24 October 2003 GST/HST Interpretation 47589 - Maintenance, Repair and Overhaul of Aircraft

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to aircraft and parts brought to Canada for various kinds of work, ranging from maintenance checks to modifications or disassembly.

XXXXX.

Interpretation Requested

The questions raised XXXXX are as follows:

1. What are the applicable GST rules for maintenance, repair and overhaul (MRO) work performed in Canada by Canadian GST/HST registrants for US and foreign-based customers?

2. What are the applicable GST importation rules when aircraft and /or aircraft parts are brought into Canada solely for the purpose of performing MRO work and subsequently to be shipped out of the country again?

3. What are the applicable GST rules when aircraft on ground (AOG)/emergency maintenance is performed at a Canadian airport by a Canadian GST/HST registrant for an airline headquartered outside Canada? Are there different rules if the invoices are sent to a Canadian address instead of a foreign address? Are there different rules if the maintenance is performed as part of a long-term contract instead of on an ad-hoc basis?

4. What are the applicable GST rules when foreign registered aircraft are brought into Canada to be dismantled, with all components to be shipped out of the country again?

5. Is there a difference in taxation treatment for MRO services for foreign customers that are and are not GST/HST registrants?

6. Why do Canadian MRO companies have to pay GST when foreign customers ship aircraft parts from a foreign address for installation on their own aircraft?

7. Can Canadian MRO companies claim a rebate on the federal excise tax they pay on fuel that is resold to a foreign customer for the purpose of ferrying the customer's aircraft out of the country?

8. XXXXX

Interpretation Given

1. A taxable supply made in Canada is subject to GST at a rate of 7%, or HST at a rate of 15% when made in a participating province (New Brunswick, Nova Scotia, or Newfoundland and Labrador), unless the supply is zero-rated (Section 165 of the Excise Tax Act (the Act)) (taxed at 0%). Therefore, where a supply of MRO work is deemed made in Canada, the registrant will be required to collect GST at 7% or HST at 15% unless it qualifies for zero-rating (taxed at 0%) (The GST/HST zero-rating provisions of exports are set out in Part V of Schedule VI to the Act. Additional information regarding the various supplies that are zero-rated as exports can be found in GST/HST Memoranda Series 4.5.2 Exports -Tangible Personal Property (at: www.ccra-adrc.gc.ca/E/pub/gm/4-5-2/README.html) and 4.5.3 Exports - Services and Intellectual Property (at: www.ccra-adrc.gc.ca/E/pub/gm/4-5-3/README.html)).

Place of supply of MRO work

i) General rule

Generally, a supply of a service is deemed made in Canada if it is, or is to be, performed in whole or in part in Canada (Subsection 142(1) of the Act) and is deemed made outside Canada if it is, or is to be, performed wholly outside Canada.

ii) Drop-shipments

Where a supply is made by a registrant to an unregistered non-resident person of a "commercial service" (Per subsection 123(1) of the Act, a "commercial service" in respect of TPP means any service in respect of the TPP other than a service of shipping the TPP supplied by a carrier, and a financial service.) in respect of tangible personal property (TPP), such as MRO work, the GST/HST drop-shipment rules must first be considered as they can affect the registrant's liability to collect tax and the place where the supply is deemed made (Section 179 of the Act).

A drop-shipment generally occurs where a registrant, under an agreement with an unregistered non-resident person, acquires physical possession of TPP of the non-resident for purposes of making a supply of a commercial service in respect of the TPP, and then transfers physical possession of it in Canada to another person or to the non-resident. In this case, the registrant is deemed to have made a taxable supply of the TPP to the non-resident and not to have supplied its service. As a general rule in this case, the registrant is required to collect tax from the non-resident person, calculated on the fair market value of the TPP when physical possession is transferred.

In certain circumstances, specific rules override the above general rule and deem the supply of the service to be made outside Canada, thus removing the liability of the registrant to collect any tax and allowing the unregistered non-resident person to acquire the services on a tax-free basis.

