2 August 2001 GST/HST Interpretation 35793 - Export Distribution Centre (EDC) Program

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th Floor 320 Queen Street Ottawa, ON K1A 0L5XXXXX XXXXX XXXXX XXXXXAttention: XXXXX

Case Number: 35793File Number: 11645-3-1August 2nd 2001

Subject:

Export Distribution Centre (EDC) Program

Dear XXXXX:

Thank you for your e-mail message of January 18, 2001 concerning the new EDC Program.

You have asked if a person involved in the following activities is providing a processing service and whether the person could qualify under the EDC Program or the Exporters of Processing Services (EOPS) Program.

A registrant imports raw fur pelts on consignment from American and European fur producers. The pelts are drummed (i.e. cleaned) and then graded in lots of similar types, colours, sizes and quality. The registrant attaches tags to the pelts to identify the consignor. The pelts are stored in a cold storage facility until sold at auction. Most of the fur pelts are sold at auctions to buyers who are manufacturers of outerwear clothing. 95% of sales are made to non-resident buyers and exported, resulting in large refunds due to paying GST on imports. The registrant has no ownership in the goods. The registrant receives a commission of 4% - 5% from the consignor on the sales.

Comments

EDC and EOPS

Sections 8.1 and 11 of Schedule VII to the Excise Tax Act (the Act) allow tax-free importation of certain goods where the goods are imported by a registrant who has been authorized under the EOPS Program and EDC Program respectively. As the question relates to the importation by a registrant, of goods that belong to a non-resident, this letter will discuss only the importation of goods of another person.

In general, under the EOPS Program, a registrant may import goods for the purpose of supplying a processing, storage or distribution service to a non-resident person where the goods are subsequently exported without having been consumed or used in Canada. The Program applies also to goods that are consumed or expended directly in the processing of other goods that will be exported without having been consumed or used in Canada. The conditions for obtaining the relief under the EOPS Program are described in section 8.1 of Schedule VII to the Act.

Under the EDC Program, the registrant must import another person's goods for the purpose of supplying a service or added property in respect of the goods to the person (see definition of customer's good in section 273.1 of the Act).

Agents and Auctioneers

Section 177 of the Act deals with supplies made by agents, including auctioneers, on behalf of principals.

Subsection 177(1) of the Act deals with a person acting as agent who makes a supply of tangible personal property (TPP) on behalf of a principal otherwise than by auction. Generally, that subsection deems a supply of TPP made by an agent on behalf of a principal who is not required to collect tax to have been made by the agent and not by the principal. Furthermore, the agent is deemed not to have made a supply to the principal of services relating to the supply of the TPP except for the purposes of section 180 of the Act. Subsection 177(1) of the Act does not apply where the supply of TPP is an exempt or zero-rated supply.

Subsection 177(1.2) of the Act deals with a person acting as an auctioneer and agent who makes a supply of TPP on behalf of a principal. That subsection deems a supply of TPP made by an auctioneer who is a registrant and agent acting on behalf of a principal to have been made by the auctioneer in all cases. Furthermore, the auctioneer is deemed, under subsection 177(1.2) of the Act, not to have made a supply to the principal of services relating to the supply of the auctioned goods, except for the purposes of section 180 of the Act. However, an auctioneer who is a registrant and a principal who is a registrant may make a joint election in certain circumstances as provided for at subsection 177(1.3) of the Act. Where the election is made, the rules under subsection 177(1.2) of the Act do not apply (i.e., the principal is deemed to be the supplier of the TPP and the auctioneer is deemed to have made a supply to the principal of services relating to the supply of the TPP).

Application to this case

Subsection 177(1.2) of the Act is applicable in this case as the registrant is acting as an auctioneer and agent on behalf of non-resident persons. Pursuant to subsection 177(1.2) of the Act, an auctioneer who sells TPP in Canada on behalf of a non-resident non-registered person is deemed not to have made to the non-resident person a supply of services relating to the supply of TPP.

In this case, the services provided to the non-resident for which the auctioneer is paid a commission, relate to the supply of TPP on behalf of the non-resident. Therefore, the registrant is deemed not to have made a supply of services to the non-resident consignor, pursuant to subsection 177(1.2) of the Act (assuming an election under subsection 177(1.3) of the Act has not been made). The auctioneer is deemed to have made a supply of services to the non-resident only for the purposes of section 180 of the Act.

EDC

The EDC Program provides relief from the payment of Division III tax where a registrant who is authorized under the EDC Program imports another person's goods for the purpose of supplying a service in respect of the goods (definition of customer's goods in subsection 273.1(1) and section 11 of Schedule VII).

In this case, although the auctioneer is deemed not to have made a supply of services to the non-resident consignor pursuant to subsection 177(1.2), the goods would still fit the definition of "customers' goods" in subsection 273.1(1) since the goods have been imported for the purpose of supplying a service in respect of the goods (and in reality, that service has been provided by the auctioneer).

