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Attention: XXXXX
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February 14, 1995
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I refer to XXXXX memorandum of October 24, 1994, addressed to XXXXX of my staff, and XXXXX conversation with XXXXX of your staff on January 3, 1995, concerning the application of the drop-shipment provisions to certain supplies made to an unregistered non-resident. I understand that XXXXX memorandum resulted from concern over an interpretation provided in a letter dated October 5, 1994 XXXXX , written by XXXXX Interpretations Officer, to XXXXX
I have reviewed the information contained in the analysis prepared by XXXXX and in the letter written by XXXXX I understand that there are actually three scenarios, as follows:
1. A unregistered non-resident claims a race horse in Canada at a claiming race. At the non-resident's direction, the horse is sent to a Canadian registrant trainer. The trainer invoices the non-resident for services provided while the horse is in the trainer's care and control. The horse is boarded with the trainer for an indefinite period of time to be trained and raced in Canada. There are no specific plans for the non-resident to export or sell the horse, although the horse may probably be claimed at a race in Canada at a future date.
2. A horse is sold to an unregistered non-resident by a Canadian trainer and a commission is earned by the trainer who has acted as the agent for the sale of the horse. The horse remains in Canada at all times during the transaction.
3. A horse is purchased by an unregistered non-resident in Canada and is raced once or twice before being exported to the United States.
Scenario 1
XXXXX has concluded that, at the time the trainer is making the supply of the services to the unregistered non-resident, conditions of section 179 of the Excise Tax Act (Act) cannot be satisfied because the trainer does not know if the horse will be transferred at a place in Canada to a third person or to the non-resident. XXXXX has also determined that because the training services are in respect of tangible personal property (e.g., the horse) that is situated in Canada at the time the services are performed, the supply is excluded from zero-rating by virtue of Schedule VI, Part V, paragraph 7(e) to the Act. The training services are, therefore, subject to the Goods and Services Tax (GST) at the standard rate of 7%.
I agree that all the conditions of section 179 cannot be satisfied at the time the trainer is invoicing the non-resident for the services. I also agree that the service are excluded from zero-rating by virtue of Schedule VI, Part V, paragraph 7(e). However, there is a possibility that all the conditions contained in section 179 may be satisfied at a later date.
For example, if the trainer subsequently causes physical possession of the horse to be transferred in Canada to a registered consignee, and the trainer is furnished with a drop-shipment certificate, subsection 179(2) will deem the supply of the services to be made outside Canada. In addition, if the horse is subsequently exported, and all the conditions contained in subsection 179(3) are met, the supply of the services will be deemed to be made outside Canada. Should either of these situations occur, section 232 of the Act provides that the trainer has up to four years from the end of the reporting period in which the GST was charged or collected in order to make a refund or adjustment.
On the other hand, if physical possession of the horse is subsequently transferred to a consumer or a registered consignee who does not furnish a drop-shipment certificate, or the requirements of subsection 179(3) are not met, subsection 179(1) provides that the trainer will be required to account for the GST on the fair market value (FMV) of the horse (plus the consideration for the supply of the training services, if it is not included in the FMV).
Scenario 2
XXXXX has determined that the commission earned by the trainer for the sale of horse is subject to the GST at 7% in view of the exclusion in Schedule VI, Part V, paragraph 7(e). I agree with her decision.
Scenario 3
I agree with XXXXX that because the horse will be raced in Canada once or twice before being exported, the supply of the horse to the non-resident is excluded from zero-rating by virtue of Schedule VI, Part V, paragraph 1(b) to the Act. However, if the requirements of subsection 252(1) of the Act are met, the non-resident would be eligible to apply for the non-resident rebate.
I would, therefore, suggest that additional information be provided to XXXXX concerning the possible application of section 179 to Scenario 1 and the possible application of subsection 252(1) to Scenario 3.
If you have any questions or require further information, please contact XXXXX
H.L. Jones
Director
General Tax Policy
Excise/GST
Policy and Legislation
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