course of its commercial activities.

Section 178.8, as proposed, affects who is entitled to an ITC under subsection 169(1) for the tax on imported goods in certain circumstances. It applies to importations of goods made on or after October 3, 2003, and to goods imported before that date that were not accounted for under section 32 of the Customs Act before that date.

Subsection 178.8(1) defines a "specified supply" as a supply of goods that "are to be imported." ^[xxviii]footnote 1

Where a specified supply of goods is made outside Canada and the goods are imported for consumption, use or supply by a "constructive importer" of the goods, subsection 178.8(2) deems the goods to have been so imported, and any amount payable as or on account of tax on the importation to have been paid or payable, by or on behalf of the constructive importer and not by or on behalf of any other person. Subsection 178.8(2) defines a "constructive importer" as "the last person to whom a specified supply of goods is made outside Canada before their release."

The previously explained place of supply rule under subsection 142(1) of the Act is subject to a further place of supply rule that applies in circumstances involving supplies made by suppliers who are non-registered non-residents. Specifically, subsection 143(1) of the Act deems a supply of personal property or a service made in Canada by a non-resident person to be made outside Canada where the non-resident is not registered for GST/HST at the time the supply is made and the supply is not made in the course of a business carried on in Canada by the non-resident.

In the scenario you have described, legal delivery of the goods supplied by Corp X to Corp A and by Corp B to Corp D occurs in Canada. However, assuming that they do not carry on business in Canada for GST/HST purposes, the supply of goods made by Corp X and Corp B are deemed to be made outside Canada under subsection 143(1) of the Act.

For GST/HST purposes, the entering into of an agreement to provide property or a service is deemed under section 133 to be a supply of the property or service made at the time of the entering into the agreement and the actual provision of the property or service is deemed to be part of that supply. Based on the information provided, the last agreement for a specified supply of the goods made outside Canada that is entered into before the goods are released is the agreement between Corp X and Corp A. Therefore, Corp A is the last recipient of a specified supply of the goods made outside Canada prior to their release, and is therefore the constructive importer of the goods.

Accordingly, the goods imported for supply by Corp A to Corp B are deemed under proposed subsection 178.8(2) to have been so imported, and the tax to have been paid, solely on behalf of Corp A, regardless of the fact that Corp D was the importer of record. Pursuant to subsection 169(4), Corp A would have to obtain the importation documentation from Corp D, the importer of record, in order to support an ITC claim.

However, if Corp A does not claim the ITC, Corp D, who is the importer of record and thus has the import documentation, will instead be considered as having imported the goods for supply in the course of its commercial activities, for purposes of subsection 169(1). In this case, then, Corp D will be entitled to an ITC for the tax on the importation of the goods. This will avoid the need for Corp D to pass on the import documentation to Corp A in order to support an ITC claim.

Proposed subsection 178.8(3) of the Act allows the parties, in certain circumstances, to agree to an alternative treatment to the default rule under proposed subsection 178.8(2) described above, in order to avoid the need for the supplier to pass on the import documentation to the constructive importer for purposes of recovering the tax. Although, for reasons explained below, this alternative treatment is not available in the scenario you have described, we will nevertheless describe this provision for your additional information.

Subsection 178.8(3) applies where:

•   a supplier who is a registrant makes a taxable specified supply of goods outside Canada to the constructive importer of the goods, and

•   tax on the importation of the goods is paid or payable by the supplier as a result of the supplier having accounted for the goods.

The supplier and the constructive importer in this case may enter into an agreement at any time in prescribed form containing prescribed information with respect to the supply and importation of the goods. The effects of making the agreement, as set out under subsection 178.8(4), are as follows:

•   The supplier is deemed to have imported the goods for the purpose of supply in the course of its commercial activities and the tax paid or payable on the imported goods is deemed to be paid or payable on behalf of the supplier and on no other person's behalf. As a result, the supplier rather than the constructive importer is entitled to an ITC for the tax on the importation.

•   The supply of the goods to the constructive importer is deemed to have been made in Canada resulting in the supplier having to collect tax on the supply. The constructive importer would in turn be entitled to an ITC for the tax paid on the deemed supply if all of the relevant ITC conditions are met.

Until the prescribed form for making the agreement is available, the supplier and each constructive importer can make the agreement by keeping on file a jointly signed document indicating that they are making an agreement, pursuant to subsection 178.8(3), to have subsection 178.8(4) apply to the supply and importation of the goods such that the supplier will be entitled to an ITC for the Division III tax on the importation of the goods and, as well, will be required to collect tax on the supply of the goods.

The agreement should also describe in detail the goods that the agreement applies to, and should specify the scope of the agreement in terms of the period during which the agreement is to remain in effect.

Subsection 178.8(3) cannot apply in the scenario you have described since Corp X, who made the specified supply to Corp A, is not a registrant, nor is Corp X the importer of record for the importation of the goods. Therefore, Corp X and Corp A may not enter an agreement under subsection 178.8(3) with respect to the supply and importation of the goods.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, 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 Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4291.

Yours truly,

Michael Place
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/02/08 — RITS 57853 — XXXXX Products for People with Special Dietary Needs