File: 11995-4
Doc: 1177
XXXXX August 22, 1995
Dear XXXXX
I refer to your facsimile letter dated August 11, 1994, requesting clarification of the application of the Goods and Services Tax (GST) to three issues involving freight transportation services.
During a telephone conversation with Tom Alley, Tax Policy Officer, on November 14, 1994, you identified two more issues for a total of five issues on which you require clarification of the application of GST:
(1) a perceived inequity between a consignee arranging the domestic leg of an inbound continuous freight movement and the shipper providing that leg;
(2) XXXXX assessments;
(3) handling charged by international freight forwarders;
(4) legal liability and errors and omissions (LLE&O) insurance costs to the freight forwarder that are itemized on the invoice from the freight forwarder to the customer; and,
(5) commissions paid to resident, registered carriers.
We have reviewed your position and provide the following response.
1. Domestic Leg of an Inbound Continuous Freight Movement
A Port Can be a Destination Contrary to the statement in your letter, in some instances there is doubt about what the final destination is of property arriving at a port. In some cases the destination of a transatlantic shipment is a port facility situated in Canada where the property is stored. The destination is specified on the ocean shipping documents. The property is stored at the port until a customer is found. It is clear that, in this situation, the destination of the import shipment is the port.
Two Conditions Required for Zero-rating
The situation I have just described corresponds with the examples given in our letter of July 15, 1994. Without trying to repeat that letter, there are two conditions (amongst others) that must be satisfied for a freight transportation service to qualify as a continuous freight movement under subsection 1(1) of Part VII of Schedule VI to the Excise Tax Act:
(1) the destination must be specified by the shipper; and,
(2) the freight transportation services supplied in order that the goods arrive at a particular destination must be a consequence of the instructions of the shipper.
Take the case where the consignee wishes to arrange his own transportation service from the port to his own premises. The shipper in France is not giving instructions on the freight transportation services past the point of discharging the cargo at the Canadian port. Consequently, the freight transportation service from the port to the consignee's desired location is a standard-rated taxable supply made in Canada.
You are concerned that, on his own, a consignee may try to reduce his costs by finding and arranging for cheaper freight transportation service from the port to his business location (the domestic leg). If the shipper is responsible for the freight transportation service from France then the shipper charges a markup on the domestic leg of the service but the service is zero-rated. You are concerned that the consignee must pay GST on the domestic portion of the freight transportation service when he makes his own shipping arrangements on the domestic leg but not if the shipper makes the arrangements.
Destination Must be Shown
Specification of a destination is not satisfied if the location is shown as a place called "whatever" or "beyond the Port of Montreal". The location shown must be a particular place normally shown as an address or the consignee's place of business in a city (e.g., XYZ Company, Winnipeg).
You understand the correct treatment but see an inequity. While I appreciate your comments and input, the Excise Tax Act does not provide for zero-rating of the domestic leg of a transportation service where the destination specified by the shipper is a port.
2. XXXXX Assessments
I understand that the XXXXX is a non-profit organization whose members include port or terminal operators, maritime agents and shipping companies or shipping lines. The XXXXX negotiates contracts with stevedores for their stevedoring services. The XXXXX does not supply the stevedoring (loading and unloading) services itself. The XXXXX assessments are designed to cover job security wage guarantees to the longshoremen (stevedores), the pension contributions of the employers and the cost of administering the collective agreements.
I cannot agree with your statement that the XXXXX fee or assessment should be zero-rated. The XXXXX assessment is consideration for taxable supplies made to the XXXXX members. The assessment is not for a freight transportation service. Indicative of this is the fact that if a member chose to show its assessment on its customer's invoice, this would not reduce the amount of the consideration for the freight service.
3. Handling Charges or Services Provided at Ports
On the issue of services provided at the port, those services relating to discharging the freight from the transatlantic ship (or other vehicle of transportation) into the port will be zero-rated. Services to load the freight onto an inland freight transportation service will be taxable at 7% in Situation 1 of my previous letter and zero-rated in Situation 2 of that letter.
There seems to be some concern about what parts of the freight transportation services performed at the port of entry and subsequent inland shipping qualify for zero-rating. You cite an example of a member of your organization who has been instructed by an auditor to charge GST on "handling" and "LLE&O". You did not have any further details and your subsequent enquiries revealed that the assessment had to do with "advice notes". I suggest you have your member contact the Revenue Canada Tax Services office in his area for a ruling on his specific situation.
4. LLE&O Charges
You have stated that legal liability and errors and omissions (LLE&O) insurance is not a common term for a charge to a customer for freight transportation service. This insurance does not relate directly to the value or nature of specific freight shipments. LLE&O insurance costs are a domestically incurred input for the freight transportation service and the LLE&O is a cost of business for the freight forwarder.
A freight forwarder with rapidly increasing insurance costs may try to show his customer that his basic rate has not changed by showing a separate allocation for LLE&O on his invoice to his customer. By doing this the freight forwarder tries to show that his cost of insurance has increased.
Such a practice does not reduce the consideration for the freight transportation service. The freight forwarder cannot treat such an allocation for LLE&O as a separate supply; it is an input for the basic freight charge. The freight forwarder's customer is not buying insurance from the freight forwarder as the agent of the customer. Rather it is the freight forwarder that is buying the insurance.
Of course, if the supply of freight transportation service is zero-rated then no GST will be collected on the total consideration for that supply including the allocation for the insurance costs. The particular allocation does not have a different status for GST from the status of the freight transportation service.
5. Commission Paid by Resident Registered Carriers
Do Not Stop Invoicing the Customer
Your Canadian member should not stop billing the Canadian carrier even though the carrier refuses to pay. From the information you have given, your member is still liable to collect GST.
Possibility of Bad Debt Adjustment
Under section 231 of the Excise Tax Act, your member may be able to claim an adjustment to his net tax for the portion of the amount that is a bad debt. Before such an adjustment can be made, the bad debt must be written off. The member must show that he has made reasonable attempts at collection. For example, the member may pursue collection of the bad debt in small claims court or hire a collection agency. You will find enclosed GST Memorandum 500-2-4, which gives some details in paragraphs 8 to 11 and Appendix C.
Note that, assuming there is a bad debt equivalent to the GST, the adjustment to net tax for the bad debt is only equal to the tax fraction (7/107) of the bad debt. For example, if the consideration was $100 with GST of $7.00 and the recipient could not pay $7.00, the bad debt adjustment for GST would be the bad debt of $7.00 x 7/107 which equals $0.46. The member has collected a significant portion of the total invoiced amount and GST must be remitted in proportion.
The foregoing comments represent our general views with respect to the subject matter of your letter and telephone conversations. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set our in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.
I trust this letter has clarified my previous letter and I apologize for the delay in my response. If you have any questions or comments, please do not hesitate to contact Tom Alley, Tax Policy Officer, at (613) 952-9218.
Yours truly,
J. A. Venne
Director
Special Sectors
GST Rulings and Interpretations
Attachments: GST Memoranda Series (1.4)
GST Memorandum 500-2-4
| c.c.: |
Enikö Vermes
Mike Place
Adam Belyea
Tom Alley |
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