12 February 2001 GST/HST Interpretation 32880 - GST/HST Tax Treatment – Drop-shipment Rules

Dear XXXXX:

Thank you for your letter that was faxed to me on September 21, 2000, (with attachments) concerning the application of the Goods and Services Tax (GST), under the Excise Tax Act (the Act), to the transactions that are to take place as between XXXXX and XXXXX. I apologize for the lateness of this response.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency.

Statement of Facts

We understand the facts to be as follows:

1. XXXXX sells alloy ingots to XXXXX, an unregistered non-resident.

2. XXXXX then sells the alloy ingots to XXXXX a registered consignee of XXXXX operating out of XXXXX, XXXXX.

3. XXXXX transfers physical possession of the alloy ingots to XXXXX.

4. XXXXX will use the ingots in the course of their manufacturing process to produce automobile parts for XXXXX[.]

5. The scrap alloy that remains as a result of the manufacturing process, is supplied by XXXXX to XXXXX, by way of sale.

6. XXXXX resells the scrap alloy to XXXXX who will transform/recycle it into new alloy ingots.

7. XXXXX transfers physical possession of the scrap alloy to XXXXX.

Interpretation Requested

Whether GST applies to the supply of alloy ingots made by XXXXX and if the GST also applies to the supply of the scrap metal alloy made by XXXXX.

Interpretation Given

Based on the information provided, we are pleased to provide you with the following interpretation:

Section 179(1) provides that where a registrant, under an agreement between the registrant and a non-resident person, who is not registered for GST/HST purposes, makes a supply in Canada of tangible personal property (the alloy ingots) by way of sale, and causes physical possession of the property to be transferred at a place in Canada to a third person (the consignee of the non-resident), the registrant is deemed to have made to the non-resident person and the non-resident person is deemed to have received from the registrant a taxable supply of the property. Accordingly, the registrant is required to charge and collect tax in respect of the supply of the property to the unregistered non-resident.

As an exception to the above, pursuant to subsection 179(2) of the Act, where a registrant, under an agreement between the registrant and an unregistered non-resident, makes a supply in Canada of tangible personal property by way of sale and causes physical possession of the property to be transferred in Canada, to a registered third person (the consignee of the non-resident), such a supply shall be deemed to be made outside Canada and would, therefore, not be subject to GST, if the third person gives the registrant a drop-shipment certificate.

In addition, subsection 143(1) of the Act provides, in part, that a supply of tangible personal property or a service made in Canada by an unregistered non-resident person, who is not carrying on business in Canada, is also deemed to be made outside Canada and, therefore, not subject to tax..

Where XXXXX supplies the alloy ingots to XXXXX, and where physical possession of the ingots is transferred by XXXXX (the registered consignee of XXXXX), the supply made by XXXXX to XXXXX is deemed to be made outside Canada pursuant to subsection 179(2) of the Act, so long as XXXXX gives XXXXX a drop-shipment certificate at the time the transfer of the ingots takes place.

Concerning the supply of the scrap alloy made by XXXXX to XXXXX, where physical possession of the scrap alloy is transferred to XXXXX (the registered consignee of XXXXX) by XXXXX, and where XXXXX gives XXXXX a drop-shipment certificate at the time that XXXXX transfers physical possession of the scrap alloy to XXXXX, then subsection 179(2) will be applicable, and the supply of the scrap alloy made by XXXXX to XXXXX would not be subject to tax.

With respect to the supply of the scrap alloy made by XXXXX, an unregistered non-resident person, to XXXXX, subsection 143(1) may apply to deem such a supply to be made outside Canada, as stated above, and consequently not subject to tax.

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