GST/HST Memorandum 3.3.1 "Drop Shipments" June 2008

Consequences of application of s. 179(2)

23 ....The consignee who issues the drop-shipment certificate to the registrant acknowledges its potential tax obligation as a result of acquiring physical possession of the goods. This tax obligation may occur as a result of the general drop-shipment rule where the consignee is acquiring physical possession of the goods to supply a commercial service to the unregistered non-resident in respect of the goods or a service of manufacturing or producing goods for an unregistered non-resident. It may also occur as a result of an obligation to self-assess tax in respect of the goods where the consignee is a recipient of an imported taxable supply of the goods (explained beginning at paragraph 29)....

29. Division IV imposes tax on an "imported taxable supply". Generally, these are supplies that are made outside Canada and acquired by the recipient for consumption, use or supply in Canada otherwise than exclusively in the course of a commercial activity. The recipient, as opposed to the supplier, is required to account for tax on an imported taxable supply.

P-107R1 "Certificate for Pre-Retail Drop-Shipments" 5 May 1999

Description of a drop shipment

4. ... Generally, for GST/HST purposes, a drop shipment of goods occurs where a registrant makes a supply to an unregistered non-resident of either goods by way of sale in Canada or a commercial service in respect of goods and then transfers physical possession of the goods in Canada either to another person on behalf of the non-resident or to the non-resident.

Main purpose of the drop-shipment rules

5. ...[T]he drop-shipment rules are mainly intended to ensure that tax applies to the fair market value of goods that are drop-shipped in Canada and supplied by unregistered non-residents for final consumption in Canada in the same way that tax would apply to goods acquired from the non-resident outside Canada and imported for that purpose. As a general rule, the drop-shipment rules address this issue by deeming the registrant in a drop-shipment situation to have made a supply of the goods to the non-resident recipient for consideration equal to their fair market value when the registrant transfers physical possession of the goods in Canada to another person on behalf of the non-resident or to the non-resident.

Requirement to self-assess if consignee did not accquire exclusively in commercial activity

31. Deeming the consignee to be a recipient of an imported taxable supply of the drop-shipped goods in this case ensures that tax is paid on the goods where they are not acquired by the consignee exclusively for consumption, use or supply in the course of commercial activities and the consignee has issued a drop-shipment certificate that relieved the registrant of the obligation to collect tax on its supply of the goods to the non-resident.

32. It is important to note that a consignee may be a recipient of an imported taxable supply of drop-shipped goods even if the unregistered non-resident who supplied the goods to the consignee is not the same non-resident who purchased the goods from the registrant to whom the consignee issued a drop-shipment certificate. Therefore, a drop-shipment certificate can be issued in certain circumstances where multiple unregistered non-residents are involved with a drop-shipment of goods.

Reproting under ss. 218, 218.1(1)

33. Where the consignee is a recipient of an imported taxable supply of the drop-shipped goods, the consignee must self-assess tax on the value of the consideration for the supply of the goods made by the unregistered non-resident to the consignee. The consignee is required to self-assess GST on the value of the consideration for the imported taxable supply or, HST on the value of the consideration for the imported taxable supply where physical possession of the drop-shipped goods is transferred to the registrant in a participating province