18 December 1998 GST/HST Interpretation HQR0000894 - Application of the GST/HST to the Supply of Production Equipment

I refer to your memorandum (with attachments), which was received in this office on October 15, 1997, concerning the eligibility of XXXXX to participate in the Exporters of Processing Services (Inward Processing) Program for purposes of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST). The delay in responding to your memorandum is regrettable.

The following information was provided in your letter:

•   XXXXX is registered for GST/HST purposes.

•   XXXXX has an office location in an industrial strip mall with an area at the back of its office for storage.

•   XXXXX has secured a customer in XXXXX that requires machining to be done to parts that XXXXX company owns.

•   XXXXX also has moulds or dies that it will send to XXXXX[.] In turn, XXXXX will send the moulds and dies to the machine shops that will produce the parts. The parts are then shipped to XXXXX[.]

•   XXXXX receives blueprints from XXXXX and finds machine shops in the area that can do the required machining.

•   Purchase orders are sent to XXXXX from XXXXX and the raw castings and forgings are sent from XXXXX supplier in XXXXX to the machine shops in XXXXX is shown as the importer of record for Customs purposes. XXXXX has advised all parties involved that XXXXX is supposed to be the importer and exporter of record for all the transactions.

•   The castings and forgings are machined and sent back from the machine shops, though XXXXX to another processor in XXXXX[.]

•   XXXXX controls the entire process from beginning to end. XXXXX invoices XXXXX for the work being performed. In addition XXXXX also keeps track of inventories for XXXXX[.] The following questions were raised in your memorandum:

1. For the scenario where XXXXX is importing the raw forgings and castings and having the machine shops do the machining, would XXXXX be eligible for the Exporter of Processing Services authorization?

2. Would the point on page 8 of TIB B-069, "Transfer to a Second Processor" apply here? Although XXXXX is ultimately responsible for the jobs performed, it is not physically doing the processing.

3. For the scenario where XXXXX is importing the moulds and dies and the machine shops that they have contracted with utilize the moulds and dies to manufacture the parts for XXXXX would they be eligible for the Exporter of Processing Services authorization for these goods?

The following responses are provided for the above questions.

1. As outlined in the second paragraph on page 2 of Technical Information Bulletin B-069, exporters of processing services can be described as manufacturing service companies. Manufacturing service companies are ones that perform manufacturing services (i.e., assembly, manufacture, alteration, etc.) on goods or materials that they do not own for which they charge a fee.

XXXXX is not performing a manufacturing service on XXXXX raw forgings and castings. Therefore, XXXXX does not qualify for participation in the Exporters of Processing Services (Inward Processing) Program.

2. Because XXXXX does not qualify for participation in the Exporters of Processing Services Program (Inward Processing), the question of whether or not there is a diversion is not relevant.

3. Moulds and dies are not goods to be processed in Canada for a non-resident. Rather, moulds and dies are production equipment. Therefore, even if XXXXX was a participant in the Exporters of Processing Services (Inward Processing) Program, the moulds and dies would be subject to the GST at 7% at the time of importation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6743.

Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate