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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th Floor
320 Queen Street
Ottawa, Ontario K1A 0L5Sandy Marr
Compliance & Verification OfficerTO BE SENT BY E-MAIL
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CVIICanada Customs Trade AdministrationFile #: 11645-3Case # 33358April 2, 2001
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Subject:
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GST implications of Canadian goods returned as described in Customs Notice N-118: Tax Treatment to be accorded to Imported Goods Considered to be Canadian Goods and Goods Once Accounted for, Exported, and Returned
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Dear Mrs. Marr:
This is in response to your e-mail messages of November 3 and November 7, 2000, concerning the information included in Customs Notice N-118 (the Notice) and the application of that information to a specific fact situation.
During our telephone conversation of November 7, it was agreed to re-state the facts as follows.
Facts
CoC is a resident registrant. DivA is a division of CoC. DivA and CoC are the same person for GST purposes.
CoB is a non-resident of Canada and is a subsidiary of CoC.
DivA produces equipment for use by exploration and production companies in the oil and gas industry. CoC has legal title to the equipment.
The equipment is leased to CoB and subleased by CoB to a third party that is also a non-resident of Canada.
The equipment is returned to CoC in Canada when CoB no longer requires it.
Where the equipment breaks down, or the wrong equipment or parts are supplied to CoB, CoC imports the equipment (or part thereof) for repair or replacement and exports them back to CoB.
DivA of CoC is the exporter and importer "of record" with respect to the movement of the equipment.
Where the goods are imported into Canada, DivA of CoC declares them under either tariff heading 9813 or 9814 (Canadian goods returned) and uses code 66 for GST purposes.
Questions Asked
Questions #1 & #2
Whether your analysis of the Notice with respect to a supply by way of lease, licence or similar arrangement is correct. Whether paragraph 14 of the Notice should be amended with respect to the apparent contradiction with paragraph 8 of the Notice.
Response
Paragraph 8 does not necessarily contradict paragraph 14; it is only that the information in the Notice is incomplete. The Notice does not explain all the circumstances under which Division III tax applies and circumstances under which Division III tax does not apply.
Generally, the importation of goods which were previously supplied by way of lease, licence and similar agreement are not subject to Division III tax if they are imported to be returned to the owner or lessor. Generally such goods would be subject to Division III tax if they are imported for consumption, use or supply in Canada by a lessee
(i) who is not required to pay Division II tax on the lease payments because the supply to him was deemed to be made outside Canada or
(ii) the supply to the lessee was zero-rated or
(iii) the lessee is required to pay Division II tax on the lease payments but is entitled to claim a non-resident rebate under subsection 252(1) of the Excise Tax Act (the Act).
The following are different situations where Division III tax is payable/not payable on the importation of Canadian goods that were supplied by way of sale or by way of lease, licence or similar arrangement.
Canadian goods returned are subject to Division III tax where the importer imports such goods for consumption, use or supply in Canada and:
• the importer was never charged GST/HST on the acquisition (by way of sale or lease) of the goods because the supply to him was deemed to be made outside Canada or the supply was zero-rated, or
• the importer previously paid GST/HST on the acquisition of the goods but was entitled to claim a non-resident rebate under subsection 252(1) of the Act.
Canadian goods returned are not subject to Division III tax where the importer imports such goods for consumption, use or supply in Canada and:
• the importer previously paid GST/HST on the acquisition (by way of sale or lease) of the goods and is a person who was not entitled to claim the non-resident rebate under subsection 252(1) of the Act, or
• the goods were manufactured in Canada by the importer, or
• the importer was never charged GST/HST because the goods were previously acquired in Canada from a non-registrant.
The importer in the above paragraphs means the owner of the goods or a person who has the use or possession of the goods under a lease, licence or similar arrangement (the lessee) with the owner or lessor of the goods. Where the "importer of record" is a person who is only acting on behalf of the lessee, the owner or the lessor for the importation of the goods, the goods will be considered to have been imported by the lessee, the owner or the lessor and not by the "importer of record".
