30 January 1997 GST/HST Interpretation HQR0000796 - Drop Shipments

                                                                        GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of July 30, 1997, in which you request a Goods and Services Tax ("GST") and Harmonized Sales Tax ("HST") interpretation.

The following hypothetical situation was described in your letter:

•   An unregistered nonresident corporation ("NRC"), who is not carrying on business in Canada, has entered into a contract to purchase goods from a manufacturer resident in Canada ("Canadian manufacturer"). The Canadian manufacturer is a GST registrant. NRC has leased the goods to a wholly owned subsidiary ("Sub") who is a GST registrant resident in the United States.

•   Sub subleases the goods to a registered Canadian resident ("Canadian Corp"), who acquires the goods for use in its commercial activities. Canadian Corp takes possession of the goods at the manufacturer's facilities. Canadian Corp, as the consignee, issues a dropshipment certificate in accordance with the Excise Tax Act ("ETA") upon taking physical possession of the goods at the commencement of the lease.

•   The goods are not returned to Sub's place of business at the end of the lease agreement between Sub and Canadian Corp. The goods are left at an agreed upon location and either Sub or a new sublessee will take possession of the goods at this location. Depending on current market conditions and demand for the goods, the goods could be exported from Canada for sublease in the U.S.

•   The lease between Sub and Canadian Corp is for a large number of goods (i.e., 100 or 200 items). It is likely that when Canadian Corp releases the goods that they will be split among several leases with new sublessees. As a result, Canadian Corp may not even know the identity of the person who takes possession of the goods from the drop off location.

•   The goods in question are used exclusively in commercial activities and the nature of the goods is such that they will not be used by a consumer for personal use.

Interpretation Requested

Notwithstanding the wording of the example of the dropshipment certificate in Policy Statement P107, is Canadian Corp or any other party in the transaction required to selfassess andor collect and remit the GST when Canadian Corp returns the goods to Sub at the conclusion of the lease, if a dropshipment certificate is not received from the next lessees? Alternatively, if such a selfassessment were required by Canadian Corp, would Canadian Corp be entitled to claim an ITC?

Interpretation Given

In our letter of May 9, 1997, addressed to XXXXX, we confirmed that for the purposes of subsection 179(2) of the ETA, Canadian Corp is considered to be the consignee. Pursuant to subsection 179(2) of the ETA, the supplies by the registered Canadian manufacturer to NRC are deemed to be made outside Canada, provided all of the conditions of the subsection are satisfied. Consequently, tax under Division II does not apply.

Canadian Corp is not required to collect and remit the GST under subsection 179(1) of the ETA. The example of a dropshipment certificate given in our Policy Paper P107 will be acceptable to the Department. As the wording in this dropshipment certificate is not prescribed by legislation; you may develop your own wording. Should you wish to compose your own dropshipment certificate, you must ensure that the requirements of paragraph 179(2)(c) of the ETA are met.

There is no need for Canadian Corp to obtain dropshipment certificates from the next sublessees as Canadian Corp does not have an agreement with an unregistered nonresident.

Under the rules of subsection 179(2) of the ETA, a registrant who issues a dropshipment certificate in accordance with paragraph 179(2)(c) of the ETA may be required to selfassess tax under Division IV. By virtue of paragraph (b) of the definition "imported taxable supply" in section 217 of the ETA, a registrant who has obtained physical possession of the goods, will be required to selfassess tax under Division IV if the goods are not acquired for consumption, use or supply exclusively in the course of commercial activities of the registrant. Canadian Corp would not be required to selfassess tax under Division IV because the goods are used exclusively in the course of its commercial activities.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 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 613 952-0419.

Yours truly,

Michèle Routhier
A/Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

NCS Subject Code(s)              I 7(mr)