The first of these circumstances (Subsection 179(3) of the Act) is where the TPP is ultimately exported after the commercial service is supplied. Specifically, the commercial service is deemed supplied outside Canada where the registrant

•   transfers physical possession of the TPP to a person at a place outside Canada or to a carrier for export and delivery to a person at a place outside Canada;

•   mails the TPP for export and delivery to a person at a place outside Canada; or

•   transfers physical possession of the TPP at a place in Canada to the non-resident person or any other person who will export it.

Where the registrant transfers physical possession of the TPP at a place in Canada to a person for export, tax relief can be obtained only if all the following conditions are met:

•   the TPP is exported by the person who took physical possession of it;

•   the TPP is exported as soon as can reasonably be expected and, if applicable, in accordance with the normal business practices of the exporter and the owner of the TPP;

•   the TPP has not been acquired by the non-resident person or any owner for consumption, use or supply in Canada at any time after physical possession of the TPP is transferred to the exporter and before it is exported;

•   the TPP is not further processed, transformed or altered in Canada before being exported, except to the extent reasonably necessary or incidental to its transportation; and

•   the registrant supplier has satisfactory evidence that the TPP has been exported, or will be exported.

For example, if a registrant acquires physical possession of an aircraft engine of an unregistered non-resident customer to perform repair work on it, the supply of the repair service is deemed made outside Canada if the registrant transfers physical possession of the engine to the non-resident who intends to export it in the circumstances described above and evidence of the exportation is maintained. For additional information regarding the drop-shipment rules, see GST/HST Memoranda Series 3.3.1 Drop-Shipments (Subsection 179(3) of the Act).

Another situation where the supply of a commercial service can be deemed made outside Canada under the drop-shipment rules (Subsection 179(2) of the Act) is where the registrant transfers physical possession to another person in Canada who in turn provides the registrant with a drop-shipment certificate acknowledging that the person is potentially liable for tax on any subsequent transfer of physical possession of the TPP in Canada. In this case, the supply of the commercial service by the registrant is deemed made outside Canada.

For example, if a registrant performs work on an aircraft engine for an unregistered non-resident customer and then transfers physical possession in Canada of the engine to another supplier that will perform additional work on the engine for the non-resident, the supply of the commercial service by the registrant will be deemed to be made outside Canada if the other person provides the registrant with a drop-shipment certificate.

Although the drop-shipment rules do not apply where the non-resident customer is registered for GST/HST purposes and therefore cannot deem the supply of a commercial service made outside Canada, the supply may nevertheless qualify for zero-rating as outlined below.

iii) MRO work supplied in a province

There are special place of supply rules for determining whether a supply that is made in Canada is made in a participating province. If a taxable (other than zero-rated) supply is made in a participating province, tax at the HST rate of 15% must be collected on that supply.

Generally, with respect to MRO work, the supply a service of MRO work is deemed to be supplied in a particular province if all or substantially all (90% or more) of the "Canadian element" (Pursuant to section 1 of Part V of Schedule IX to the Act, the "Canadian element" of a service is the portion of the service that is performed in Canada.) of the service is performed in that province (Section 144.1 and paragraph 2(a) of Part V of Schedule IX to the Act). Therefore, if, for example, a particular supply of MRO work that does not qualify for zero-rating is entirely done in the province of Nova Scotia, the supply would be subject to HST at 15%.

Zero-rating of MRO work i) Services performed on temporarily imported goods

MRO work supplied in Canada by a registrant is zero-rated (Section 4 of Part V of Schedule VI to the Act), whether the supply is made to a non-resident or not, where the service is in respect of TPP that is:

•   ordinarily situated outside Canada;

•   temporarily imported for the sole purpose of having the service performed; and

•   exported as soon as is practicable after the service is performed.

Also zero-rated in this case is any TPP supplied by the registrant in conjunction with that service. Paragraphs 6 and 7 of the GST/HST Memoranda Series 4.5.3 Exports - Services and Intellectual Property provide additional information regarding this zero-rating provision.

For example, if TPP such as an aircraft or aircraft engine owned by a customer is temporarily imported for the sole purpose of having MRO work done on it, the supply of the service, including any related parts, is zero-rated provided the aircraft or engine is exported as soon as is practicable after the service is performed.

