26 September 2003 GST/HST Interpretation 38099 - Application of Subsections 179(2) and 179(4)

Dear XXXXX

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to two specific drop shipment scenarios.

The following information was taken from your letter:

•   A Canadian resident company ("CanCo") is registered for purposes of the Excise Tax Act (the "Act") and is engaged in the manufacturing and sale of tangible personal property (the "Property").

•   A subsidiary of CanCo, ("SubCo") is a company which is not resident in Canada. SubCo is registered for purposes of the Act.

Transaction 1

•   In this transaction CanCo makes a sale of the Property to an unregistered non-resident person ("ForCo"). CanCo is directed by ForCo to drop-ship the Property to a third party consignee who is resident in Canada (the "Consignee"). The Consignee is registered for purposes of the Act.

•   The Consignee gives to CanCo a drop shipment certificate in accordance with the requirements of paragraph 179(2)(c) (i.e., the Consignee states the consignee's name and GST/HST registration number and acknowledges that the Consignee is assuming liability to pay or remit any amount that is or may become payable or remittable by the Consignee under subsection 179(1) of the Act in respect of the Property.)

•   Significantly however, although the drop shipment certificate is prepared and all of the facts relating to the issuance of the drop shipment certificate and the representations of the Consignee continue to be valid in every respect, the drop shipment certificate is inadvertently not signed by the Consignee at the time the supply is made. Instead, the drop shipment certificate is signed by the Consignee several months later with effect from the date of the original supply of the Property.

Transaction 2

•   In a separate and unrelated transaction, ForCo places an order with CanCo for the delivery of the Property outside Canada. ForCo is not registered for GST/HST purposes.

•   In order to fulfil this contract, CanCo purchases the Property from SubCo. GST is paid by CanCo on its purchase from SubCo.

•   Pursuant to the terms of the agreement between CanCo and ForCo, the Property is stored in Canada by CanCo in order that the Property can be further processed by CanCo prior to export from Canada to ForCo.

Interpretation Requested

For Transaction 1

We request your confirmation that in order to effect a valid drop shipment certificate pursuant to subsection 179(2) of the Act, it is permissible to sign and current date such drop shipment certificate with effect from the date of the original supply.

For Transaction 2

CanCo is not required to charge GST/HST on its sale of the Property to ForCo pursuant to subsection 179(4) of the Act.

Interpretation Given

Based on the information provided we offer you the following interpretations:

Interpretation For Transaction 1

A drop-shipment certificate that is signed by a consignee after the day on which the particular supply of Property is made will be valid for purposes of subsection 179(2) of the Act with effect from the date of the original supply, provided all of the conditions of the provision are otherwise satisfied.

Interpretation For Transaction 2

Subsection 179(4) of the Act applies where a registered supplier makes a supply of tangible personal property to a non-resident non-registered person by transferring ownership of the property to the non-resident but retains physical possession of the property for the purposes referred to in subparagraphs 179(4)(b)(i), (ii), and (iii) of the Act. For subsection 179(4) to apply, a registrant must retain possession of the property for the purpose of:

•   transferring physical possession of the property to the non-resident purchaser or another person who subsequently acquires ownership of the property or a person designated by the non-resident or subsequent purchaser,

•   making a supply of a commercial service in respect of the property to the non-resident person or a subsequent purchaser, or;

•   for consumption, use or supply by the registrant under an agreement for a supply of the property by way of sale or lease to the registrant by the non-resident.

In the circumstances described, CanCo has sold Property to ForCo (an unregistered non-resident) and retains physical possession of the Property for the purpose of storing and further processing the Property for ForCo before it is delivered to ForCo outside Canada. In this case, when ownership of the property transfers, paragraph 179(4)(c) of the Act deems CanCo to have transferred physical possession of the Property to another registrant and to have obtained a certificate from the other registrant (as described in paragraph 179(2)(c) of the Act). As a result, the supply by way of sale of the Property by CanCo to ForCo is deemed under subsection 179(2) of the Act to be made outside Canada and CanCo is not required to charge GST/HST on that supply.

It is important to note, however, that when ownership of the Property transfers, CanCo is also deemed under paragraph 179(4)(c) of the Act to have acquired physical possession of the Property for the purpose of supplying the commercial service and therefore remains potentially liable under subsection 179(1) of the Act when physical possession of the Property is transferred to another person.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the 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) 952-8812.

Yours truly,

Jeffrey Frobel
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate