12 November 1998 GST/HST Interpretation HQR0001351 - Subsections 179(2) and 179(3) of the Excise Tax Act (Act)

Dear XXXXX

I refer to your facsimile message of September 28, 1998, and XXXXX facsimile message of October 22, 1998 (forwarding a copy of Exhibit A), concerning the application of the subsections 179(2) and 179(3) to a hypothetical situation concerning materials processed in Canada. The materials may or may not be subsequently exported.

The following information was provided in your message:

•   Company A is a non-resident corporation that does not carry on business in Canada and is not registered for GST/HST purposes. Company A has no permanent establishment or employees in Canada.

•   Company A purchases Product X in Canada from a GST/HST registered resident, Company C.

•   Company C transfers physical possession of Product X (at a place in Canada) to Company B, a GST/HST registered resident corporation, who will process Product X.

•   Company A retains ownership of Product X at all times.

•   Company B processes Product X by adding other materials to create Product Y, which is exported from Canada by Company A.

•   Upon receiving physical possession of Product X, Company B issues a drop-shipment to Company A's supplier, Company C, indicating that Company B has assumed liability to pay or remit any amount of tax that may become payable. As a result, Company A does not pay the GST on the acquisition of Product X.

•   In addition, as Product Y is exported, Company B does not charge Company A the GST for its services in respect of processing Product Y.

•   In certain circumstances, Company B imports Product X into Canada. The owner of Product X is Company A but Company B is the importer of record. Product X is imported for purposes of processing into Product Y. Company B claims an input tax credit to recover the GST paid at the time of importation of Product X.

•   In the course of processing Product X, there is a by-product, By-product Z, which company A intends to sell to certain customers in Canada. These customers are GST/HST registrants who are acquiring By-product Z for use in their commercial activities.

•   Company B intends to acquire drop-shipment certificates from Company A's GST/HST registered customers so that Company B will not Charge Company A the GST in respect of By-product Z.

•   As an unregistered non-resident, Company A will not charge its customers the GST or the HST on the sale of By-product Z.

•   Products X and Y and By-product Z are all taxable products (i.e., either subject to the GST or the HST).

Interpretations Requested

1. Please confirm that Company A is not required to pay the GST on the acquisition of Product X in Canada from Company C where physical possession of Product X is transferred to Company B and Company B provides a drop-shipment certificate to Company C.

2. Please confirm that Company B is entitled to claim an input tax credit under subsection 169(2) of the Act in respect of Product X imported on behalf of Company A to be used in the course of supplying the service of processing Product X into Product Y and By-product Z.

3. Please confirm that Company B is not required to charge the GST to Company A in respect of the service of manufacturing Product Y by virtue of subsection 179(3) where Product Y is either delivered to Company A outside Canada or exported by Company A in compliance with the requirements of subparagraph 179(3)(c)(ii) of the Act.

4. For purposes of the sale of By-product Z by Company A to customers in Canada, please confirm the application of subsection 179(2). In this regard, please confirm that Company B is not required to charge the GST to Company A in respect of the service of manufacturing By-product Z sold by Company A to customers in Canada where physical possession of By-product Z is transferred to Company A's customers who in turn provide Company B with drop-shipment certificates.

5. Please confirm that Company B does not have a GST liability concerning the drop-shipment certificate provided to Company C in respect of Product X acquired for use in producing Product Y. Most of Product X is used in the production of Product Y that is exported from Canada and, therefore, subsection 179(3) applies. However, some of Product X ends up in By-product Z that Company A intends to sell to persons in Canada. As stated above, Company B would transfer physical possession of By-product Z to Company A's customers after obtaining valid drop-shipment certificates from them and, therefore, subsection 179(2) applies.

Interpretations Given

1. Provided Company B issues a drop-shipment certificate to Company C, the supply of Product X by Company C to Company A will be deemed to be made outside Canada under the provisions of subsection 179(2) and not subject to the taxes under Division II of the Act.

2. Company B is importing goods (Product X) of an unregistered non-resident (Company A) for the purpose of making a taxable supply of a commercial (processing) service in respect of the goods. Therefore, Company B is entitled to claim an input tax credit (ITC) for the tax payable at the time of importation under Division III of the Act.

3. Company B is providing a taxable supply in Canada of a service of manufacturing or producing (processing) tangible personal property (Product Y) to Company A. Company A is not a consumer of Product Y. Therefore, provided Product Y is either delivered to Company A outside Canada or exported by Company A in compliance with the requirements of subparagraph 179(3)(c)(ii), the supply of Product Y by Company B to Company A will be deemed to be made outside Canada and not subject to the taxes under Division II.

4. Company B is providing a taxable supply in Canada of a service of manufacturing or producing tangible personal property (By-product Z) to Company A. Company A is not a consumer of By-product Z. Therefore, if Company B transfers physical possession of By-product Z at a place in Canada to Company A's customers, and these customers are registered for GST/HST purposes and issue drop-shipment certificates to Company B, the supply of By-product Z by Company B to Company A will be deemed to be made outside Canada and not subject to the taxes under Division II.

5. By issuing a drop-shipment certificate to Company C, Company B, on taking physical possession of Product X, is assuming liability to pay or remit any amount that is or may become payable or remittable. However, because Product X is acquired by Company B for consumption, use or supply exclusively in the course of its commercial activities, Product X is not regarded as an "imported taxable supply" for purposes of section 217 of the Act. Therefore, Company B would not required to self-assess the taxes imposed under sections 218 and 218.1 of Division IV of the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. Unannounced or future amendments to the Act may result in changes to these interpretations. These comments are not rulings and, in accordance with the guidelines set our in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department 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) 952-6743.

Yours truly,

Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate