Section 179 - Non-Resident

Subsection 179(1) - Delivery to Consignee of a Non-Resident

Paragraph 179(1)(b)

Administrative Policy

27 February 2020 CBA Roundtable, Q.4

meaning of causing physical possession transfer in s. 179(1)(b)

What factors should be considered in determining whether a registrant “causes physical possession of the particular property to be transferred” for purposes of s. 179(1)(b)? Would CRA look to the terms of the applicable contracts, the intention of the parties, and would the degree of physical control generally carry the most weight? CRA responded:

The CRA would consider all relevant facts in determining whether the registrant referred to in paragraph 179(1)(b) of the Excise Tax Act has caused physical possession of the tangible personal property to be transferred. Generally, a registrant who has physical possession of the tangible personal property and transfers physical possession of the property would be considered to have caused physical possession of the property to have been transferred for purposes of paragraph 179(1)(b) ... .

Paragraph 179(1)(d)

Administrative Policy

27 February 2020 CBA Roundtable, Q.3

a drop shipment sale is not completed and the goods are bought back by the non-resident, the 1st sale can be rendered taxable

A non-resident that does not carry on business in Canada acquired tangible personal property (“TPP”) from a registered supplier in Canada, who retained physical possession of the property after the acquisition. Although the non-resident intended to export the TPP for sale outside Canada, it was unable to find a buyer. Pursuant to the terms of the sales contract with the supplier, the supplier buys back the TPP from the non-resident. Does s. 179(1)(d) apply to the sale to the non-resident by virtue of the subsequent sale of the TPP to a third-party, i.e., after the supplier buys back the TPP from the non-resident?

CRA responded:

[I]t appears that 179(1)(d) would apply and therefore require GST/HST to apply to the supply, subject to the application of the other relieving provisions in the section such as subsections 179(3) or 179(4).

GST/HST Memorandum 3.3.1 "Drop Shipments" June 2008

Description of a drop shipment

4. ... Generally, for GST/HST purposes, a drop shipment of goods occurs where a registrant makes a supply to an unregistered non-resident of either goods by way of sale in Canada or a commercial service in respect of goods and then transfers physical possession of the goods in Canada either to another person on behalf of the non-resident or to the non-resident.

Main purpose of the drop-shipment rules

5. ...[T]he drop-shipment rules are mainly intended to ensure that tax applies to the fair market value of goods that are drop-shipped in Canada and supplied by unregistered non-residents for final consumption in Canada in the same way that tax would apply to goods acquired from the non-resident outside Canada and imported for that purpose. As a general rule, the drop-shipment rules address this issue by deeming the registrant in a drop-shipment situation to have made a supply of the goods to the non-resident recipient for consideration equal to their fair market value when the registrant transfers physical possession of the goods in Canada to another person on behalf of the non-resident or to the non-resident.

Subsection 179(2) - Exception Where Delivery to Registrant Consignee of a Non-Resident

Administrative Policy

21 October 2004 Headquarter Letter RITS 38435

Where a registrant imports tangible personal property of an unregistered non-resident for the purpose of providing storage services to the non-resident, and physical possession of the tangible personal property is transferred at a place in Canada to the registrant (the "consignee") purchasing the goods from the non-resident, and the consignee gives the registrant storage service provider a drop-shipment certificate, the provision of the storage services to the non-resident is deemed under s. 179(2) to have been made outside of Canada and thereby is not subject to Division II tax.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(2) 33

GST/HST Memorandum 3.3.1 "Drop Shipments" June 2008

Consequences of application of s. 179(2)

23 ....The consignee who issues the drop-shipment certificate to the registrant acknowledges its potential tax obligation as a result of acquiring physical possession of the goods. This tax obligation may occur as a result of the general drop-shipment rule where the consignee is acquiring physical possession of the goods to supply a commercial service to the unregistered non-resident in respect of the goods or a service of manufacturing or producing goods for an unregistered non-resident. It may also occur as a result of an obligation to self-assess tax in respect of the goods where the consignee is a recipient of an imported taxable supply of the goods (explained beginning at paragraph 29)....

29. Division IV imposes tax on an "imported taxable supply". Generally, these are supplies that are made outside Canada and acquired by the recipient for consumption, use or supply in Canada otherwise than exclusively in the course of a commercial activity. The recipient, as opposed to the supplier, is required to account for tax on an imported taxable supply.

P-107R1 "Certificate for Pre-Retail Drop-Shipments" 5 May 1999

94 CPTJ - Q. 2

Where an unregistered non-resident company (A) agrees with a registered Canadian company (B) to install goods manufactured outside Canada by A and imported into Canada by a Canadian registered customer (C) and B has charged GST to A who has included the GST in its invoice to C, there are no provisions in the ETA that would allow an input tax credit to be claimed by C in respect of the installation of the property.

Subsection 179(4) - Retention of Possession

Administrative Policy

27 February 2020 CBA Roundtable, Q.19

exclusion of Sched. VI, Pt. VII freight services from s. 179(4)

Regarding a registered, resident person who imports goods that are owned by a non-registered, non-resident for the purpose of storing (warehousing) and then ships the goods as directed for re-export (and assuming that there is no “carrying on business in Canada” issue), CRA indicated that it appeared that s. 179(1)(d) applied to deem the making of a taxable supply of the goods by the registered resident person to the non-registered non-resident person, with the storage services deemed under s. 179(4)(d) to be made outside Canada. Regarding a query as to whether there is no tax on the storage or shipment services regarding the re-exported goods pursuant to s. 179(4) given the changes in the drop shipment rules at the end of 2017, i.e., as long as the services are not considered to be “commercial services,” i.e., if the shipping services are not performed by a freight carrier pursuant to Sched. VI, Pt. VII, there is no tax under s. 179, CRA stated:

Generally, a “commercial service” in respect of tangible personal property is defined in subsection 123(1) of the ETA to be mean any service in respect of the property other than a service of shipping the property supplied by a carrier. If the service referred to in the question is a service of shipping the property supplied by a carrier, the service is excluded from the definition of commercial service and excluded from the application of subsection 179(4) of the ETA. The freight transportation services rules in Part VII of Schedule VI to the ETA may alternatively apply to zero-rate the supply where it is not a commercial service. If the service supplied is a service of shipping the property that is not provided by a carrier, the service may be considered to be a commercial service in respect of the goods.

Subsection 179(9)

Administrative Policy

27 February 2020 CBA Roundtable, Q.24

s. 179(9) does not affect whether a non-resident lessor is carrying on business in Canada

Example 1 in Policy Statement P-051R2 indicates that a non-resident lessor (with a leasing business outside Canada) is considered to be carrying on business in Canada by virtue of a sale-leaseback transaction under which it purchases a conveyance from a resident registrant, with delivery under the sale agreement and under the lease-back to the resident (who will use the conveyance partly in Canada) occurring in Canada, notwithstanding no other significant connecting factors to Canada.

In response to a suggestion that this Example needed to be reviewed in light of s. 179(9), CRA responded (perhaps on the basis that it continued to consider the non-resident to be required to be registered):

The CRA has reviewed the leasing examples in P-051R2 and has determined that the introduction of new subsection 179(9) … does not impact the rationale or carrying on business conclusions in those examples.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 240 - Subsection 240(1) non-resident lessor of equipment delivered in Canada is carrying on business in Canada even if the leased equipment is immediately exported 178