11635-3 (gjor)
XXXXX
Interpretations and Services
XXXXX District Office
Excise/GST July 17, 1995
This is in response to your E-Mail dated October 18, 1994, concerning the above subject.
Facts Presented
Creation of Compact Discs
A non-resident non-registered company (NRNRC) ships a "master" music disc (owned by NRNRC ) to a distributor in Canada (CDR) who is a registrant. CDR, in turn, ships the "master" disc to a manufacturer in Canada (CMR) who is also a registrant, to have compacts discs produced for NRNRC.
CDR acts as importer of record of the "master" disc, thereby incurring a tax liability under Division III, and claims an ITC under section 169 of the Act.
After CMR creates compact discs from the master, CMR ships the compact discs to CDR and bills CDR for the supply of its manufacturing service, plus GST. CDR, in turn, bills NRNRC for its service, plus GST. CDR has apparently been claiming an ITC under section 169 of the Act in respect of the tax it was charged by CMR, but you feel that the recipient of the service from CMR and the person responsible for paying the GST should be NRNRC rather than CDR.
The compact discs are then offered for sale by CDR under a consignment arrangement with NRNRC.
Sale of Compact Discs
In addition to the compact discs produced in Canada, NRNRC has other compact discs produced in the U.S. and ships these compact discs to CDR, also to be sold on a consignment basis. CDR acts as importer of record when the discs are imported, incurring Division III tax and claims an ITC under section 169 of the Act .
You state that CDR bills NRNRC for the cost of importing the compact discs and the Division III tax but that an invoice is not issued. Apparently, CDR deducts all expenses incurred on NRNRC's behalf from the credit balance in the sale account. We do not understand why CDR would recover the Division III tax from NRNRC when they (CDR), as importer of the compact discs, has taken an ITC for the Division III tax.
When compact discs are sold in Canada by CDR under either of the two above scenarios, CDR collects and remits the GST on the sale. At the end of each month, CDR provides NRNRC with a statement showing net sales for the period (net of GST) along with account adjustments for goods returned and volume discounts. After deducting expenses and an amount in respect of CDR's mark-up, CDR pays any remaining balance to NRNRC.
Your Analysis
You state that if CDR is the recipient of the "master" disc, the other imported compact discs and the service provided by CMR, then CDR may claim ITCs in respect of all amounts paid as GST on the acquisition of those supplies. When CDR rebills NRNRC (as a registrant), CDR should be collecting and remitting the GST on any goods or services re supplied to NRNRC.
You also state that if CDR is not the recipient in respect of the services supplied by CMR, then NRNRC would be the person entitled to claim an ITC in respect of any GST paid by CDR on NRNRC's behalf based on the assumption that NRNRC was carrying on business in Canada and required or able to register. Further, the reimbursement by NRNRC to CDR of the amount CDR expended on NRNRC's behalf would not be consideration in respect of a taxable supply and consequently would bear no GST consequences, based on the assumption that an agency relationship exists between NRNRC and CDR.
ISSUES RAISED
1. Is NRNRC carrying on business in Canada and consequently required to register pursuant to subsection 240(1) of the Act?
2. Who is entitled to ITCs in respect of the importation of the "master" disc as well as the compact discs produced outside Canada and sent to CDR on consignment?
3. With regard to the services performed by CMR of making compact discs from a master disc, is CDR the recipient of the supply and thereby in a position to claim an ITC under subsection 169(1) of the Act or, in fact, is NRNRC the recipient?
Our Comments
1. Carrying on Business in Canada
First we should explain that it must not be assumed that a non-resident person selling goods in Canada on consignment is necessarily carrying on business in Canada. Whether a non-resident is carrying on business in Canada is a question of fact and the "carrying on business" test, as established by the courts and outlined in GST Memorandum 200-1-1, must be applied in each and every case to make such a determination.
The fact that a non-resident person sells goods in Canada on consignment merely determines that the supplies made by that non-resident will be supplies made in Canada in accordance with paragraph 142(1)(a). Nevertheless, as you yourself point out, if the non-resident person is found not to be registered and not carrying on business in Canada, those same supplies will be deemed to be made outside Canada pursuant to subsection 143(1).
As outlined in GST Memorandum 200-1-1, the two primary criteria to be considered when a non-resident person is carrying on business in Canada are:
1) The place where contract for the supply was made, and
2) The place where the operations that produce the profits take place.
Place where the contract for the supply was made.
The "contract" referred to in this criteria is the contract for the sale of compact discs to CDR by NRNRC which takes place at the time that CDR makes a sale to a third party in Canada. This contract must have been concluded in Canada for this criteria to indicate that NRNRC is carrying on business in Canada. That is not to say that a general contract cannot be in place between NRNRC and CDR covering all such sales. The important element is to determine where such a general contract is concluded. If such a general contract exists, where was it concluded or accepted (signed)? If CDR entered the United States to establish and sign the contract with NRNRC, then the contract would have been concluded outside Canada. Alternatively, if NRNRC entered Canada to establish and sign the contract, then the contract would have been concluded in Canada.
If no general contract exists covering all sales by NRNRC to CDR, then we must determine where the contract for each individual sale by NRNRC to CDR is concluded. This case is not unlike the case of Geigy (Canada) Ltd. v MNR, [1969] CTC 79. In that case, Geigy, a Montreal drug manufacturer which shipped annually about $450,000 worth of its product to British Columbia in response to orders received and filled in Montreal, was held not to be " carrying on business" in British Columbia. Geigy had no office nor officers in British Columbia and shipped the goods to British Columbia in response to orders received in Montreal. In other words, Geigy accepted the contracts outside British Columbia. In the case at hand, if NRNRC fills orders that are received and accepted by them outside Canada for goods to be provided to CDR on consignment at the request of CDR, then we can conclude that the contracts are accepted by NRNRC outside Canada. x
Alternatively, if NRNRC were to ship goods on consignment to CDR which goods are not requested by CDR, and CDR accepted the goods, then we would have to conclude that the contracts are concluded (accepted by CDR) in Canada.
