19 October 1998 GST/HST Interpretation HQR0001309 - Application of Section 5 of Schedule VII to the Excise Tax Act (Act)

                                                                        GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Ave.
Vanier, Ontario, K1A 0L5

Dear Mr. XXXXX

I refer to your letter dated August 28, 1998, concerning the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) on importations. You provide that:

1. XXXXX a corporation incorporated in XXXXX is a non-resident of Canada.

2. XXXXX manufactures a product that consists of several parts.

3. XXXXX delivers the product, and spare parts for the product, to its Canadian subsidiary, XXXXX, in Canada. GST is paid on the importation of the parts and the product.

4. XXXXX sells the product to Canadian customers and offers a warranty on the product. XXXXX also offers a service contract on the product.

5. If the product becomes defective, while under warranty or service contract, Canadian customers return the product to XXXXX will either replace the defective part of the product, or it will replace the entire product.

6. XXXXX will sometimes send the defective part, or the defective product, as the case may be, to XXXXX for replacement. At other times, XXXXX will simply dispose of the defective part or product and request that XXXXX ship a replacement part or product.

7. Regardless of whether the part or product is returned to XXXXX will replace the part or the entire product and deliver it to XXXXX does not charge a fee for the replacement of the part or product, other than shipping and handling charges.

8. XXXXX is registered for GST/HST purposes.

Interpretation Requested

In your letter you have asked that we confirm the following statements based on the facts outlined above:

A) The supply by XXXXX to XXXXX of both the replacement part and the replacement product pursuant to a warranty is a non-taxable importation pursuant to section 5 of Schedule VII to the Act.

B) It is sufficient that a warranty between XXXXX and the Canadian customer exists and that it is not necessary to have an actual written warranty between XXXXX and XXXXX for section 5 of Schedule VII to the Act to apply.

C) Section 5 of Schedule VII to the Act will apply to the replacement of both parts and the replacement of products pursuant to a service contract.

D) It is sufficient that the importer of record is the warrantor, XXXXX and it need not be the Canadian customer for section 5 of Schedule VII to the Act to apply.

E) There is no requirement to return the defective part or product for section 5 of Schedule VII to the Act to apply.

Interpretation Given

Based on the facts provided I am pleased to furnish the following interpretations.

A) The facts provided suggest that the only warranty present is between XXXXX and the Canadian customer. If this is the case, section 5 of Schedule VII to the Act would not apply and the replacement parts would not be considered non-taxable importations under this provision as the replacement parts are not provided by XXXXX to XXXXX under the terms of a warranty in respect of the goods originally imported by XXXXX[.]

B) In order for section 5 of Schedule VII to the Act to apply, the replacement parts must be supplied as replacement parts under a warranty. Further, as in interpretation A), the remaining criteria must be satisfied. Specifically, the provision of the replacement part must be by the non-resident warrantor to a Canadian customer pursuant to a warranty. It is therefore not sufficient that a warranty exist between XXXXX and the Canadian customer for the supply of a replacement part by XXXXX to XXXXX to be considered a non-taxable importation pursuant to section 5 of Schedule VII.

C) This section of the Act only applies where the parts are supplied as replacement parts under a warranty.

D) It is not sufficient that the importer of record be the warrantor. The replacement parts must be imported by the particular person who is receiving them pursuant to the warranty agreement. In the situation that you propose, it does not appear that the replacement parts are being imported as replacement parts under a warranty.

E) Section 5 of Schedule VII to the Act does not make any reference to a requirement that the defective part be returned for that section to apply.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8532.

Yours truly,

J. Frobel
A/Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate