The basic policy of the drop-shipment rules is explained
The drop-shipment rule in ETA s. 179 addresses inter alia the situation where an unregistered non-resident vendor who does not carry on business in Canada (A) sources goods in Canada at a cost of, say, $80, from a registered Canadian supplier (C), and directs C to “drop-ship” the goods directly to the registered Canadian purchaser (B), who has purchased from A for $100.
In the absence of s. 179, CRA would collect tax only on C’s $80 selling price and the sale for $100 by A would escape tax under s. 143.
S. 179 addresses this leakage by deeming the supply made by C to A to be made for the FMV of the good (presumably, $100) and by allowing for a certificate mechanism (e.g., permitting B, if it is acquiring the goods for use as a registrant in commercial activities, to issue a “drop-shipment” certificate) permitting the parties to deal with A’s purchases and sales on a tax-free basis, with the liability for the tax being passed along the chain to the first purchaser who uses the goods otherwise than in the course of its commercial activities.
It is suggested that “the presence of an unregistered non-resident in a transactional scheme involving property moving within Canada should be an immediate red flag” that engages a detailed review of these complex rules.
Neal Armstrong. Summary of Robert G. Kreklewetz and Stuart Clark, “Drop Shipments: Tips, Traps, and Terrors,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 10 under ETA s. 179(2).