Indirect Taxes, Canada: Impact of Delivery Terms: Effect is significant on application of GST/HST on imports, exports, and sales.

• Author: Kenigsberg, Alan
• Position: Goods and services tax, harmonized sales tax - Cover story

Canada imposes a five percent federal value-added tax called the goods and services tax (GST), which applies to the supply of most goods and services in Canada and to imports of most goods into Canada. Five Canadian provinces (Ontario, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador) have harmonized their provincial sales taxes with the federal GST to make a single harmonized sales tax (HST), which applies to most supplies within these provinces. The HST includes the five percent federal GST and a provincial component, for a combined HST rate of thirteen percent in Ontario and fifteen percent in the other four provinces. The GST and HST are both applied under the same legislation (the Excise Tax Act, or the Act), follow the same set of rules, and are remitted to the government on the same GST return. Most GST registrants can claim an input tax credit (ITC)--in effect a refund--for any GST/HST they pay, so in the business-to-business context, the biggest concern is generally that GST/HST is collected and that ITCs are claimed correctly rather than what the total amount of GST/HST payable actually is.

Whether GST/HST applies to a particular transaction--and what the applicable rate of GST/HST is--is generally based on where the supplied goods are delivered, as identified in the transaction agreement. This makes determining the delivery point in a contract extremely important for tax purposes. Parties should carefully consider the delivery terms they use to ensure that they are collecting and paying GST/HST correctly. Furthermore, the Act contains a number of specific provisions that may apply to imports into and sales within Canada, which can cause unintended and often counterintuitive results, so these rules should also be taken into account.

Place of Supply in Canada

In determining whether GST/HST applies to the supply of tangible personal property, the Act generally focuses on where the tangible personal property is "delivered or made available." The term "delivered" refers to the actual physical delivery to the recipient, and the term "made available" is generally considered to refer to constructive delivery in situations where physical delivery does not occur. Specifically, goods are considered to be "made available" where they have not been physically delivered to the recipient, but it is recognized that parties intended to transfer the goods to the recipient at that point.

The general rule is that if goods are delivered or made available to a recipient outside Canada, then the supply is considered to be made outside Canada and the sale is generally not subject to GST/HST. If goods are delivered or made available to the recipient within Canada, then the supply is generally considered to be made in Canada and the sale is subject to GST/HST.

One exception to the general rule occurs when supplies are made by a nonresident of Canada who is not registered for GST and is not carrying on business in Canada. (1) In these circumstances, the Act deems the supply of the goods to have been made outside Canada, such that no GST/HST should apply on the sale of the goods regardless of where the goods are actually delivered or made available. As GST-registered purchasers must have retained certain documentation in order to claim an ITC, including the GST registration number of the supplier, if a supplier who is not registered for GST collects GST/HST on a supply, the purchaser will generally not be able to claim an ITC for the tax paid. For this reason, when purchasing goods, purchasers should make sure that the suppliers are registered for GST/HST and that the registration number they have provided is correct. (2)

It should also be noted that since GST/HST is payable at the time of importation, (3) and since only a GST registrant can claim an ITC for the GST payable on importation, many nonresident companies choose to register for GST to deal with the importation of goods, even in cases where they might not otherwise be required to do so.

Place of Supply in Provinces

Special provincial place-of-supply rules are used to determine if a sale of goods is made in a particular province. The general rule for provincial place of supply follows the general rule for when a supply will be considered to be made in Canada. Specifically, goods are deemed to be supplied in a province, and the applicable rate of GST/HST for that province will generally apply to that sale, if the goods are delivered or made available to the recipient in that province. (4) However, an override to the general rule deems goods to be delivered in a particular province if the supplier either:

(a) ships the property to a destination in a particular province that is specified in the contract for carriage of the property;

(b) transfers possession of the property to a common carrier or consignee that the supplier has retained on behalf of the recipient to ship the property to such a destination; or

(c) sends the property by mail or courier to an address in the particular province.

The Canada Revenue Agency (CRA) has stated that it will generally require the supplier to hire the carrier on its own account before it will allow the deeming rule in (a) and (b) above (5) to apply, so care should be taken when setting delivery terms in the contract and when arranging for transport to ensure that the suppliers actions do not change the place of supply from what the parties intend and to ensure that the correct amount of GST/HST is charged on the supply.

Determining Delivery Point

In determining where goods are "delivered or made available," the CRA position is that the place where title transfers is generally not determinative. Rather, where a good is delivered or made available to the recipient is determined by reference to the terms of the contract (often Incoterms or other delivery terms). (6) If there are no delivery terms set out in the contract, then the parties will...