A key condition for the zero-rated treatment described above is that the TPP be exported. The MRO service provider must maintain satisfactory evidence of the exportation for the service to be zero-rated. The CCRA provides guidance on what it considers satisfactory evidence of exportation in paragraphs 12 and 13 and Appendix A of GST/HST Memoranda Series 4.5.2 Exports - Tangible Personal Property.

ii) Supplies to unregistered foreign carriers

A supply of TPP or a service, including a supply of maintenance or repair services, made by a registrant may also be zero-rated (Section 2 of Part V of Schedule VI to the Act) if it is made to an unregistered non-resident aircraft operator in certain circumstances. The non-resident person must carry on a business of transporting passengers or TPP to or from Canada or between places outside Canada, and the service or TPP is acquired by the non-resident for consumption, use or supply in the course of so transporting passengers or TPP. In order for this provision to apply, the following two conditions must be satisfied:

•   the non-resident person must be transporting TPP or passengers at the time the person consumes, uses or supplies the service or TPP acquired by the person; and

•   the consumption, use or supply of the service or TPP by the person must be connected with or arise from the provision of the service of transporting passengers or TPP.

Therefore, if for example, an aircraft of a non-registered non-resident customer were to be flown into Canada for the sole purpose of having maintenance or repair work performed on it, the supply of the maintenance or repair work would not be zero-rated under this provision (Although it may be zero-rated under section 4 of Part V of Schedule VI to the Act.).

A supply of TPP or a service, including a supply of maintenance or repair services, made by a registrant may also be zero-rated if it is made to an unregistered non-resident person that is acquiring it for consumption, use or supply in the course of operating an aircraft by or on behalf of a government of a country other than Canada.

A registrant that makes a supply that is zero-rated if made to a non-registered non-resident person as described above must verify and obtain evidence that the recipient is a non-resident and is not registered for GST/HST purposes. GST/HST Memoranda Series 4.5.1 Exports - Determining Residence Status (Available at: www.ccra-adrc.gc.ca/E/pub/gm/4-5-1/README.html) provides additional information regarding this issue, including the documentation that the CCRA will generally accept as proof that the customer is a non-resident that is not registered.

2. Generally, all goods entering Canada are subject to GST at the time of importation (Section 212 of the Act), except if they qualify as non-taxable importations (Imported goods that are listed in Schedule VII to the Act or in the Non-Taxable Imported Goods (GST) Regulations.).

i) Goods temporarily imported for maintenance, repair or overhaul

With respect to the importation of goods related to MRO work, the first instance (Paragraph 3(d) of the Non-Taxable Imported Goods (GST) Regulations) where the importation of goods may be relieved of tax is where they are imported for the sole purpose of maintenance, overhaul or repair of those goods in Canada, provided the following conditions are met:

•   neither title to nor beneficial use of the goods is intended to pass, or passes, to a person in Canada while the goods are in Canada; and

•   the goods are exported as soon after the maintenance, overhaul or repair is completed as is reasonable having regard to the circumstances surrounding the importation and, where applicable, to the normal business practice of the importer.

It should be noted that this relieving provision only applies to the importation of a particular good that is to be maintained, repaired or overhauled and not, for example, to the importation of other goods, such as parts, that are simply to be added to the particular good as they are not being imported for the purpose of their maintenance, repair or overhaul. The importation of such goods may, however, qualify for relief in certain circumstances under the Exporters of Processing Services Program (EOPS) as explained below.

ii) Goods imported for repair or replacement under warranty

The relief from the tax on importations provided under the above provision includes goods imported for warranty repair. A condition of that relief is that the imported good must be exported after the repair service is performed. However, where the imported good is replaced rather than repaired, that provision does not apply.

A separate provision (Section 5.1 of Schedule VII to the Act) ensures that, in a situation where a replacement good is provided under warranty for no additional consideration, other than shipping and handling charges, and is exported in place of the original defective good, no tax is payable in respect of the importation of the defective good. In order for this relief to apply, the goods must be imported solely for the purpose of fulfilling an obligation under a warranty to repair or replace the goods if defective. Also, the replacement good cannot be used or consumed in Canada except to the extent reasonably necessary or incidental to its transportation.

iii) The importation of foreign-based conveyances

Generally, foreign-based conveyances that are imported while engaged in the international commercial transportation of passengers or goods may be imported on a non-taxable basis (Customs Tariff 98.01 under Section 1 of Schedule VII to the Act).

