4 April 1997 GST/HST Interpretation HQR0000326 - Entitlement to Input Tax Credits in Respect of Freight Transportation Charges Paid by

                                                                        April 4, 1997

Dear XXXXX

Thank you for your letters of September 29, 1994 and August 9, 1996 concerning the application of the Goods and Services Tax (GST) to transportation charges paid by XXXXX in which you were questioning an interpretation of the Excise Tax Act (ETA) provided by XXXXX the Ministère du Revenu du Québec which appeared to be different from an interpretation issued by Revenue Canada on August 9, 1990. I apologize for the delay in responding to your request.

Statement of Facts

XXXXX is a company resident in Canada and is registered under the Excise Tax Act (ETA) for GST purposes and under the Quebec Sales Tax Act for QST purposes.

XXXXX sells goods f.o.b. shipping point (plant/warehouse) with the freight prepaid to their customer's destination.

XXXXX makes supplies of goods taxable at 7% and of other goods taxable at 0% for GST purposes.

XXXXX charges a single amount to their customers in respect of the goods and does not charge them a separate amount for the transportation services.

•   According to the terms of sale, the method of transportation and routing is designated by XXXXX enters into contracts directly with various carriers for transportation of goods sold by XXXXX to their customers. The transportation contracts are entered into before the particular goods which are the subject of the transportation contract have been sold by XXXXX to their customers.

•   The transportation contracts entered into between XXXXX and their carriers are either for a fixed term of approximately two years or an indefinite term which may be cancelled on a thirty-day notice by either party.

•   The transportation contracts stipulate that any loss or damage to the shipped goods is to be paid by the carrier to XXXXX[.] In turn, XXXXX agrees to reimburse its customers for loss or damage.

XXXXX pays 7% GST on the amount paid for domestic freight services provided to XXXXX by GST registrants and has claimed ITCs for the GST paid to these carriers.

•   On July 7, 1990, XXXXX wrote to Revenue Canada to inquire as to whether XXXXX was entitled to claim ITCs for all the GST paid to their carriers.

•   On August 9, 1990, Revenue Canada answered XXXXX indicating that XXXXX is entitled to claim an ITC for GST paid on transportation services supplied to them by carriers that are registered for GST purposes.

•   On October 30, 1992, XXXXX wrote to the Ministère du Revenu du Québec (MRQ) requesting a ruling on the same matter for purposes of the Quebec Sales Tax Act.

•   On February 21, 1994, the MRQ wrote to XXXXX[.] In their letter, the MRQ indicated that XXXXX was not entitled to Input Tax Refunds for purposes of the QST and to ITCs for GST purposes.

Ruling Requested

You inquired as to whether XXXXX is entitled to claim ITCs in respect of the freight transportation costs they are paying to carriers with whom they enter into agreements for the transportation of goods sold f.o.b. origin or whether it is XXXXX customers who are entitled to claim the ITCs in respect of those charges.

Ruling Given

Based on the facts set out above, we rule that XXXXX is entitled to claim ITCs in respect of freight transportation charges paid by them to carriers with whom they enter into agreements to transport goods sold by XXXXX to XXXXX customers where they enter into contracts with carriers in their own name.

Explanation

Where XXXXX undertakes to deliver the goods to their customer's premises and enters into transportation contracts with common carriers in their own name for carrying these goods, they are acquiring these services for the purposes of supplying goods to their customers. Therefore, they are acquiring the freight transportation services in the course of their commercial activities and are entitled to claim ITCs for the tax paid in respect of these services, provided XXXXX meets all the necessary conditions to claim these ITCs.

As you are aware, to be entitled to claim an ITC in respect of the tax payable on a property or service, a person must meet all the following conditions:

1. The property or service must be supplied to or imported by the person;

2. The person must be a GST registrant during the reporting period in which tax becomes payable or is paid without having become payable;

3. Tax must be payable by the person in respect of the supply or importation, or be paid by the person before it becomes payable;

4. The property or service must be acquired or imported for consumption, use or supply in the course of the commercial activities of the person; and

5. The person must have obtained sufficient documentation to determine the amount of the ITC.

Statement of Facts

•   In addition to the question that you asked, the information provided by XXXXX XXXXX in a fax that she sent me XXXXX raises another issue. In this fax, she indicated that XXXXX charges the same price to their customers who pick up the goods that XXXXX charges where they deliver the goods at their customers' premises. In these circumstances, XXXXX pays back an amount plus GST to their customers who pick up the goods at XXXXX premises.

Ruling Given

In the scenario mentioned in the above paragraph, we rule that XXXXX customers are not making a supply to XXXXX and that the amounts paid to them by XXXXX are not consideration for a supply and are not subject to GST.

Explanation

In fact, where they pay back an amount to their customers picking up the goods, XXXXX is reducing the consideration previously charged to reflect that they are not providing transportation to their customers. If XXXXX charges tax to their customers on the price of the goods and subsequently refunds part of the price to their customers, they may, pursuant to subsection 232(2) of the ETA, adjust, refund or credit the amount of tax charged to their customers for the goods within four years after the end of the reporting period in which the price is reduced. If they charged tax on the goods but did not collect it, they may adjust the tax payable on the goods by subtracting the portion of the tax calculated on the price reduction from the tax charged initially. If they collected tax on the goods, they may refund or credit the portion of the tax calculated on the price reduction. As you are aware, a registrant is not required to adjust, refund or credit the tax pursuant to subsection 232(2). In particular, this is not necessary where a customer is a registrant and is entitled to claim ITCs for the tax paid on supplies.

These rulings are subject to the general limitations and qualifications outlined in the GST Memoranda Series (1.4). We are bound by these rulings provided that none of the above issues are currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transactions for which you requested a ruling.

For your convenience, find enclosed, copy of GST Memoranda Series (1.4). If you need additional information, please feel free to contact us again.

Yours truly,

Serge Bernier
Senior Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST Rulings and Interpretations

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