28 June 2001 GST/HST Interpretation 34958 - Tax Treatment on Goods in Transit in Canada

Dear XXXXX:

Thank you for your letter of September 10, 2000, concerning the application of the Goods and Services Tax (GST) under the Excise Tax Act (the ETA) to XXXXX (XXXXX operations, in respect of goods imported by its non-resident sister company, that are combined with goods belonging to XXXXX, for export from Canada. I apologize for the lateness of this response.

Interpretation Requested

According to the information included in your submission and further to your telephone conversation with XXXXX, on August 15, 2000, and our telephone conversation of March 30, 2001, I understand the issues as follows:

1. XXXXX is a GST registrant that manufactures rubberized membranes for sale on the domestic market and internationally.

2. XXXXX's sister company (SC), is an unregistered non-resident person, that is in the business of selling goods, internationally.

3. A particular non-resident individual owns both XXXXX and SC.

4. At different times, XXXXX may sell goods to SC and SC may in turn sell goods to XXXXX.

5. Occasionally, SC may export goods into Canada for delivery to XXXXX, who then combines these goods with their own manufactured goods, for export from Canada, and

-    The goods imported by SC, that are to be ultimately used in conjunction with XXXXX goods by SC's non-resident customers, and which are combined with XXXXX s goods for export, are not supplied by SC XXXXX.

-    The goods belonging to SC are shipped to XXXXX f.o.b. destination, where SC pays for the transportation and insurance costs.

-    XXXXX merely combines SC's with goods of its own which are packaged for export in containers. This arrangement helps reduce the transportation costs associated with the exportation of SC's goods abroad by cargo vessel.

-    The non-resident end-user of the exported goods is a customer of SC and not of XXXXX. SC invoices its non-resident customer.

6. The customs broker has been invoicing the Division III tax (the GST charged on the imported goods) to XXXXX, albeit SC was the importer of record for the goods.

7. XXXXX is currently paying the Division III tax and claiming a corresponding input tax credit (ITC) on its monthly returns.

Interpretation Given

The tax imposed on imported goods under Division III of the ETA is payable by the importer of the goods, usually, but not limited to, the owner of the goods, or the person who ordered or caused the goods to be imported into Canada. According to the above information, it appears that the importer in this case would be SC and not XXXXX.

Turning now to the issue of input tax credits (ITCs), subsection 169(1) of the ETA generally provides that an ITC may only be taken by a registrant who is so eligible. To be eligible for an ITC, a registrant must first have acquired or imported goods or services. Secondly, such an acquisition would have to be for consumption, use or supply in the course of the registrant's commercial activities.

As mentioned earlier, SC does not supply goods to XXXXX. SC, however, does transfer physical possession of its goods to XXXXX, as outlined in fact number 5 above, essentially to have XXXXX combine its goods with those of SC, for export from Canada. Therefore, XXXXX would not have acquired nor imported the goods for the purpose of consumption, use or supply in the course of its commercial activities.

Subsection 169(2) of the ETA provides for the credit of the tax for goods imported to provide a commercial service. Specifically, where a registrant imports goods of a non-resident person, who is not registered for GST/HST purposes, for the purpose of making a commercial service in respect of the goods (making a supply of packing or otherwise preparing them for export) and the tax in respect of the importation is paid by the registrant, the input tax credit of the registrant is equal to that tax.

As mentioned earlier, SC is the importer of record for the goods. Therefore, subsection 169(2) of the ETA would not be applicable to XXXXX.

In regards to whether an ITC can be taken in respect of the importation of the goods, where SC is the importer of record and who has paid the Division III tax, section 180 of the Act provides that SC may flow-through the tax to XXXXX under certain conditions.

1. The property must be used in Canada by or on behalf of the non-resident person or the particular person 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 XXXXX 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 it had been the importer of record and had actually paid the tax.

Where XXXXX is considered by Customs to be the importer of record, subsection 169(2) of the ETA, as mentioned earlier, would apply, in that if XXXXX imported the goods of SC for purposes of making a supply to SC of a commercial service in respect of the goods, XXXXX would be eligible for an ITC in an amount equal to the Division III tax it paid as the importer of record.

In regards to whether XXXXX is supplying to SC a commercial service, subsection 123(1) of the ETA defines "commercial service" in respect of tangible personal property to mean any service in respect of the property other than a service of shipping the property supplied by a carrier, and a financial service.

Therefore a supply of packing goods for purposes of transporting the goods would be included in the above definition.

In view of the information provided above, XXXXX appears to be performing a commercial service in respect to the imported goods belonging to SC - XXXXX acquires physical possession of the imported goods in order to pack them with XXXXX own goods into a container, for purposes of transporting the goods abroad. Therefore, XXXXX would be making a supply of a commercial service to SC at the time it packs SC's goods with its own.

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) 957-8220.

Yours truly,

Daniel E.B. Chamaillard
Senior Technical Analyst
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate