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XXXXX
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File #: 11680-7(glr)
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I refer to XXXXX facsimile message of March 25, 1996, addressed to Mr. Garry Ryhorchuk of my staff, concerning the possible application of the drop-shipment provisions in section 179 of the Excise Tax Act to services provided by XXXXX[.] I have reviewed the letter dated February 2, 1996, from XXXXX. I understand that:
• XXXXX is a resident and is registered for Goods and Services Tax (GST) purposes. XXXXX is owned by XXXXX[.]
• XXXXX a partnership located in XXXXX, is not registered for GST purposes.
• Pursuant to a licensing agreement between XXXXX and XXXXX distributes new films to Canadian theatre operators as licensee of XXXXX imports from XXXXX a master copy of the film (the master). XXXXX is the owner of the master. XXXXX is the importer of record for the importation of the master. After the film has finished showing, the master is returned to XXXXX XXXXX is the exporter of record.
• Under the licensing agreement with XXXXX has film prints of the master made and charges XXXXX for the cost of these prints. XXXXX arranges to have the prints reproduced in Canada by XXXXX. XXXXX invoice XXXXX for the cost of the prints and pass title of the prints to XXXXX. Title to the prints is then transferred by XXXXX to XXXXX The prints are subsequently delivered by XXXXX to various Canadian theatre operators for showing.
The following comments are provided regarding the possible application of the drop-shipment rules contained in subsection 179(2) to the supplies by XXXXX to XXXXX[.] In order the for the drop-shipment rules to apply, XXXXX must be:
• making a taxable supply in Canada of tangible personal property by way of sale to XXXXX·making a taxable supply in Canada of a service of manufacturing or producing tangible personal property to XXXXX or
• acquiring physical possession of tangible personal property (other than property of a person who is resident in Canada) for the purpose of making a taxable supply of a commercial service in respect of the property to XXXXX has put forward arguments relating to the making of a supply of tangible personal property or making a supply of a commercial service in respect of the property. However, the correct characterization of the supply being made by XXXXX to XXXXX is "a service of manufacturing or producing tangible personal property". XXXXX has the master and contracts with XXXXX for the production of prints.
I will now discuss the possible application of subsection 179(4). In order for this provision to apply to the transactions between XXXXX and XXXXX the following requirements must be met:
• A particular registrant must transfer ownership of tangible personal property to an unregistered non-resident person, under an agreement for the supply of the property.
XXXXX states that XXXXX transfers title (ownership) of the copies of the films to XXXXX under the licensing agreement. Therefore, it appears that this requirement is met.
• The particular registrant retains physical possession of the property after the transfer of ownership for the purpose of consumption, use or supply by that registrant under an agreement for a supply of the property made by way of sale or lease to that registrant by the non-resident person.
XXXXX does retain physical possession of the prints after ownership is transferred to XXXXX is retaining physical possession of the prints for supply to Canadian theatre operators. XXXXX states that the supply of the prints by XXXXX to XXXXX is made by way of lease under the licensing agreement. Therefore, it appears that this requirement is met.
As a result, the supply by XXXXX to XXXXX will be deemed to be made outside Canada under the provisions of subsections 179(2) and 179(4) and not subject to the GST under Division II.
However, before providing a response to XXXXX, I suggest that a copy of the licensing agreement between XXXXX and XXXXX be obtained in order to ascertain the conditions for the supply of the prints by XXXXX to XXXXX and the subsequent supply back to XXXXX from aylward XXXXX[.] If the licensing agreement is not supplied, you would only be in a position to issue an interpretation and not a ruling.
If you have any questions or require further information, please contact Mr. Ryhorchuk at (613) 952-6743 or Mr. Randy Nanner at (613) 952-8810.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch
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R. Nanner GAD #: 2854(GEN)
G. Ryhorchuk |
OFFICER: Garry L. Ryhorchuk
Telephone #: (613) 954-8585
Fax #: (613) 990-1233
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