5 December 1995 GST/HST Interpretation 11645-6[3] - Customs Bonded Warehouse Program - Duty Deferral Initiative

                                                                        DOCKET: 22404 (GEN)
NAME: XXXXX
OFFICER: Garry L. Ryhorchuk
11645-6 (RMcK)

I refer to a memorandum from Mr. E.D. Warren, Director General, Commercial Operations Directorate, to Interim Directors, Customs Border Services, All Regions, concerning the re-engineering of the Customs Bonded Warehousing Program as part of the duty deferral program. We would like to re-iterate some information previously provided to your office.

On page 2 of Mr. Warren's memorandum it is stated that "the complete deferral of the payment of customs duties, excise duties & taxes, countervailing, anti-dumping and the GST, up to the point the goods are entered for Canadian domestic consumption will be maintained".

I assume that the reference to the GST in this statement is to the tax imposed under section 212 of Division III of the Excise Tax Act (the Act) and not to the tax imposed under Division II. The reason for this assumption is that the memorandum indicates that the deferral is being maintained until the goods are entered for Canadian domestic consumption. It is the GST that is imposed under Division III that is the tax paid to Customs at time of importation that is covered by this division. Canada Customs does not collect the tax imposed under Division II of the Act

On page 3 of the memorandum it is stated that "activities permitted in bonded warehouse are being expanded to encourage value-added activities in Canada and to ensure that Canadian companies are on a level playing field with their international competitors. The complete list of activities that are available includes:

•   basic storage (increased to four years):

•   export of domestic and imported goods;

•   displaying;

•   inspecting;

•   marking, labelling, tagging, ticketing;

•   packing, unpacking, packaging, repackaging;

•   sampling;

•   testing;

•   cleaning;

•   complying with any law of Canada or a province;

•   normal maintenance and servicing;

•   preserving;

•   separating defective goods from prime quality goods;

•   sorting, grading;

•   diluting;

•   trimming, filing, slitting, cutting; and

•   disassembling or reassembling goods which have been assembled for packing, handling or transportation."

It should be noted that services which are performed in whole or in part in Canada are deemed to be made in Canada under the provisions of paragraph 142(1)(g) of the Act. Under subsection 165(1) of the Act, these services are subject to the GST at 7% unless there are zero-rating provisions in Schedule VI, Part V to the Act, or other provisions in the Act to deem the services to be made outside Canada.

One of the activities listed deals with the export of domestic and imported goods. There is only one zero-rating provision that could apply to services supplied to a resident in respect of imported goods that are subsequently exported. This is found in — Schedule VI, Part V, section 4 of the Act. This section reads as follows:

"A supply of a service (other than a transportation service) in respect of tangible personal property that is ordinarily situated outside Canada, that is temporarily imported for the sole purpose of having the service performed and that is exported as soon as is practicable after the service is performed."

If the goods are supplied domestically and are destined for the Canadian market or for export, or are imported and destined for the Canadian market, the services supplied to residents would be subject to the GST at 7%, notwithstanding the fact that the services are performed in a Customs bonded warehouse.

I hope that these comments will be noted when dealing with the issues raised by the pending legislation. These concerns were previously addressed in letters to your Directorate as well as in a meeting with representatives from your office, GST, Legal Services and the Department of Finance.

If you have any questions or require further information on this subject, please speak to Roy McKain at 952-4294.

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations

Doc 2546 (Regl)