16 January 2006 GST/HST Ruling 64274 - GST Exemption certificate

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 letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST), with particular reference to proposed section 178.8 of the Excise Tax Act.

All legislative references below are to the Excise Tax Act.

You have provided the following information:

1. XXXXX Incorporated (US Corp) is a registered non-resident, located in XXXXX USA.

2. US Corp manufactures XXXXX, which will be sold to Canadian customers through independent dealers throughout Canada.

3. US Corp intends to sell its XXXXX products directly to the Canadian dealers ^[xlix]1. The place of delivery will be that described under the Incoterm "Ex Works." Under this Incoterm, delivery takes place at the seller's premises, where the goods are placed at the disposal of the buyer. The specific Incoterm in this case will be "ExWorks US Corp's premises outside Canada."

4. Due to the number of dealers involved and the nature of the imported shipments, US Corp will be required to be the importer of record, and will pay the Division III tax on the importations.

5. US Corp is registered for the GST/HST and is required to be registered due to its other business activities in Canada.

Interpretation Requested

You have requested an interpretation on the application of subsections 178.8(1) to 178.8(4), which are proposed amendments to the Excise Tax Act, in circumstances such as those described above.

You also asked how an agreement under subsection 178.8(3) can be made (what information is required, etc.), since the prescribed form for that agreement is not yet available.

Interpretation Given

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.

Subsections 178.8(1) and (2): Default Rule

Subsection 178.8(1) defines a "specified supply" as a supply of goods that "are to be imported" ^[l]2. 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."

Based on the information that you have provided, it appears that the dealers are the constructive importers of the goods supplied to them by US Corp. That is, they are the last persons to whom a specified supply of the goods is made outside Canada prior to their release. This conclusion is based, in part, on the premise that legal delivery of the goods to the dealers takes place outside Canada ^[li]3.

As a result, under the default rule in subsection 178.8(2), it is the dealers who will be entitled to ITCs under subsection 169(1) for the Division III tax on the importation of the goods, regardless of whether another person, such as US Corp, is the importer of record and pays the Division III tax. This will be the case unless there is an agreement made under subsection 178.8(3), as described below.

Subsections 178.8(3) and (4): Agreement for Alternative Treatment

Subsection 178.8(3) of the Act allows the parties to agree to an alternative GST/HST treatment to the default rule 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 ^[lii]4. This alternative treatment is available 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 ^[liii]5 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 ^[liv]6. 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 ^[lv]7 on the supply. The constructive importer would in turn be entitled to an ITC for the tax on the deemed supply if all of the relevant ITC conditions ^[lvi]8 are met.

Based on the information provided, it appears that US Corp and the constructive importers (the Canadian dealers) may enter into an agreement under subsection 178.8(3) with respect to the supply and importation of the goods.

Format of the Agreement

Until the prescribed form 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.

The foregoing comments represent our general views with respect to the proposed amendments to the Excise Tax Act as they relate to the subject matter of your request. Any change to the wording of these proposed amendments or any future 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 GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-4291.

Yours truly,

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

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