22 June 2000 GST/HST Interpretation 31505 - Application of Section 4 of Part V of Schedule VI to the Excise Tax Act (the Act) to Services Provided to Non-residents

XXXXX

Thank you for your letter of June 5, 2000 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of one of your clients (your client).

Statement of Facts

1. Your client, a resident registrant, provides a service to a non-resident customer who is registered for GST/HST purposes. The service involves mixing and blending imported ingredients with spring water. The finished product is bottled and placed in cartons which are shrink-wrapped and then exported. Your client provides the shrink wrap used to shrink wrap the cartons.

2. All ingredients are supplied and owned by the non-resident customer other than the spring water, sweetener, such as sugar or aspartame, and the acid used as a preservative which your client provides.

3. The non-resident customer also provides the bottles, bottle caps, labels, cartons, etc.

4. The finished product is exported as expeditiously as possible except for a situation where no more than 2 1/2 % (two and a half per cent) of a product run may be delivered to Canadian customers on behalf of the non-resident. The non-resident collects GST on such sales.

Interpretation Requested

Your client would like to import the items used in producing the product making use of section 4 of Part V of Schedule VI to the Act to avoid having to pay GST at the time of importation.

Interpretation Given

Based on the information provided, we are pleased to provide the following interpretation.

Section 4 of Part V of Schedule VI to the Act applies to a supply made by a registrant in Canada; it does not apply to the importation of goods. That section zero-rates a supply of a service in respect of tangible personal property (TPP), and a supply of any TPP supplied by a registrant in conjunction with that service. Therefore, that section would not provide for non-taxable status on the importation of goods by your client.

The fee charged by your client to the non-resident customer for the service provided and for the goods supplied in conjunction with the service (i.e. water, sweetener, etc.) may be zero-rated if all the conditions of section 4 of Part V of Schedule VI are met: the service is in respect of TPP that is ordinarily situated outside Canada, the TPP is temporarily imported for the sole purpose of having the service performed and the TPP is exported as soon as is practical after the service is performed. However, it appears that there are situations where all these conditions are not met (i.e. where a portion of the finished product is sold in Canada rather than exported). In such a case, your client must charge and collect tax on the service that relates to goods not exported and on goods supplied in conjunction with that service.

There are two tax relief measures that may apply to the importation of goods by your client. The exporters of processing services (EOPS) program and the export distribution centre (EDC) program.

The EOPS program allows the tax-free importation of goods and materials imported for the purpose of processing goods in Canada for a non-resident and subsequent export. Some of the conditions outlined in the program are that:

1. The processor must be a registrant and must possess a valid import certificate prior to the importation of the goods;

2. The processor must not have a proprietary interest in the imported goods or the processed products and cannot be closely related to the non-resident person on whose behalf the processing is being done;

3. The products resulting from the processing and the imported goods and materiel must be subsequently exported without being used in Canada for any purposes. By exportation it is meant that the goods or materials are physically exported from Canada.

The EOPS program does not allow for any of the goods to be diverted into the Canadian market. Therefore, your client will be authorized under the program if all finished products are intended for export.

The EDC program was announced in the Federal Budget of February 28, 2000 and is proposed to begin on January 1, 2001. The program will permit businesses that export substantially all of their outputs, or operate export distribution operations of other businesses, to acquire or import most goods without the payment of GST/HST. It will be limited to businesses that add only limited value in the course of processing goods.

For your convenience, please find enclosed a copy of our Technical Information Bulletin (B-069): "Goods and Services Tax Treatment of Imports by Exporters of Processing Services (EOPS)", and a copy of the Notice of Ways and Means Motion to amend the Excise Tax Act which outlines the technical changes concerning Export Distribution Centres announced on February 28, 2000.

With respect to cash flow concerns mentioned in your letter, your client may wish to take advantage of the periodic payment system implemented by Customs if they are not allowed tax-free importation under the EOPS program or the EDC program. This system permits the deferral, for about 30 calendar days on average, of payment of duties and taxes on imported goods that have been accounted for under section 23 of the Customs Act. This deferral measure, combined with the option to file monthly available to all registrants may permit registrants minimize the impact of GST/HST on their cash flow. You may obtain additional information on this provision from your local Trade Administration Services office.

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 Canada Customs and Revenue Agency 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) 954-4291.

Yours truly,

Béatrice Mulinda
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate