15 October 1999 GST/HST Interpretation HQR0001896 - Eligibility for Claiming Input Tax Credits and Carrying on Business in Canada

Dear XXXXX

Thank you for your letter of July 2, 1999 (with attachments) sent to Mr. Ivan Bastasic, Manager of the Border Issues Unit, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your members operations. In particular your questions relate to the acquisition of motor vehicles in Canada by your members or otherwise acquired through non-resident commission agents. I have been asked to respond to your inquiry.

Interpretation Requested

According to the information supplied in your letter and following our telephone conversation of October 1, 1999, I understand the facts as follows:

Scenario 1:

•   Canadian registrant members of your XXXXX (the members) acquire motor vehicles from Canadian motor vehicle dealers (Candeal), which they then supply to unregistered non-resident persons (the NRs) for export to the U.S.

•   The NRs also may act as agent for the members in acquiring motor vehicles from Candeal. As such the NRs, under an agency agreement between the members and the NRs (the agreement), have the authority to acquire or purchase motor vehicles from Candeal on behalf of the members.

•   The NRs, at no time, receive or obtain any interest in the motor vehicles they acquire on behalf of the members, the latter possessing all of the beneficial interests and property rights in the motor vehicles so acquired.

•   The agreement provides, in part, that payment in full to Candeal is made by cheque drawn only on the members' bank accounts.

Scenario 2:

•   The NRs themselves, in their own right, or through representatives - employees or independent contractors -, acquire motor vehicles in Canada directly from Candeal or at auctions, for re-supply on the U.S. market.

•   Although the NRs do not maintain a presence in Canada (i.e., a permanent establishment), it is possible for the NRs to lease office space for the purposes of purchasing motor vehicles in Canada.

You ask the following questions:

1. Do the above transactions, as between the members and the NRs, entitle the members to claim input tax credits on the purchases of motor vehicles made under the agreement?

2. Can the NRs become GST/HST registrants without creating a Canadian tax presence (for Income Tax purposes)?

3. Is an ongoing presence in Canada required in order to become a GST/HST registrant?

4. To what extent does the employment status of the representatives impact upon registration entitlement?

Interpretation Given

Based on the information provided, I shall respond in the order of the questions asked.

Firstly, in order to determine a person's entitlement to an input tax credit, one must determine who is eligible for such a credit. The Excise Tax Act. R.S., c. E-13, s. 1 (the Act) generally provides for an input tax credit to a person who is a GST/HST registrant and who has acquired a taxable input used in the course of their commercial activity.

According to the facts mentioned above, the members who acquire motor vehicles from Candeal through NRs, acting as agents at that time for those members, and the members are the recipients of the supply (i.e., a person who is liable to pay the consideration for a supply) who so acquire these motor vehicles for use in their commercial activities, those members are entitled to claim an input tax credit, unless of course the original supply of the motor vehicles are zero-rated (e.g., taxed at zero per-cent).

The Act provides that a supply can be zero-rated if specifically acquired for export from Canada. Pursuant to section 1 of Part V of Schedule VI to the Act, a supply of property made to a person in Canada (whether or not the property is acquired through a non-resident agent) and who intends to export the property from Canada can be zero-rated if all of the conditions attached thereto are met:

-    the recipient-members export the motor vehicles as soon after the property is delivered by Candeal;

-    the motor vehicles are not acquired by the recipient-members or the by the agent NRs for consumption, use or supply in Canada before their exportation;

-    after the supply is made by Candeal and before the recipient-members export the motor vehicles, these are not further processed, transformed or altered in Canada except to the extent reasonably necessary or incidental to their transportation;

-    Candeal maintains evidence satisfactory to the Minister of the exportation of the motor vehicles by the recipient-members.

With respect to your second question in regards to the registration of the NRs, the Act provides that any non-resident may voluntarily register for GST/HST purposes, who, in the course of carrying on business outside of Canada, has entered into an agreement for the supply of a service to be performed in Canada (i.e., the service of acting as agent of the members). Therefore, those NRs who meet the above requirement may apply for registration, by filing the appropriate application with the Tax Services Office closest to them. For your information, I have enclosed a GST/HST publication entitled "Doing Business in Canada", which provides further details on registration.

With respect to NRs creating a tax presence in Canada once registered for GST/HST purposes, this depends to a great extent on whether the NRs carry on any business in Canada and/or have a permanent establishment in Canada

I have taken the liberty of enclosing as well a copy of Income Tax Interpretation Bulletin IT-420R3, dated March 30, 1992, which sets out the rules for non-residents who may earn taxable income in Canada.

In response to your third question, and as mentioned previously, there is no requirement in the Act for NRs to maintain an ongoing presence in Canada in order to become a GST/HST registrant.

With respect to your fourth question concerning the employment status of representatives (of the NRs) and the registration entitlement, a distinction must be made as to whether the representative is an employee of the NR or an independent contractor hired by the NR. If the representative is an employee of the NR, it is the NR who may voluntarilly register for GST/HST purposes. On the other hand, it would be up to the independent contractor to determine if he/she may wish to register, unless he/she is required to be registered under the Act, should the independent contractor carry on business in Canada and/or maintains a permanent establishment in Canada, through which it makes taxable supplies, including zero-rated supplies. Please find enclosed GST/HST Policy Statements P-208, entitled "Fixed Place of Business" and Policy Statement P-051R, entitled "Carrying on Business in Canada", that will provide you with more information on whether a permanent establishment exists in Canada, through which a person makes supplies.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%., to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax 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) 957-8220.

Yours truly,

Daniel E.B. Chamaillard, Senior Technical Analyst
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

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