Canadian goods returned are also not subject to Division III tax in the following situations:
• the goods are returned to the Canadian supplier because the sale was cancelled or the goods are defective or not as ordered,
• the goods were acquired and exported by a vendor for re-sale and are being returned to Canada, without having been sold, to vendor's supplier,
• the goods are imported for the purposes of returning the goods to the owner or the lessor for repair or maintenance during the lease agreement.
• the goods are imported for the purpose of returning the goods to the owner or lessor at the end of a lease agreement.
In the case described above, the equipment is considered to be a Canadian good as it was manufactured in Canada by a division of CoC for CoC's consumption, use or supply and CoC has legal title to the equipment. Therefore, Division III tax will not apply where the equipment is imported for the purpose of returning the equipment to CoC for repair or maintenance or for the purpose of returning the equipment to CoC at the end of the lease agreement.
Question #3
Paragraph 15 which discusses goods sold on a zero-rated basis (because of export) and then imported, uses the phrase "for use or consumption". What is the tax status if the goods are being imported for purposes of a "supply" by the owner?
Response
Paragraph 15 of the Notice should refer to goods that are returned to Canada "for consumption, use or supply in Canada". Furthermore, the information in paragraph 15 of the Notice does not apply only to goods that were supplied on a zero-rated basis by way of sale. It applies to goods that were supplied by way of sale as well as to goods that were supplied by way of lease, licence or similar arrangement as outlined in paragraph 4 of the Notice.
Question #4
What is the tax status of a good that is supplied by way of lease, licence or similar arrangement and the good is supplied under zero-rated conditions because of export?
Response
Canadian goods which were supplied in the conditions described in paragraph 4 of the Notice (i.e. tax free) will have the same tax status (i.e. subject or not subject to Division III) when imported under the same circumstances. It does not matter whether they were previously supplied by way of sale or supplied by way of lease, licence or similar arrangement.
Question #5
What happens if the equipment being exported/imported is a drop-shipment. That is, CoC hires CoA (both Canadian residents) to manufacture goods. CoC then instructs CoA to ship the goods directly to CoB in the U.S.. Title to the goods remains with CoC; the goods are supplied by CoC to CoB under a lease, licence or similar arrangement. CoA is both the exporter of record when the goods are exported and the importer of record where the goods come into Canada.
Response
In this scenario, CoC acquired the equipment from CoA. It is assumed that CoA is only acting as the "exporter/importer of record" on behalf of CoC who is real exporter/importer of the equipment. It is also assumed that the equipment is being imported for the purposes of returning the equipment to CoC at the end of the lease term.
If the supply of the equipment by CoA to CoC was deemed to be made outside Canada (i.e. delivered outside Canada) or was a zero-rated supply, CoA would not have charged Division II tax to CoC on the supply. Therefore, the importation of the equipment at the end of the lease period would be subject to Division III tax because it would be the first time the equipment would be returned to CoC after having been supplied by CoA to CoC under conditions where Division II tax was not payable.
If the supply of the equipment by CoA to CoC was deemed to be made in Canada and was not a zero-rated supply, CoA would have charged Division II tax to CoC on the supply. The importation of the equipment for the purpose of returning the equipment to CoC would not be subject to Division III tax in these circumstances.
Question #6
Paragraph 16 of the Notice refers to goods imported into Canada or acquired in Canada. What happens if the goods are manufactured in Canada? We have not received the full amount of GST on the value of the manufactured good.
Response
Goods manufactured in Canada are considered to be Canadian goods. These can be goods that were manufactured by a particular person in Canada for its own consumption, use or supply or, goods that were manufactured by another person in Canada as ordered by the particular person and delivered to that particular person in Canada (the particular person would have paid tax on the service of manufacturing of the goods).
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
| Legislative References: |
Proposed Amendments to Schedule VII (Non-Taxable Importations) |
| NCS Subject Code(s): |
G 11645-3 |
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