10 July 2001 GST/HST Interpretation 35583 - Export Distribution Centre Program

XXXXX

Thank you for your e-mail of April 18, 2001 concerning the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in respect of three export related tax relief programs contained in the Excise Tax Act (ETA) and administered by the Canada Customs and Revenue Agency (CCRA). We regret the delay in confirming by letter the information provided to you in various telephone conversations and by e-mail.

Interpretation Requested

I understand from your request of April 18, 2001, that you are seeking an interpretation regarding the application of the existing and new legislative provisions for the Export Distribution Centre (EDC) Program, the Export Trading House (ETH) Program and the Exporters of Processing Services (EOPS) Program.

Specifically your questions are:

1. What happens if a company has an EDC certificate and does not export more than 80% of the goods for example, the company exports 70% and sells 30% domestically or the company adds more than 20% to the goods - will the company be required to pay the GST/HST and be charged interest for not complying with the conditions under which an EDC certificate was authorized? Will the company lose its certificate?

2. What happens if a company has an export certificate and does not export 100% of the goods or adds more than 20% value to the goods - will the company be required to pay the GST/HST and be charged interest for not complying with the conditions under which an export certificate was authorized? Will the company lose its certificate?

3. What happens if a company has an import certificate and does not export 100% of the goods or if the company actually purchases ownership of the goods from the foreign company - will the company be required to pay the GST/HST and be charged interest for not complying with the conditions under which the import certificate was authorized? Will the company lose its certificate?

Interpretation Given

Based on the information you provided and with respect to your conversation with Cathy Evans on May 8, 2001, I am pleased to provide the CCRA's interpretation of the application of the GST/HST provisions of the ETA to the three export related programs you referenced in your e-mail of April 18, 2001.

1. Export Distribution Centre (EDC) Program

The EDC Program allows eligible export-oriented businesses that do not manufacture or produce goods and that add limited value to goods in the course of their processing or distribution activities to use an EDC certificate to acquire or import most inventory, parts used in the course of processing, and customers' goods on which processing services are to be provided, on a GST/HST free basis. The provisions for the EDC Program are contained in new section 273.1 of the ETA.

Please note that in order for a person to qualify for the EDC Program, there is a requirement for the person to meet an export revenue percentage of at least 90%. This is determined by dividing the person's export revenue for a year by the person's specified total revenue for the year. The terms "export revenue percentage" and "specified total revenue" are defined in new subsection 273.1(1) of the ETA.

Where a person who is authorized to use an EDC certificate does not meet the "export revenue percentage" for a fiscal year, i.e. the person's export revenue percentage is less than 90%, the person is required to add an amount to their net tax for the first reporting period that follows that fiscal year. New subsection 236.3(2) of the ETA outlines the amount of the net tax adjustment to be paid.

With respect to your question regarding the revocation of an EDC certificate, there are provisions in the ETA whereby the Minister of National Revenue may revoke the person's authorization to use an EDC certificate after giving that person reasonable written notice if, for example, the person engages in substantial alteration of property (as defined in subsection 273.1(1) of the ETA) or begins manufacturing. The conditions under which an EDC certificate may be revoked by the Minister are contained in new subsection 273.1(10) of the ETA.

There is also a provision for a deemed revocation of an EDC certificate whereby, a person's authorization to use an EDC certificate is deemed to have been revoked immediately after the end of a fiscal year if, for example, the person's export revenue percentage for that year is less than 80%. This provision is outlined in new subsection 273.1(11) of the ETA.

An authorization given to a person to use an EDC certificate is valid for three years after which time the person may apply for a renewal of the certificate. If a person's authorization to use an EDC certificate is revoked, the person is not entitled to obtain a new authorization for at least one full fiscal year.

2. Export Trading House (ETH) Program

The provisions for the ETH Program are contained in section 221.1 of the ETA. The ETH Program allows a person who is registered for GST/HST purposes to use an export certificate to acquire goods in Canada on a tax-free basis if it is reasonable to expect that the person will meet the following two tests during the next 12-month period:

at least 90% of the inventory the person purchases in Canada for resale will qualify for zero-rating under section 1 of Part V of Schedule VI except that the supplier need not maintain proof of export (i.e., the goods must not be consumed, used, processed, transformed or altered after being purchased and prior to being exported); and at least 90% of the person's sales outside Canada of items of inventory that were acquired in Canada or imported into Canada will be of items that were sold without having been consumed, used, processed, transformed, or altered by the person.

Where a person who is authorized to use an export certificate within the meaning of section 221.1 of the ETA uses the certificate to acquire goods that are not exported in accordance with the conditions under which the certificate was authorized, the person is required to add an amount to the net tax for the reporting period that includes the earliest day on which tax would have become payable in respect of the supply if it had not been received on a zero-rated basis.

Similar to the EDC Program, an authorization given to a person to use an export certificate is valid for three years after which time the person may re-apply for a renewal of the certificate. If authorization to use an export certificate is revoked, the person is not entitled to re-apply for at least one full fiscal year.

The Minister may revoke, on a particular day, an export certificate that was authorized to a person where, for example, the person failed to comply with any condition attached to the authorization or any provision of Part IX of the ETA. This provision is contained in subsection 221.1(5) of the ETA.

Subsection 221.1(6) of the ETA contains the deemed revocation provisions whereby a person's authorization to use an export certificate is deemed to be revoked if at the end of a fiscal year during which the certificate is in use, the percentage of inventory purchased in Canada on a zero-rated basis using the certificate exceeds the percentage of inventory supplied outside Canada.

3. The Exporters of Processing Services (EOPS) Program

The EOPS Program allows for the tax-free importation of goods by a Canadian processor for the purpose of processing the goods in Canada and subsequent export if, throughout the time the goods remain in Canada, they are not the property of the processor or a non-resident person to whom the processor is closely related. New sections 8.1, 8.2 and 8.3 of Schedule VII of the ETA contain the provisions for the EOPS Program.

Once authorized to use an import certificate under the EOPS Program, the certificate is valid for three years. Goods imported under the EOPS Program must be exported within four years after the day on which they were accounted for under section 32 of the Customs Act.

Where there is non-compliance with the provisions of the EOPS Program by a participant, for example, the imported goods were not exported within the four year time limit or the goods become the property of the EOPS participant, payment of the GST/HST and any interest or penalties would be required in accordance with the re-assessment provisions of the Customs Act. This is outlined in section 214 of the ETA which reads: "Tax on imported goods shall be paid and collected under the Customs Act, and interest and penalties shall be imposed, calculated, paid and collected under that Act, as if the tax were a customs duty levied on the goods under the Customs Tariff and, for those purposes, the Customs Act, with such modifications as the circumstances require, applies subject to Division III of the ETA."

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) 954-5124.

Yours truly,

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