HST Place of Supply Rules for Goods: Suppliers Outside HST Zone Also Affected
On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.
The proposed HST place of supply rules for tangible personal property (goods) may surprise sellers of goods located in Alberta, Saskatchewan, Manitoba, Quebec and Prince Edward Island. Based on the Canada Revenue Agency's (CRA) views, some suppliers located in non-HST provinces may be required to charge, collect and remit HST. All suppliers of goods in Canada may need to consider whether they want to continue to ship goods to recipients in the HST Zone (and in particular Ontario and British Columbia). Some sellers of goods need to start working quickly to update their computer systems and accounting systems to account for HST on supplies of goods.
The proposed HST Place of Supply Rules to be in effect after July 1, 2010 are:
Rule #1: A supply of goods by way of sale is deemed to be made in a province if the supplier (Seller) of the goods delivers the goods or makes the goods available to the recipient (Buyer) in the province. For example, if an individual goes into a store in Ontario and purchases goods (e.g., a television), the store would charge HST at the rate of 13% (5% GST and 8% Ontario HST). The key fact is the place of delivery.
CRA Example: A supplier in Ontario agrees to sell to a purchaser in British Columbia. Based on the terms of delivery in the agreement for the supply of goods, legal delivery of the goods to the purchaser occurs in British Columbia.
CRA Position: The CRA takes the position that because legal delivery of the goods to the purchaser occurs in British Columbia, the supply of the goods is made in British Columbia and the supply will be subject to HST a rate of 12%.
CRA Example: A retailer in Ontario sells goods to a purchaser that is a resident of British Columbia and is visiting Ontario. The purchaser picks up the goods at the retailer's premises in Ontario and then transports the goods to British Columbia.
CRA Position: The goods are delivered to the purchaser in Ontario. The supply of goods is therefore made in Ontario and is proposed to be subject to HST at a rate of 13%.
Rule #2: A supply of goods by way of sale is deemed to be made inside the HST Zone (British Columbia, Ontario, Nova Scotia, New Brunswick, and Newfoundland and Labrador) if the legal delivery of the goods is made in that province. For the purposes of this rule, goods are deemed to be delivered in the HST Zone, and not outside the HST Zone, if the supplier either:
- (a) ships the property to a destination in the HST Zone that is specified in the contract for shipment of the goods;
- (b) transfers possession of the goods to a common carrier or consignee that the supplier has retained on behalf of the recipient (Buyer) to ship the goods to a destination in the HST Zone; or
- (c) sends the goods by mail or courier to an address in the HST Zone.
Pursuant to this rule, Incoterms, such as F.O.B. (freight or board) or C.I.F. (cost, insurance freight) are important if the location stated is within the HST Zone.
CRA Example: A supplier in Alberta agrees to sell goods to a purchaser in Ontario. Based on the terms in the agreement for the supply of the goods, legal delivery of the goods to the purchaser occurs in Alberta. However, the supplier agrees to have the goods shipped to the purchaser in Ontario.
CRA Position: Although legal delivery of the goods to the purchaser occurs in Alberta, delivery of the goods to the purchaser is deemed to occur in Ontario because the supplier ships the goods to Ontario. The supply of goods is therefore made in Ontario and is proposed to be subject to HST at a rate of 13%.
CRA Example: A mail-order company located in Nova Scotia sells greeting cards to customers across Canada. The company places the packages of greeting cards in the mail for delivery to customers in Ontario and British Columbia.
CRA Position: The supply of greeting cards mailed to Ontario is made in Ontario and is proposed to be subject to HST at a rate of 13%. The supply of greeting cards mailed to British Columbia is made in British Columbia and is proposed to be subject to HST at a rate of 12%.
Rule #3: Where a recipient of a supply of goods by way of lease, license or similar arrangement (Lessee) subsequently exercises an option to purchase the goods, the recipient lessee is deemed to take delivery by way of sale at the time and place at which the recipient lessee ceased to have possession of the property as a lessee and begins to have possession of the property as a purchaser. The key fact is the location of the goods at the time the option to purchase is exercised.
For example, if a person in Ontario leases a piece of manufacturing equipment from a lessor in Quebec and exercises an option to purchase the equipment at a late date when the equipment is in Ontario, HST will be applicable at a rate of 13% in respect of the option price.
The rate of HST will depend on which HST Zone province is the destination.
Rule #4: Where a supply of goods is made by way of lease, license or similar arrangement (other than a specified motor vehicle) (e.g. an equipment lease) for consideration that is attributed to a period (referred to as a "lease interval") and the lease, license or similar arrangement exceeds three months, the supply is deemed to be made in the HST Zone if the ordinary location of the property is within the HST Zone.
For the purposes of the place of supply rules, the ordinary location of the property is deemed to be the location where the supplier and the recipient mutually agree. This is a concession because the supplier may not be in the best position to know where the recipient has the goods. The CRA states that, "In other words, the mutual agreement of the supplier and the recipient will be determinative even where the property is actually located in a different place at the relevant time than what had been agreed upon."
The CRA will look to the contract and any subsequent amendments to agreements to determine the location of the leased goods.
A separate supply of the goods is deemed to be made for each lease interval of the earliest of the first day of the lease interval, the day on which the lease payment attributable to the lease interval becomes due and the day the payment is made.
Rule #5: Where a supply of goods is made by way of lease, license or similar arrangement (other than a specified motor vehicle) (e.g. an equipment lease) and the lease, license or similar arrangement does not exceed three months, the supply is deemed to be made in province in which the supplier delivers the goods or makes the goods available to the recipient. For the purposes of this rule, goods are deemed to be delivered in the HST Zone, and not outside the HST Zone, if the supplier either:
- (a) ships the property to a destination in the HST Zone that is specified in the contract for shipment of the goods;
- (b) transfers possession of the goods to a common carrier or consignee that the supplier has retained on behalf of the recipient (Buyer) to ship the goods to a destination in the HST Zone; or
- (c) sends the goods by mail or courier to an address in the HST Zone.
Cyndee Todgham Cherniak is the founding lawyer of LexSage, a boutique international trade law and sales tax firm in Toronto,
As far as I can tell, there is nothing new about these rules with respect to the sale of tangible personal property. Looking back at old versions of the Excise Tax Act, Schedule IX, I see the same provisions. And David Sherman's related commentary from 2005 also makes this point. The only thing that's new is that the HST zone is getting bigger, and there will be more rates to be concerned with. Am I missing something?
Cyndee"s response - there are new regulations - New Harmonized Value-added Tax System Regulations.
This is really an interesting time we live in. HST, GST... some pay, while others do not.
I have a question. As a distributor in Ontario, selling goods to suppliers(retailers), who then sell to consumers from store level... there are times that we're requested to drop-ship out of province to the retailer's customer. As an example: Ontario Distributor sells to Ontario Supplier(retailer), who then requests drop-shipping to Quebec Consumer. Ontario Distributor bills/invoices for goods sold to Ontario Retailer. Should Ontario Retailer be charged for provincial HST of 13%? ... as goods were sold to the Ontario Retailer, but re-directed out of province to the Ontario Retailer's Quebec consumer. The Ontario Distributor does not bill the Quebec consumer, as the goods are sold at wholesale to the Ontario Retailer - who makes his/her money by selling goods through brokering ANYWHERE in Canada.
It would be understandable that if the Ontario Distributor were billing an out of province Retailer, that HST Place of Supply Rules would come into play... but there is no exact wording to describe the Distributor-Retailer-Consumer process.
Is there someone that could lend some light to this rather intriguing issue? Much appreciated.
I am a supplier in Ontario with clients in Nunavut. I ship products to a common courier in ottawa- who in turn ship it to Nunavut. Do I charge the customer Hst? Because the products are handed over in Ottawa. Or do I charge taxes based on Billing address? which is 5% Only.