30 March 2000 GST/HST Interpretation HQR27035 - Application of GST/HST on the Importation of Products Shipped to an Assembly Manufacturer in Canada

XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

GST/HST Rulings and Interpretations Directorate Place de Ville, Tower A, 16th Floor 320 Queen Street Ottawa, ON K1A 0L5Case: HQR27035March 30, 2000

Subject:

APPLICATION OF GST/HST ON THE IMPORTATION OF PRODUCTS SHIPPED TO AN ASSEMBLY MANUFACTURER IN CANADA

Dear XXXXX

Thank you for your letter of February 15, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the products you intend to import into Canada. As you are aware effective November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Statement of Facts

1. XXXXX a US corporation has a customer in the United States.

2. The customer requests that XXXXX ship certain products to their assembly manufacture in Canada.

3. There is no direct business transaction between XXXXX and the Canadian assembler.

4. At the time of importation of the goods into Canada the importer of record is XXXXX and the products are owned by XXXXX.

5. After importation the products are then stored in a warehouse until a withdrawal notification is received from the US customer by the assembler.

6. At the time when the products are removed from the warehouse, the goods are sold by XXXXX to its US customer.

7. In a telephone message of March 6, 2000 XXXXX indicated that once the assembler has completed the assembly work, all of the finished products are exported to the US customer.

Interpretation Requested

Is XXXXX responsible for payment of tax on the importation of its own goods, can it claim an input tax credit (ITC) for the tax paid on the importation and is it carrying on business in Canada?

Interpretation Given

Based on the information provided and the questions asked we are pleased to provide you with the following interpretation relating to the application of the tax and the need for a business number.

With respect to the need for a business number (BN)

All commercial importers of goods into Canada are required to apply for and must indicate a BN number on their customs accounting document.

The BN is a business identifier that assigns each business a single number. This number remains the same no matter how many accounts a business has with the CCRA. The BN includes the major accounts most businesses have: corporate income tax, GST/HST, import/export, and payroll deductions. All new businesses registering for any one of these accounts receive a BN. Businesses can call 1-800-959-5525 (English service) or 1-800-959-7775 (French service) to register a business. We automatically route the call to the appropriate business window.

Will XXXXX be responsible for GST/HST tax payment if they are the importer of record going into Canada.

Section 214 of the Excise Tax Act (Act) states that tax on the importation of goods is paid and collected under the Customs Act as if the tax were a customs duty levied on the goods under the Customs Tariff. Therefore the actual payment and who pays is determined by and made to Customs under the provisions of the Customs Act. The Customs Act provides that no goods shall be released until they have been accounted for by the importer or owner thereof in the prescribed manner and, are accounted for in writing, in the prescribed form (the Customs Accounting form B3) containing the prescribed information; and all duties including the GST/HST thereon have been paid.

Can XXXXX claim an input tax credit (ITC) for GST/HST payments made to the Customs Branch of the CCRA?

Businesses that are registrants for the purpose of the GST/HST are entitled to claim an ITC where they import or acquire goods or services for consumption, use or supply in the course of their commercial activity. Since XXXXX is not a GST/HST registrant it may not claim an ITC for the tax paid on the products it has imported.

Can section 180 of the Excise Tax Act be used to flow-through the tax paid by XXXXX on the importation.

Section 180 of the Excise Tax Act provides for situations where tax is paid by a non-resident person who, not being a registrant, cannot claim an ITC in respect of the tax paid. This section permits a flow through of the credit to a registrant. However, there are certain conditions which must be met namely:

1. The property must be used in Canada by or on behalf of the non-resident person or the particular person (assembler) must be acquiring the property for the purpose of making a taxable supply of a commercial service in respect of the property to the non-resident person.

2. The non-resident non-registrant must have paid GST/HST on the importation.

3. In addition, for the provision to apply the non-resident must further provide the registrant with satisfactory evidence that GST/HST was paid on the imported goods.

If all these conditions are satisfied the registrant may be considered to have paid that tax and thus be able to claim the ITC to the same extent as would have been the case if the registrant had been the importer of record and had actually paid the tax.

In the circumstances at hand all the conditions are not met. For example, the goods are not being used in Canada on behalf of XXXXX, neither is the assembler making a taxable supply of a commercial service to XXXXX. Therefore, XXXXX would not be able to flow through to the assembler the tax it has paid on the importation of the goods. The products are being used in Canada on behalf of XXXXX customer and this customer has not paid any tax on the importation. Based on the fact situation XXXXX may only be able to recoup tax paid on the importation if it were a GST/HST registrant.

Would the fact scenario outlined above be considered as carrying on business in Canada?

To determine if XXXXX is carrying on business in Canada, the criteria, outlined below, need to considered:

1. the place where the contract for the supply was made;

2. the place where the operations that produce the profits take place; and

3. other factors.

Place Where Contract For Supply Was Made

To determine where the contract for a supply was made, the jurisdiction where the contract was concluded must be considered. Two important components of a contract are an offer and acceptance. A contract is concluded at the place where the offer is accepted. So when a non-resident supplier accepts orders outside Canada for shipment to Canada, the contract was concluded outside Canada. However, this is a question of fact and will be determined by reference to the written agreement, if any, and other factors such as the intention and the conduct of the parties to the contract.

Place Where the Operations That Produce the Profits Take Place

The place where the contract for a supply was made is not always appropriate in determining whether a business was carried on in a particular jurisdiction. In some cases, the contract for a supply was made outside Canada, but yet the manufacture of the goods, some negotiation of the terms and complete execution of the contract took place in Canada, so that the transaction actually took place in Canada. If a non-resident person has no physical presence in Canada either directly, through employees, or through agents, then in general, the profit-making operation will not be considered to be located in Canada.

Other Factors

Other factors to be considered when determining whether a non-resident person is carrying on business in Canada include:

•   the place where the goods were delivered;

•   the place where payment was made;

•   the place where the goods in question were manufactured;

•   the place where the orders were solicited;

•   the place where the inventory of the goods is maintained;

•   the place where the company maintains a branch or office;

•   the place where agents or employees, who are authorized to transact business on behalf of the non-resident person, are located;

•   the place where bank accounts are kept;

•   the place in which back-up services are provided under the contract; and

•   the place in which the non-resident person is listed in a directory.

Transactions carried on in Canada that are part of a business that is carried on outside Canada by a non-resident person may not be considered the carrying on of the business in Canada, provided such transactions are isolated. Therefore, even though a contract may be concluded in Canada, other significant factors, such as the site at which the operations producing profit took place, may indicate that the non-resident person is not carrying on business in Canada.

As a general rule, the Canada Customs and Revenue Agency (CCRA) considers that when all these factors are taken into account, a significant presence in Canada would be required for a non-resident person to be considered to be carrying on business in Canada. While it appears that XXXXX may not be carrying on business in Canada, it may nevertheless be entitled to register voluntarily under the provisions of subsection 240(3) of the Act, as if it is performing services in Canada.

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 CCRA with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-4294.

Yours truly,

Roy McKain
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings

Encl.:	Section 1.4 of Chapter 1 of the GST/HST Memoranda Series.
Legislative References:	Section 180 of the Excise Tax Act Section 214 of the Excise Tax Act Subsection 123(1) of the Excise Tax Act definition of the term "business"
NCS Subject Code(s):	I-