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MEMORANDUM FOR: XXXXX
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File number: 11635-3 (JAF)April 26, 1999
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This is in response to your e-mail message to Randy Nanner on March 26, 1998, and to Michèle Routhier's letter of July 2, 1997 to your attention, concerning the application of the Excise Tax Act (the "Act") to the transactions between XXXXX XXXXX XXXXX[.] We apologize for the delay in our response.
The facts supplied and previously outlined in Michèle Routhier's letter are as follows:
XXXXX a non-resident, non-registered publisher, entered into a XXXXX XXXXX dated XXXXX with XXXXX, a Canadian GST registrant. The Contract is in effect for the period of XXXXX[.] Under the agreement, books are shipped by XXXXX warehouse at its own expense on a consignment basis. XXXXX retains title to the books. These books are XXXXX XXXXX markets and sells the books, establishes levels of credit for XXXXX customers, and accepts and processes orders on behalf of XXXXX assigns the accounts receivable to XXXXX who is responsible for collecting the receivables and assumes risk of loss for unpaid accounts. Once XXXXX invoices the Canadian customer and removes the book from XXXXX inventory, title to the book passes to XXXXX insures the books while in transit to Canadian customers. XXXXX remits to XXXXX the net sales amount, less insurance, transportation, deductions, marketing fund, XXXXX commissions and any charges for other services.
Michèle Routhier confirmed through a telephone conversation with XXXXX XXXXX that XXXXX invoices the Canadian customers XXXXX under their own name and report all sales in respect of the Contract as sales revenues rather than commission income.
The concerns will be addressed individually with a discussion of the relevant facts as necessary to support our conclusions. The transactions between XXXXX seem to be in the nature of a "consignment" arrangement. A consignment is generally an agreement whereby a supplier (the consignor) transfers possession of the property but not the ownership to a particular person (the consignee). The consignee may in turn make a supply of the property to a third person. In the case at hand, ownership is transferred from XXXXX and then from XXXXX to the third person simultaneously at the time that XXXXX invoices the third person and removes the books from XXXXX inventory.
1. Must every non-resident who has consignment goods in Canada be required to register for GST/HST purposes?
No. The provisions of subsection 240(1) of the Act require a non-resident to register for GST/HST purposes if the non-resident makes taxable supplies in Canada in the course of "carrying on business" in Canada, other than as a small supplier. Whether a non-resident person who has consignment goods in Canada is carrying on business in Canada is a question of fact.
2. Is XXXXX carrying on business in Canada?
Whether a non-resident person 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 Policy P-051, must be applied on a case by case basis.
The following are the criteria to be applied:
A. the place where the contract is made,
B. the place where the operations from which profits arise takes place, and
C. other factors, such as:
a) the place where delivery of the goods is made;
b) the place where payment is made;
c) the place where the goods in question are manufactured;
d) the place where the orders are solicited;
e) the place where an inventory of the goods is maintained;
f) the existence of any branch or office in the particular place;
g) the existence of any agents or employees authorized to transact business on behalf of the non-resident person in the particular place;
h) the place where bank accounts are maintained;
i) the place where back-up services under the contract are provided; and
j) a list of the names and business of the non-resident person in a directory in the particular place.
In general, a non-resident person, to be considered to be carrying on business in Canada, must have a significant presence in Canada. The application of the facts of the case to the test is as follows:
A. The Place Where the Contract is Made XXXXX U.S.
• The Contract outlines the rights and responsibilities of the two parties in respect of the sale of books to third parties in Canada.
• Based on information provided by XXXXX XXXXX concluded their offer and acceptance of this Contract in the XXXXX
• XXXXX
• XXXXX
B. The Place Where the Operations From Which Canada Profits Arise Take Place
• The profits in relation to the Contract arise as a result of the supply by way of sale of books by XXXXX to its customers in Canada. Due to the nature of the sale, XXXXX makes a sale to XXXXX at the time that XXXXX invoices its customer and removes the books from XXXXX inventory in Canada (clause 28 of the Contract).