An importation of this nature is still relieved of tax where the conveyance is diverted for maintenance, overhaul or repair in Canada (Paragraph 3(f) of the Non-taxable Imported Goods (GST) Regulations) provided the following conditions are met:

•   neither title to nor beneficial use of the conveyance is intended to pass, or passes, to a person in Canada while the conveyance is in Canada; and

•   the conveyance is exported as soon after the maintenance, overhaul or repair is completed as is reasonable having regard to the circumstances surrounding the importation and, where applicable, to the normal business practice of the importer.

As in the previous section, these provisions only apply to the importation of the foreign-based conveyance and not to the importation of other goods that are to be added to the conveyance.

iv) EOPS Program

In general, under the EOPS Program (Section 213.2 of the Act and sections 8.1 to 8.3 of Schedule VII to the Act), a registrant may obtain authorization to import goods on a tax-free basis where the goods are imported solely for the purpose of having services performed that are supplied by the registrant to a non-resident person (that may or may not be the owner of the goods). This program is intended to alleviate the cash-flow cost that would typically occur for such a registrant where the registrant imports the goods and would otherwise be required to pay tax on their importation and then have to wait for a net tax refund to be paid to recover the tax.

The registrant must import the goods for the purpose of supplying a "processing" ("Processing" is defined in section 8.2 of Schedule VII to the Act as including adjusting, altering, assembling or disassembling, cleaning, maintaining, repairing or servicing, inspecting or testing, labelling, marking, tagging or ticketing, manufacturing, producing, packing, unpacking or repacking, and packaging or repackaging.), storage or distribution service in respect of the goods in Canada in circumstances in which the goods, or the product of their processing, if any, will subsequently be exported without having been consumed or used in Canada except to the extent reasonably necessary or incidental to the transportation of the goods. This includes imported goods that are to be incorporated or transformed into, attached to, or combined or assembled with, other goods that are processed in Canada. EOPS also applies to imported materials that are consumed or expended directly in the processing of other goods that will be exported without having been consumed or used in Canada.

The conditions for using the EOPS Program are as follows:

•   the processor must be a registrant that has been authorized to use the program (the application to use the program must be made prior to the importation of the goods);

•   the registrant cannot be closely related to the non-resident owner of the imported goods or to the non-resident recipient of the importer's services if that is another person;

•   the registrant does not obtain ownership or co-ownership of the imported goods or of the exported processed products while they are in Canada (The importer may, however, supply property, such as components or parts, taken from the importer's own inventory, which is added to the imported goods in the course of their processing.);

•   neither the imported goods or the processed products are the property of a resident while they are in Canada;

•   the registrant must not transfer physical possession of the imported goods or the processed products to another person in Canada (e.g., the goods cannot be drop-shipped to another service provider in Canada). An exception to this is where the importer transfers possession of the imported goods or the processed products for the purpose of their storage, their transportation to or from a place of storage or their transportation in the course of being exported;

•   the exportation of the imported goods or processed products must occur within four years from the day on which the goods are accounted for under section 32 of the Customs Act;

•   the registrant has provided any security that may be required as a condition of obtaining an import certificate.

Registrants who import duty free goods and have no need to seek duty relief under the Customs Inward Processing Program must apply to use the EOPS program and to receive an import certificate by sending a letter making this request to their nearest Tax Services Office. The letter should contain evidence showing that the person will import goods or materials to provide processing services and/or has done so in the past where the resultant products are exported. Where the person wishes to apply for Duties relief under the Customs Inward Processing Program in addition to EOPS relief, the person should submit a form K-90 (application for relief of customs duties) to their Regional Customs Office (The EOPS program will be explained in detail in a new GST/HST Memoranda Series dealing with imported goods that is to be published in the near future.).

(v) Recovery of tax paid on imported goods

There are various provisions that allow for the recovery of tax paid on the importation of goods where the importation is not relieved of tax under the provisions described above.

