Most commercial goods that enter Canada are subject to the federal goods and services tax (GST), the Canadian VAT. The current rate is 5% of the duty paid value. The major exceptions are for certain basic groceries, prescription drugs and biologicals, medical and assistive devices and products of agriculture and fishing. The full list of exceptions may be found in Schedule VI and Schedule VII to the Excise Tax Act.
For most business inputs such as raw materials, capital equipment and goods acquired for resale, this GST is recoverable as an input tax credit. The credit is claimed by a registrant on its regular periodic return, as a deduction against tax collected on sales made in Canada. However, importers involved in certain businesses (for example: financial services, rental of residential real estate, health care and education) may not be able to recover the tax, or may be able to recover only part of it.
Where a non-resident of Canada acts as importer of record, claiming an input tax credit often requires some thought and extra work.
GST Registration for Non-Residents
A non-resident is required to register for GST purposes if it is carrying on business in Canada or making sales from a permanent establishment in Canada. Most non-resident importers do not reach these thresholds.
A non-resident who regularly solicits orders for the supply of goods for export to, or delivery in, Canada may register voluntarily for GST purposes. That is the easiest and most direct means of claiming input tax credits. However, non-residents are often reluctant to register. They do not want to deal with the administration of collecting tax on sales made in Canada and filing returns in a foreign jurisdiction. They also wish to stay off the radar of the Canada Revenue Agency, which also administers income taxes.
Credit claimed by the customer – section 180
Fortunately, section 180 of the Excise Tax Act provides an alternative. Where a non-resident is not registered, an input tax credit for the tax it paid on importation may generally be claimed by its Canadian customer. The customer then reimburses the non-resident. The non-resident must provide to the customer evidence that the tax was paid. This is usually a copy of the customs accounting document.
Initially, a customer who is unfamiliar with section 180 may refuse to apply it. The customer does not believe that it could be entitled to claim an input tax credit for GST paid by someone else. Providing a copy of the section does not help because it applies to other situations that are not relevant here. Further, some of the language is obscure to anyone other than a tax practitioner.
Section 180 is easier to read when you take out the non-relevant portions:
For the purposes of determining an input tax credit of …. a particular person, where a non-resident person who is not registered under Subdivision D of Division V
(a) makes a supply of tangible personal property to the particular person and delivers the property, or makes it available, in Canada to the particular person before the property is used in Canada by or on behalf of the non-resident person,
(b) has paid tax under Division III in respect of the importation of the property …. and
(c) provides to the particular person evidence, satisfactory to the Minister, that the tax has been paid,
the particular person shall be deemed
(d) to have paid, at the time the non-resident person paid that tax, tax in respect of a supply of the property to the particular person equal to that tax.
The term “particular person” refers to the customer of the non-resident. Where the conditions in paragraphs (a), (b) and (c) are satisfied, paragraph (d) “deems” that that the tax paid by the non-resident is paid by the customer. This deeming allows the customer to claim an input tax credit on its GST return.
In my experience, reluctance by a customer to use section 180 may often be resolved by having the importer’s tax advisor communicate with the customer’s tax advisor, who then provides reassurance to the customer.