C. Other Factors
• As previously stated, numerous other factors have also been considered by the Courts when determining whether a person is carrying on business in a particular place, including:
(a) the place where delivery of goods is made;
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Clause 21 of the Contract states that XXXXX will deliver, at its own expense an inventory of books to XXXXX at its distribution centre in XXXXX[.] The books are removed from XXXXX inventory and title is transferred to XXXXX at the time that XXXXX sells the book and invoices its customer in XXXXX |
CANADA |
b) the place where payment is made;
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While the Contract is silent on the issue of where the payment is actually made, the Contract does state that the funds must be paid to XXXXX XXXXX (clause 62). Based on the information provided and general business practice it is our understanding that payment for the books is made to XXXXX XXXXX which are deposited into XXXXX bank accounts in the XXXXX XXXXX |
U.S. |
c) the place where the goods in question are manufactured;
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The books are published in the XXXXX |
XXXXX |
d) the place where the orders are solicited;
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While the Contract is silent with respect to order solicitation, clause 20 states "XXXXX ill use its reasonable efforts to supply XXXXX with sufficient copies of the Works to meet the demand as estimated by XXXXX in mutual collaboration from time to time ...". XXXXX therefore has input with respect to which books should be ordered and in what quantity. |
CANADA |
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Pursuant to clause 11 of the Contract XXXXX must provide statements to XXXXX outlining the books it has removed from XXXXX inventory. This also demonstrates that XXXXX has input concerning the makeup of XXXXX inventory in Canada. |
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(e) the place where an inventory of the goods is maintained;
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An inventory of XXXXX books is maintained in XXXXX warehouse in XXXXX until it is sold by XXXXX to its customers in Canada. |
CANADA |
(f) the existence of any branch or office in the particular place;
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XXXXX does not maintain an office or branch in Canada nor does it operate through another person's establishment. |
U.S. |
(g) the existence of any agents or employees authorized to transact business on behalf of the non-resident person in the particular place;
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XXXXX has no employees in Canada in respect of these operations. A review of the facts, policy P-182, and Michèle Routhier's interpretation letter suggests that no agency arrangement exists either. |
U.S. |
(h) the place where bank accounts are maintained;
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Based on the information provided and the terms of the Contract it is our understanding that XXXXX deposits all revenues associated with the sales in respect of the Contract into its bank accounts in the U.S. |
U.S. |
(i) the place where back-up services under the contract are provided;
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This factor is not applicable as there are no back-up services associated with the Contract. |
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(j) a list of the names and business of the non-resident person in a directory in the particular place.
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Based on the facts presented XXXXX is not listed in directories in Canada. |
U.S. |
Contrary to the conclusions in the memorandum addressed to you dated July 2, 1997, from Michèle Routhier, we consider XXXXX not to be carrying on business in Canada with respect to the Contract. Ms. Routhier's conclusion was partially based upon the belief that offer and acceptance of the implied contracts, which may result due to a consignment sale, should be used in the application of the carrying on business test rather than the general contract. We conclude, considering the circumstances of the transactions and the level of detail in the Contract, that offer and acceptance of the general contract must be used in applying the test. As we have established in the analysis section of this memorandum, we consider offer and acceptance of the Contract to have been concluded at a place outside Canada. We consider the place where the operations from which profits arise to be Canada. Therefore, our analysis of the facts with respect to the first two of the three major factors provide us with an inconclusive position concerning whether XXXXX is carrying on business in Canada. In order to make a determination, a thorough examination of the remaining ten other indicators of the third major factor of the test must be conducted. As represented in our analysis the majority of these indicators support the conclusion that XXXXX is not carrying on business in Canada. When all these indicators are taken into consideration in the context of XXXXX operations with respect to the Contract, we conclude that XXXXX is not carrying on business in Canada.
In summary, XXXXX is engaged in the supply by way of sale of books to XXXXX pursuant to the Contract which was entered into and accepted at a place outside Canada. Although the profits in relation to the Contract arise in Canada, the following facts lead us to conclude that the remaining ties are not strong enough to support a position that XXXXX is carrying on business in Canada:
• the books are published in the U.S.;
• XXXXX pays for the books in U.S. funds;
• the funds are received by XXXXX and deposited into its bank accounts in the U.S.;
• XXXXX does not have an office or branch in Canada;
• XXXXX does not have any employees or agents acting on its behalf in Canada;
• XXXXX is not listed on directories in Canada;
• sales to final consumers are made by XXXXX name as vendor on sales invoices; and
• revenues in relation to the Contract are accounted for by XXXXX as sales revenue.
After a thorough reconsideration of the facts of this case as presented above, we conclude that XXXXX does not have a significant presence in Canada and is therefore not carrying on business in Canada in relation to the Contract.
3. Is XXXXX eligible for ITCs in relation to Division III tax?
Yes. The 'flow-through' provisions under section 180 would allow XXXXX to recover Division III tax paid by XXXXX at the time of importation.
Subsection 123(1) of the Act defines:
"sale", in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property;
A consignment is an agreement to transfer possession, and by delay, ownership of the property, since sale includes in the context of such an agreement, the transfer of possession of such property, the transfer of the possession is considered a "sale" under subsection 123(1) of the Act. Pursuant to subsection 123(1) a supply by definition includes a sale. Therefore, we are of the opinion that XXXXX "makes a supply of tangible personal property" as the phrase is used in subparagraph 180(a)(i), at the moment the possession of the property is transferred under a consignment agreement between XXXXX and XXXXX[.] Providing XXXXX has paid the tax and gives XXXXX evidence satisfactory to the Minister that the tax has been paid, the flow through provisions of section 180 will apply.
Should you have any concerns or require further clarification, please contact me at (613) 952-8532.
Jeffrey A. Frobel
A/Rulings Officer, Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
HQR0001118
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Randy Nanner
Jeffrey Frobel |
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