Where a registrant imports goods of an unregistered non-resident person for the purpose of making a taxable supply to the non-resident person of a commercial service in respect of the goods, the registrant is entitled to an input tax credit equal to the tax paid by the registrant at time of importation (Subsection 169(2) of the Act). Where it is the unregistered non-resident person who imports the goods and pays the tax on importation, the registrant may claim an ITC to recover the tax paid by the non-resident on the imported goods provided the non-resident provides the registrant with satisfactory evidence that the tax has been paid (Section 180 of the Act).

3. There are various provisions that may zero-rate the supply of emergency repair services.

The supply of an emergency repair service in respect of an aircraft, and any TPP supplied in conjunction with the service, made to a non-resident airline is zero-rated (Section 6 of Part V of Schedule VI to the Act). Zero-rating in this case is restricted to supplies made to non-resident recipients that are using the aircraft in the course of a business of transporting passengers or property. Under these circumstances, the aircraft would likely be engaged in the international commercial transportation of passengers or goods and therefore be relieved of GST on importation (Section 1 of Schedule VII to the Act).

An "emergency" is considered to be an unforeseen event or combination of events that calls for immediate action. The repairs must be of an urgent nature in that if they are not immediately undertaken they could seriously affect the safety of the aircraft, the property or passengers being transported or the people working on or about the aircraft.

Zero-rating applies to the supply of the emergency repair service that is made to the non-resident recipient (Generally, the "recipient" as defined in subsection 123(1) of the Act, is the person liable under the agreement for the supply to pay the consideration payable under the agreement for the supply.), regardless of where the invoices are mailed. Furthermore, whether the services are performed on an ad-hoc basis or pursuant to a long-term contract will not have an impact on the tax status of the supply provided the remaining conditions of the provision are met (Additional information regarding this provision can be found in GST/HST Memoranda Series 4.5.3 Exports - Services and Intellectual Property).

The supply of an emergency repair service may also be zero-rated where an aircraft that is on a flight that is not scheduled to land in Canada must fly into Canada for the sole purpose of obtaining an emergency repair service (Section 4 of Part V of Schedule VI to the Act).

4. As the supply of the dismantling service would be made in Canada in this case and there is no provision that would zero-rate the supply, the registrant supplying the dismantling service would be required to collect tax on the service.

The importation of the aircraft in a case such as this could only be relieved of tax if the conditions of the EOPS program were to be satisfied as explained in the response to question #2, including the requirement that the aircraft is imported by the registrant supplying the dismantling service.

Although there is a provision that specifically zero-rates the supply made to an unregistered non-resident of a service of dismantling TPP, a condition of this provision is that the dismantling service must be for the purpose of exporting the TPP. (Section 20 of Part V of Schedule VI to the Act ) For example, under this provision, if an unregistered non-resident purchases used equipment in Canada for export, any dismantling service associated with the equipment will be zero-rated.

5. The tax treatment of MRO services can vary in certain circumstances based on whether the non-resident recipient is registered or not.

As indicated in the response to question #1, the drop-shipment rules only apply where the non-resident is not registered. This is also the case of the zero-rating provision dealing with supplies made to unregistered foreign carriers in the response to question #1 and the provision described above dealing with dismantling services.

6. The importation of parts in the circumstances described may only be relieved of tax if they are imported in accordance with the EOPS Program which, as explained in the response to question #2, requires that the parts be imported by the registrant authorized under the program. However, as indicated in the response to question #2, the registered MRO company would be eligible to claim an ITC for the tax that it pays on the importation of the parts or that an unregistered non-resident customer pays.

7. Canadian maintenance, repair and overhaul companies are entitled to file for a refund of the amount of the excise tax paid on fuel loaded on board aircraft for the purpose of ferrying that aircraft out of Canada (Section 68.17 of the Act). This is subject to their having the properly completed K-36A form necessary to validate the claim for ships' stores exemption.

XXXXX

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Act, 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/HST Memoranda Series, do not bind the CCRA with respect to a particular situation.

Should you have any further questions or require clarification on the above matters, please do not hesitate to contact me at (613) 954-7959.

Yours truly,

John Sitka
Director
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate