Introduction

The primary obligation of a non-resident exporting goods to Canada is to provide a commercial invoice which contains much of the information[1] that the importer of record must provide to the Canada Border Services Agency (“”CBSA”). This information includes a detailed description of the goods along with their valuation, country of origin and tariff classification. The importer accounts for the goods to calculate duties and taxes owing. The most common tax is the goods and services tax (“GST”), a value added tax which applies to most commercial goods imported into Canada at 5% of the duty paid customs value.

Most (but not all) GST paid on the importation of commercial goods is recoverable from the Canada Revenue Agency (“CRA”} as an “input tax credit” by an importer who is registered for GST purposes. Substantially all Canadian resident importers are registered. They recover the GST they pay by deducting it against the GST they collect on their sales in Canada.

If the goods qualify for preferential tariff treatment under the rules of origin of a free trade agreement, the exporter generally provides certification of this status to the importer. In most cases, the certification is prepared by the producer, generally the only person who has the necessary information.

Where a non-resident acts as importer of record

Many non-residents who export goods to Canada agree to act as importer of record. These non-residents account for the goods to the CBSA, usually through a customs broker, and pay any duties and taxes owing. The most common practical problem they face is handling recovery of the GST.

With limited exceptions, non-residents who act as importer of record may register voluntarily [2] and follow the same recovery process as Canadian residents. However, most non-residents do not wish to do this. Registration requires them to collect GST on sales made in Canada, file returns and take the risk of being audited and/or assessed by the CRA.

GST recovery by an unregistered non-resident - section 180

As an alternative to registration, an unregistered non-resident importer is generally entitled, under section 180 of the Excise Tax Act (“ETA”), to have its Canadian customer claim an input tax credit for the GST it pays. The Canadian customer then reimburses the non-resident on receipt of evidence of payment [3]. This mechanism generally works in practice for frequently recurring transactions where the Canadian customer has the time and resources to investigate and become comfortable with the situation.  However, it is a significant problem for less frequent transactions.  Neither party may be aware that the Canadian customer may claim the credit, or the Canadian customer may be unwilling to take what it sees as an audit risk of claiming a credit for tax paid by another person.  Unfortunately, the tax often becomes an unrecoverable cost.

To help alleviate this uncertainty, the CRA makes it clear by way of Example 7 in its Policy Statement P-125R [4] that the Canadian customer is entitled to the credit. Example 7 reads as follows.

"Facts

1. A non-resident non-registrant manufacturer agrees to make a taxable supply of goods by way of sale to a registered resident who will use the goods in the course of its activities.

2. Delivery of the goods to the recipient occurs at the premises of the recipient in Canada.

3. Pursuant to the agreement for the supply of the goods, the manufacturer will transport the goods to the premises of the recipient in Canada, be the importer of record with respect to the importation and pay the tax on the importation.

Decision

The recipient is entitled to an ITC for the tax on the importation of the goods. The recipient may claim an ITC for the tax on the importation of the goods provided the recipient obtains a copy of the import documentation from the manufacturer.

Rationale

The supply is a specified supply of goods because the goods are imported after the supply of the goods is made.

Since the supply of the goods is made by an unregistered non-resident person who does not carry on business in Canada, the supply is deemed made outside Canada. As a result, tax will not be collected in respect of the supply.

Although a specified supply is made, the rules in section 178.8 of the Act do not apply in this case. Rather, section 180 of the Act applies as a result of the manufacturer having paid the tax on the importation. Where the manufacturer provides the recipient with a copy of the import documentation, the recipient is deemed to have paid tax in respect of a supply of the goods equal to the tax paid on the importation when the manufacturer paid the tax. The recipient is consequently entitled to an ITC for the tax on the importation of the goods."

GST recovery for a commercial service

Section 180 also applies where an unregistered non-resident who acts as importer of record imports goods into Canada for the purpose of having a commercial service performed on the goods by a Canadian resident who is registered. The term “commercial service”  is broadly defined [5] to mean any service in respect of goods other than (a) a shipping service supplied by a carrier, (b) a financial service or (c) a service that is acquired for consumption, use or supply in certain “mining activities” [6]. Common examples of commercial services include repairs, reconditioning and further manufacture of goods.

The most common situation where section 180 applies to a commercial service occurs where an unregistered non-resident imports goods into Canada to have a commercial service performed on them by a registered resident, who then re-exports the goods.  Provided the conditions of section 180 discussed above are met, the resident may claim an input tax credit for the GST paid by the non-resident on importation.

In Example 42 of its Memorandum  3-3-1, the CRA provides the following example of this common situation.

• "An unregistered non-resident manufacturer hires a registered service provider to perform a commercial service in respect of its goods.

• The non-resident ships the goods to the registrant’s premises in Canada.

• The non-resident is the importer of record of the goods and pays the tax on the importation of the goods.

• Once the service is performed, the service provider transfers physical possession of the goods to a carrier for export to the non-resident outside Canada.

The non-resident has caused physical possession of the goods to be transferred to the registrant in Canada for the registrant to make a taxable supply of a commercial service in respect of the goods to the non-resident.

If the non-resident provides the registrant with satisfactory evidence that the tax has been paid on the importation of the goods the registrant is deemed to have paid tax in respect of a supply of the goods to the registrant equal to the tax paid on the importation when the non-resident paid the tax, and to have acquired the goods for use exclusively in its commercial activities. As a result, the registrant is entitled to an ITC for the tax.

The registrant has acquired physical possession of the goods to perform a commercial service in respect of the goods and is therefore potentially liable to collect tax on the fair market value of the goods. However, the registrant transfers the goods to a carrier for export to the non-resident. As a result, the general drop-shipment rule will not apply and the supply made by the registrant will be deemed to be made outside Canada. The registrant is not required to collect tax from the non-resident in respect of this supply."

Where GST registration is required

A non-resident who is carrying on business in Canada [7], or is making supplies from a permanent establishment situated in Canada [8], is required to register for GST. However, due to the problems in recovering GST discussed above, most non-residents register voluntarily before they reach those thresholds.

Whether a non-resident is carrying on business in Canada is a question of fact, where the weight of a number of factors must be considered. There is no “bright line” test. The CRA’s position on this issue is set out in their Policy Statement P-051R2. Many tax practitioners have criticized this policy as being more restrictive than the common law that has been established in income tax cases. However, P-051R2 has remained in effect since it was published in 2005.