20 February 2001 GST/HST Interpretation 32402 - PROPOSED LAW/REGULATION

Dear XXXXX

Thank you for your letter of August 17, 2000, (with attachments), which you faxed to Mr. Ivan Bastasic, formerly of our Directorate, concerning the application of the Exporters of Processing Services Program, under the Excise Tax Act (the Act), to your client, namely, XXXXX operating as XXXXX[.] I apologize for the lateness of this response.

Although you have requested a ruling on the subject matter, the issue at hand is in connection with proposed legislation under the Act. GST rulings are binding only as long as the law, its interpretation or the administrative policy does not change.

While the Canada Customs and Revenue Agency (the CCRA) does not provide GST rulings on proposed or draft legislation, draft regulations, Budget resolutions, or Ways and Means Motions that are not yet law, CCRA does provide interpretations on GST matters contained in these documents. Accordingly, we a pleased to provide you with the following interpretation.

Statement of Facts

According to the facts presented and following our January 3, 2001 telephone conversation, our understanding of the issues is as follows:

Facts

1. XXXXX is a GST/HST registrant operating a manufacturing concern in XXXXX, XXXXX, that specializes in manufacturing various conveyor parts and trolley frames on behalf of its customers.

2. XXXXX makes a supply to its customers of manufacturing trolley frames, according to their client's specifications, and assembling them with parts belonging to their customer, such as gear motors and guide/drive rollers, resulting in a finished product, a conveyor system, that is ultimately delivered by XXXXX to its customers that are substantially situated outside Canada.

3. XXXXX has an agreement with an unregistered non-resident person, namely XXXXX., to manufacture a conveyor system. XXXXX would not be closely related to XXXXX if XXXXX were a resident registrant in Canada.

4. Under the agreement, XXXXX manufactures trolley frames for XXXXX in accordance with its specifications (i.e., blueprints) and then assembles them with various components (motors, wheels, cables and grommets) belonging to XXXXX.

5. XXXXX imports these components that are to be assembled with the trolley frames, according to XXXXX specifications, where the appropriate value of the components is several times greater that the value of the trolley frames.

[6]. The trolley frames manufactured by XXXXX under XXXXX specifications, become the property of XXXXX.

7. The resulting final processed product is tested and delivered by XXXXX at a destination outside Canada.

8. XXXXX holds the patent to the manufactured product.

Interpretation Requested

What does proprietary interest mean for purposes of proposed section 8.1 of Schedule VII to the Act, and does it apply to the imported goods or the finished product.

Interpretation Given

New proposed sections 8.1, 8.2 and 8.3 of Schedule VII to the Act, were included in a Notice of Ways and Means Motion tabled on October 4, 2000 and specifically set out the conditions under which a person may use the Exporters of Processing Services Program (EOPS).

Proposed section 8.1 of Schedule VII to the Act, provides, in part, that particular goods that are imported at any time by an authorized registrant are considered as non-taxable importations if the goods are to be incorporated or transformed into, attached to, or combined or assembled with, other goods that are processed in Canada and that are subsequently exported without being consumed or used in Canada, except to the extent reasonably necessary to the transportation of those other goods.

However, certain conditions which are provided for in proposed paragraphs 8.1(d) to 8.1(i) of Schedule VII apply. Proposed paragraph 8.1(e) of Schedule VII states that 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 ("processed products"), resulting from the processing, neither the particular goods nor the processed products can be the property of the Canadian registrant, nor can the registrant have any proprietary interest in the particular goods or the processed products.

It should be noted that the definition of the term "processing", as mentioned in proposed section 8.2 of Schedule VII is very broad and expressly includes, among other things, manufacturing or processing. Also, as indicated in the Explanatory Notes to the October 4, 2000 Notice of Ways and Means Motion, the importer must not obtain ownership or co-ownership of the imported goods or of the exported processed products while they are in Canada.

The importer may, however, supply property, such as components or parts, taken from the importer's own inventory, which is added to the imported goods in the course of their processing. This property may be provided by way of a separate supply or may be covered in the overall charges for the processing service, so long as the terms of the supply are not such that, in so adding this property, the importer becomes the owner or part-owner of the processed products.

As you can see, the mere fact that property which belonged to a registrant has been attached or assembled with the imported property will not, in and by itself, disqualify the registrant from eligibility for EOPS purposes.

The essence of "proprietary interest" is that of ownership over or to the "property". The term "property", in its legal sense, refers to the relationship between a person and some thing. Given that the term "proprietary" has been linked with the notion of ownership then one is lead to the result that a "proprietary right" is a right that leads to a right in the thing itself instead of damages in lieu thereof.

Subject to any evidence to the contrary, the facts outlined above would not appear to support a right in the thing itself (i.e., either in the imported goods or in the exported final product). XXXXX provides property that it owns to XXXXX for assembly with other parts manufactured for XXXXX[.] The parts provided by XXXXX are processed to specifications supplied by XXXXX. XXXXX, in this case, appears to hold property in the sense of a right to demand payment under the agreement - property in the sense of a chose in action - for its supply of making the trolley frame and assembling it with the imported components.

XXXXX has possession at times of the imported and exported goods but would not appear to exert a general right of ownership over such goods. Any rights over the property itself would flow from the agreement. If XXXXX holds additional rights, such as that of a patent, over the goods produced in Canada for incorporation into the assembly then the position taken above is further strengthened.

Accession may also be a factor in determining whether one has a proprietary right or interest in some thing. When one chattel results from the joining together of two or more chattels, a single ownership results. The chattels in themselves, however, lose their respective identity once joined together to create the resulting chattel. Therefore, the proprietary interest can only rest with the person who has title to the resulting chattel.

I have enclosed for your information, a copy of proposed section 213.2 of the Act, and proposed sections 8.1 to 8.3 of Schedule VII to the Act, as well as the corresponding Explanatory Notes.

The foregoing comments represent our general views with respect to the proposed amendment(s) to the Excise Tax Act as it(they) relate(s) to the subject matter of your letter. Any change to the wording of these proposed amendments or any future 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