Introduction

When the GST was implemented in 1991, one of the key objectives of the legislation (the Excise Tax Act or "ETA") was to exclude most non-residents from the administrative requirements to register, collect and remit 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 collected GST for remittance to the Canada Revenue Agency ("CRA"). On the other hand, the government needed to protect tax revenues and the competitiveness of Canadian businesses.

The primary means of achieving these objectives was to include in the ETA a carrying on business test for determining when a non-resident is subject to the GST administrative requirements. A non-resident who was not carrying on business in Canada was not required to register [FN 240(3)] or to collect and remit GST on supplies it made in Canada. [FN s 143]. However, most non-residents who do business with Canadian customers were permitted to register voluntarily if they wished [FN 240].

Further, non-residents who imported goods into Canada were, in common with Canadian residents, required to pay GST under Division III of the ETA ("Division III Tax") calculated on the duty-paid value of the goods. In most cases, a non-resident who carried on business in Canada or registered voluntarily ("Registered Non-Resident") recovered the Division III Tax by claiming, on its regular GST return, an input tax credit deducted against the GST it collected on supplies it made in Canada.

These fundamental statutory provisions still apply. However, they contain weak spots and holes which have been filled over the past 33 years with special rules (and some administrative practices) described below which have encouraged or forced many non-residents who do not carry on business in Canada to register and collect tax. The complexity and/or practical awkwardness of these special rules have likely discouraged some non-residents from doing business with Canadian companies.

1. Recovery of the Division III tax paid by an unregistered

A non-resident who imports goods into Canada must generally deal with the following rules:

1. In common with Canadian residents, a non-resident who acts as importer of record must pay, under Division III of the ETA, GST calculated as 5% of the duty paid value of the goods ("Division III Tax").

2. In most cases, a non-resident who carries on business in Canada or registers voluntarily ("Registered Non-Resident") recovers the Division III Tax by claiming, on its regular GST return, an input tax credit deducted against the GST it collects on supplies it makes in Canada.

3. The only means a non-resident who does not carry on business in Canada and does not register voluntarily (an "Unregistered Non-Resident") has of recovering Division III Tax is to transfer, under section 180 of the ETA, the right to an input tax credit to its Canadian customer or Canadian provider of a commercial service (the "Section 180 Transfer").

4. If an Unregistered Non-Resident transfers physical possession of the goods in Canada to a Canadian resident commercial service provider who is registered for GST, the non-resident and service provider must deal with the complex "drop shipment" rules in section 179 of the ETA.

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.

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. 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.