Mar 6, 2023

GST Issues for Non-Resident Importers

This article discusses:

  1. the general application of GST to imported goods;

  2. the general GST registration rules for non-residents;

  3. special rules that allow an unregistered non-resident to recover GST paid on importation by passing the right to an input tax credit through to a Canadian customer or commercial service provider; and

  4. when a non-resident is required to register and collect GST on certain sales of goods in Canada (generally to Canadian consumers from a Canadian warehouse).

Introduction

When it was implemented in 1991, one of the key design features of the GST legislation was to try to exclude most non-residents from the administrative requirements to register, collect and remit the tax, and file returns. The government did not wish to discourage non-residents from selling goods and services to Canadian businesses or from purchasing goods and services in Canada. Further, the government wanted to minimize the instances where a non-resident collects GST for subsequent remittance to the Canada Revenue Agency ("CRA"). The application of the GST to non-residents involves a delicate balance between (a) ensuring that GST is not an impediment for non-residents who wish to do business with Canada and (b) the need to protect tax revenues and the competitiveness of Canadian businesses.

The primary means of achieving these objectives was to include in the legislation a carrying on business test for determining when a non-resident is subject to the above administrative requirements. If a non-resident is not carrying on business in Canada then it is not required to register, collect and remit GST on supplies it makes in Canada, or file GST returns.

However, a non-resident who does not carry on business in Canada and does not register voluntarily must deal with the following rules when importing goods into Canada or purchasing or selling goods in Canada:

  1. In common with Canadian residents, the non-resident must pay GST on the duty paid value of goods it imports into Canada.

It appears that the system, as designed, has worked reasonably well. The combination of the non-resident override rule, the Division III tax on imported goods, the Division IV tax on imported services and intangible personal property, the drop-shipment rules and the zero-rated exports has resulted in a system that if not in balance, is very close.

The non-resident override rule

The starting point when dealing with non-residents who are selling goods into Canada is the place of supply rules.

A supply of goods is only subject to Division II GST if the supply is made in Canada. Section 142 provides the general rules on when a supply is deemed to be made inside or outside of Canada. Section 142 is subject to the provisions of Sections 143, 144 and 179.

Subsection 143(1) overrides section 142 and stipulates that a supply of goods made in Canada by a non-resident is deemed to be made outside of Canada, and therefore not subject to GST, unless it is made in the course of a business carried on in Canada by the non-resident or the non-resident is registered to collect tax. This is referred to as the "non-resident override rule".

The result of subsection 143(1) is that if a non-resident is not carrying on business in Canada and is not registered to collect the tax, then a supply made by the non-resident is not taxed and the non-resident is not required to collect the tax.

GST on imported goods

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. 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.

Voluntary registration

A non-resident who regularly solicits orders for the supply of goods for export to, or delivery in, Canada may register voluntarily[ii] for GST.  This is the most convenient method for recovering, as an "input tax credit", GST paid on imported goods. It also allows the non-resident to claim a credit for GST paid on goods and services acquired in Canada.

However, persons registered for GST are also required to collect tax from customers on most sales made in Canada. In periodic returns filed with the Canada Revenue Agency (CRA), input tax credits are deducted from the tax collected to determine "net tax", which is remitted to the CRA.

Non-residents are often reluctant to register. They may not wish to deal with the administration of collecting tax on sales made in Canada and filing returns or become a more obvious blip on the CRA's radar.

Input tax credit transferred to the customer

For non-residents who do not wish to register voluntarily, or cannot do so, there are special rules in section 180 of the Excise Tax Act (“ETA”) which allow them to indirectly recover tax paid on importation.  These rules are useful but can be awkward to apply in practice.  They provide relief in two situations:

  1. where the goods are resold unused to a customer in Canada, and

  2. where a taxable “commercial service”[iii] is performed on the goods in Canada by a registrant.

Section 180 allows the input tax credit to be claimed by the Canadian customer or commercial service provider provided that person obtains evidence that the tax was paid by the non-resident. This is generally a copy of the customs accounting document. Some importers are reluctant to provide this document because it may disclose their cost and may include unrelated import items.

A customer or commercial service provider who is unfamiliar with section 180 may be reluctant to apply it. They may not believe they could be entitled to an input tax credit for GST paid by someone else. Providing a copy of the section may not help because some of the language is obscure to anyone other than a tax practitioner.

Section 180 is easier to read when you take out the portions that are not relevant to a particular situation.  For example, the portion that is relevant where the goods are sold to a customer in Canada reads as follows.

For the purposes of determining an input tax credit[iv] 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 Canadian 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.

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.

Where registration is required

A non-resident is required to register if they carry on business in Canada or make supplies from a permanent establishment situated in Canada[i].  Unfortunately, there is no "bright line test" of when a non-resident crosses the line from carrying on business with Canada to carrying on business in Canada. A number of factors must be taken into account and weighed. In cases involving taxes other than GST (primarily income tax) the Courts have determined that the two main factors are:

  1. the place where the contract is made, and

  2. the place from which the operations from which profits arise take place.

The CRA's administrative policy for GST generally followed this jurisprudence until 2005, when it released Policy Statement P-051R2, which remains in effect. P-051R2 does not follow the jurisprudence. Rather, it states that the following twelve factors must be taken into account in determining whether a person is carrying on business in Canada:

  1. the place where agents or employees of the non-resident are located;

  2. the place of delivery;

  3. the place of payment;

  4. the place where purchases are made or assets are acquired;

  5. the place from which transactions are solicited;

  6. the location of assets or an inventory of goods;

  7. the place where the business contracts are made;

  8. the location of a bank account;

  9. the place where the non-resident's name and business are listed in a directory;

  10. the location of a branch or office;

  11. the place where the service is performed; and

  12. the place of manufacture or production.

The CRA provides little general guidance on how to apply the twelve factors, other than stating that the importance or relevance of a given factor in a specific circumstance will depend on the nature of the business activity and the related facts and circumstances. However, the CRA does provide guidance on how the factors are to be applied in specific circumstances set out in 21 detailed examples. These examples will be the subject of a separate article.

The CRA notes that, in general, a person must have a significant presence in Canada to be considered to be carrying on business in Canada.

Electronic commerce rules

Under a complex set of “electronic commerce” rules that became effective on July 1, 2021, a non-resident who does not carry on business in Canada is required to register and collect GST if the non-resident makes more that $30,000 per year of “qualifying tangible personal property supplies” to persons in Canada that are not registered (generally consumers).  A qualifying tangible personal supply includes any sale of goods made in Canada other than (a) an exempt or zero-rated supply or (b) a supply sent by mail or courier to an address in Canada from an address outside Canada. 

The main intent of these rules is to ensure that GST is collected where sales are made by non-residents to Canadian consumers from a warehouse situated in Canada.

Where a non-resident is registered (either through these electronic commerce rules or voluntarily), the non-resident collects GST on qualifying tangible personal property supplies made directly (for example, through its own website) or through a “distribution platform operator” (for example, Amazon).  The non-resident may claim input tax credits. 

Where an unregistered non-resident makes qualifying tangible personal property supplies through a distribution platform operator, the distribution platform operator collects and remits GST/HST.  Through a mechanism similar to section 180, the distribution platform operator may claim an input tax credit for GST paid by the non-resident on importation or purchase of the goods.

References

[i] Subsections 240(1) and 132(2) of the ETA.

[ii] Paragraph 240(3)(b) of the ETA.

[iii] A “commercial service” is defined to mean any service in respect of tangible personal property other than a financial service or a service of shipping the property supplied by a carrier.

[iv] Or a rebate under section 259 or 260 of the ETA.

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