9 May 1997 GST/HST Interpretation HQR0000485 - Drop-Shipments

                                                                        May 9, 1997

Dear XXXXX

Thank you for your letter of December 19, 1996 concerning the application of the Goods and Services Tax (GST) to certain transactions involving drop-shipments being entered into by your client. Please accept our apologies for the delay in responding to your interpretation request.

You described the following situation in your letter:

An unregistered non-resident corporation (NRC), who does not carry on a business in Canada has entered into a contract to purchase goods from a registered Canadian manufacture.

NRC leases the goods to a registered, wholly owned U.S. subsidiary (Sub) located in Canada.

Sub in turn subleases the goods to a registered Canadian resident (Canadian Corp) for use in its commercial activities. Canadian Corp takes possession of the goods at the manufacturer's facilities.

Once the goods are accepted by NRC, the leases between NRC and Sub and the Sub and Canadian Corp commence.

At the end of the lease agreement the goods are left at an agreed location and either the Sub or a new sublessee will take possession.

Interpretation Requested

You have requested our opinion of the following:

•   Whether Sub or Canadian Corp will be the consignee for the purposes of subsection 179(2) for the Excise Tax Act (ETA).

•   Whether it is possible for Canadian Corporation to take physical possession of the goods on behalf of the Sub; therefore, allowing the Sub to issue a drop shipment certificate?

•   If Canadian Corp must issue a drop shipment certificate, whether it is required to self-assess on the fair market value of the railcars at the end of the lease term?

•   Whether Canadian Corp can claim an input tax credit in respect of tax payable as a result of self-assessment?

Interpretation Given

Subsection 179(1) of the ETA states "... at any time causes physical possession of the property to be transferred, at a place in Canada, to a third person (in this subsection referred to as the "consignee")". The key words that are significant to your case are "physical possession". For the purposes of subsection 179(2), Canadian Corp would be considered to be the consignee. In order to have the Sub as the consignee, the physical possession of the goods must be obtained by it from the Canadian manufacture. Pursuant to subsection 179(2) of the ETA the supplies by registrants to non-residents are deemed to be made outside of Canada provided all of the conditions of the subsection are satisfied. Consequently, Division II tax would not apply.

The letter stated that the goods are left at an agreed upon location and either the Sub or a new subleesee will take possession of the goods from this location. Canadian Corp is only leasing the goods for a period of time and ownership is not transferred to it; therefore, there is no reason for the Canadian Corp to self-assess on goods that do no belong to it after the termination of the lease.

In respect to the above paragraph, the ITC is not a relevant issue.

Pursuant to section 143 of the ETA, the lease payments charged by NRC to Sub are not subject to GST. The supply is deemed to be made outside of Canada. When the same property is subleased by the Sub to Canadian Corp it becomes taxable under section 165 of the ETA.

The foregoing comments represent our general views with respect to the subject matter of your letter. 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 out in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.

Please contact me at (613) 952-8532 if you have any questions or require further information.

Yours truly,

Leslie White
Border Issues Unit
General Operations and Border Issues Division
GST Rulings and Interpretations

Authority:       s. 179 and 143