However, the auctioneer will not meet the "export revenue percentage" test if its principal income is the commission paid by the non-resident consignors. This commission would not qualify as "export revenue" as defined in subsection 273.1(1) because the supply of service made by the auctioneer to the consignors (selling goods on behalf of the non-residents) is not a supply of a service of processing, storing or distributing tangible personal property. Any processing services performed (cleaning, sorting, storing) are inputs to the supply of an auctioneering service.

If the export revenue percentage test is not met, the auctioneer cannot be authorized to use an EDC certificate and would therefore not be able to import on a tax-free basis the non-residents' goods to be auctioned.

Definition of "Processing" for EDC purposes: Subsection 273.1(1)

"processing" includes adjusting, altering, assembling and any basic service.

"basic service" means any of the following services performed at any time in respect of goods, to the extent that, if the goods were held in a bonded warehouse at that time, it would be feasible, given the stage of processing of the goods at that time, to perform that service in the bonded warehouse and it would be permissible to do so according to the Customs Bonded Warehouses Regulations:

(a) disassembling or reassembling, if the goods have been assembled or disassembled for packing, handling or transportation purposes;

(b) displaying;

(c) inspecting;

(d) labelling;

(e) packing;

(f) removing, for the sole purpose of soliciting orders for goods or services, a small quantity of material, or a portion, a piece or an individual object, that represents the goods;

(g) storing;

(h) testing; or

(i) any of the following that do not materially alter the characteristics of the goods:

((i) cleaning,

(ii) complying with any applicable law of Canada or of a province,

(iii) diluting,(iv) normal maintenance and servicing,

(v) preserving,

(vi) separating defective goods from prime quality goods,

(vii) sorting or grading, and

(viii) trimming, filing, slitting or cutting)

EOPS

Pursuant to section 8.1 of Schedule VII, goods imported by a registrant who has been authorized under the EOPS Program are not subject to Division III tax if the goods are:

(a) processed, distributed or stored in Canada and subsequently exported without being consumed or used in Canada except to the extent reasonably necessary or incidental to the transportation of the goods,

(b) incorporated or transformed into, attached to, or combined or assembled with, other goods that are processed in Canada and subsequently exported without being consumed or used in Canada except to the extent reasonably necessary or incidental to the transportation of those other goods, or

(c) materials (other than fuel, lubricants and plant equipment) directly consumed or expended in the processing in Canada of other goods that are exported without being consumed or used in Canada except to the extent reasonably necessary or incidental to the transportation of those other goods, where

(a) the particular goods are imported solely for the purpose of having services performed that are supplied by the registrant to a non-resident person,

(b) throughout the period beginning at the time the particular goods are imported by the registrant and ending at the time of the exportation of the particular goods or the products (in this section referred to as the "processed products") resulting from the processing referred to in whichever of paragraphs (a) to (c) applies,

(i) neither the particular goods nor the processed products are the property of a person resident in Canada,

(ii) the registrant does not have any proprietary interest in the particular goods or the processed products, and

(iii) the registrant is not closely related to any non-resident person referred to in paragraph (d) or to any non-resident person whose property are the particular goods or the processed products,

(a) at no time during the period referred to in paragraph (e) does the registrant transfer physical possession of the particular goods or the processed products to another person in Canada except for the purpose of their storage, their transportation to or from a place of storage or their transportation in the course of being exported,

(b) the exportation of the particular goods or the processed products, as the case may be, occurs within four years after the day on which the particular goods are accounted for under section 32 of the Customs Act,

(c) at the time of that accounting for the particular goods, the registrant discloses, on the accounting document, the number assigned to the registrant under subsection 213.2(1) of the Act, and

(d) the registrant has provided any security that is required under section 213.1 of the Act.

In this case, although the auctioneer is deemed not to have made a supply of services to the non-resident consignor pursuant to subsection 177(1.2), the goods were nonetheless imported solely for the purpose of having services performed that are supplied by the registrant to a non-resident person. However, the goods are imported for the purpose of selling them at an auction on behalf of non-resident consignors and not for the purpose of providing a service of processing, storage or distribution. Further, since the goods sold at auction can be purchased by any person, it would not be possible for the auctioneer to confirm that all conditions in section 8.1 of Schedule VII will be met. For example, the goods may be purchased by residents of Canada. Also, where physical possession of the goods is transferred to the buyer in Canada (whether to a resident or non-resident), it would not be not for the purpose of their storage, their transportation to or from a place of storage or their transportation in the course of being exported, but rather because the goods have been sold to the person.

Definition of Processing for the EOPS Program purpose: Section 8.2 of Schedule VII to the Act

For the purpose of section 8.1, "processing" includes adjusting, altering, assembling or disassembling, cleaning, maintaining, repairing or servicing, inspecting or testing, labelling, marking, tagging or ticketing, manufacturing, producing, packing, unpacking or repacking, and packaging or repackaging.

Conclusion

It appears that the auctioneer would not qualify for the EDC Program because the "export revenue percentage" test will not be met. The auctioneer does not also qualify for the EOPS Program.

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,

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

c.c.:

Ivan Bastasic

Legislative References:	Section 273.1 Sections 8.1 and 11 of Schedule VII
NCS Subject Code(s):	I-11645-3-1