While we understand that you have not yet determined the type of contract(s) involved between NRNRC and CDR, nor where they were concluded, the fact that a sale from NRNRC to CDR occurs simultaneous with a sale from CDR to a Canadian consumer does not necessarily make the initial contract concluded in Canada.
Place where the operations that produce the profits take place.
Your memorandum seems to equate the place of sale with the site at which the operations producing profits take place. This is not the case. Other factors need be considered.
In the British case of Firestone Tyre and Rubber Co. Ltd. v Lewellin, 37 TC 111, it was determined that the parent company located in the U.S. was carrying on business in Britain. The case turned on the fact that, because of a contract with a Swedish distributor, the parent entered into a separate agreement with its U.K. manufacturing subsidiary to manufacture and deliver in the U.K. the brand name tires to the distributor.
Further, payment was made by the Swedish distributor to the U.K. subsidiary who, in turn, credited the payment to the foreign parent after deducting costs plus 5%. Because of the activities performed as agent on behalf of the U.S. parent in the U.K. by its subsidiary, ( the manufacture and delivery of the tires in the U.K. on its behalf ), and, in particular, the fact that it was determined that the contracts were, in fact, concluded only when the orders were accepted by the U.K. subsidiary, the House of Lords concluded that a trade was exercised in the U.K. by the U.S. parent.
We can see from this case that more than the mere selling of goods in a jurisdiction might be factors to consider when examining whether a person is considered to be carrying on business in that jurisdiction. In this context, the person must, at the very least, have a presence in Canada, whether through an office, employees or agent to be considered to be carrying on business in Canada..
In the case at hand, there is no indication that NRNRC has any presence in Canada in the form of offices or staff.. It seems that they only have a customer in Canada (CDR) to purchase their products on a consignment basis. The fact that NRNRC sells its compact discs in Canada to CDR is not, in itself, sufficient to conclude that NRNRC is carrying on business in Canada and therefore, required to register pursuant to subsection 240(1) of the Act.
If, after considering our comments, it is determined that NRNRC is not carrying on business in Canada, it is our view that if NRNRC desires registration for GST purposes, they would probably qualify for voluntary registration pursuant to paragraph 240(3)(b) of the Act as a non-resident person who in the ordinary course of carrying on business outside Canada regularly solicits orders for the supply of tangible personal property for delivery in Canada.
2. Entitlement to ITCs for Tax Paid at Time of Importation
With regard to the importation of the "master" tape and other compact discs, we would like to comment briefly on the fact that CDR pays the Division III tax on their importation and claims input tax credits in respect thereof.
Section 169 provides that, in order for a person to be eligible to claim an ITC in respect of the tax payable on property or service, the following conditions must be met:
1. the person must be the recipient of the property or service or the person must be the importer of the property or service;
2. the person must be a GST registrant during the reporting period in which the supply or importation is made;
3. tax must be payable by the person in respect of the supply or importation, or be paid by the person prior to it becoming payable;
4. the property or services must be acquired or imported for consumption, use or supply in the course of commercial activities of the person; and
5. the person must have obtained sufficient documentation to establish the eligibility for the ITC before the claim is made.
There are two separate and distinct importation concerns in this case; the question of the importation of the "master" disc and the importation of other compact discs. Each must be considered separately.
Imported Master Disc
CDR can demonstrate that it is a registrant, that it imported the goods, paid the tax payable under Division III and has adequate documentation to support the ITC claimed. Further, from the information provided, the master disc can be considered to have been imported for use in the commercial activities of CDR on the basis that the master disc is used to make copies which are sold in the course of the commercial activities of CDR. This being the case, CDR would meet the necessary criteria for claiming ITCs and would be eligible to claim an ITC in respect of Division III tax paid by CDR on the importation of the master disc.
Imported Compact Discs
Under the general conditions for claiming ITCs, CDR must meet all of the requirements of section 169 as stated previously. As a registrant, CDR can demonstrate that it imported the property, it paid the tax at the time of importation, and that it has satisfactory evidence of this information from the Customs accounting documentation. The remaining question is whether the goods are for consumption, use or supply in the course of CDR's commercial activity at the time the tax is payable. From the information provided, it appears that it could be demonstrated that the goods in question were for use in the commercial activities of CDR. Accordingly, CDR would be justified in claiming ITCs for the tax paid on the compact discs at the time of importation.
3. Services Provided by CMR
The same conditions outlined above under the heading "Entitlement to ITCs for Tax Paid at Time of Importation" must all be met in order that CDR qualify to claim ITCs in respect of GST paid to CMR for the services of creating compact discs from the master disc. We have no difficulty in recognizing CDR as the recipient of the services supplied by CMR, based on the assumption that CDR contracts with CMR for the services and is liable to pay the consideration for same. CDR pays for the services and receives the finished product (compact discs) for use in their commercial activities. The fact that the master disc is owned by NRNRC is not, in itself, sufficient to conclude that CDR is not the recipient of the supply of services from CMR.
If additional information is required, please contact Gerry O'Reilley at (613) 952-9589.
H.L. Jones
Director
General Tax Policy
GST Rulings & Interpretations
Policy and Legislation Branch - XXXXX
sign-off: Mitch Bloom
| c.c.: |
Imposition Team
G. Preston, ITC Unit
M. Matthews, ITC Unit |
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