Non-Residents Can Get Their Border GST/HST Back If They Plan Ahead

I am asked regularly whether a non-resident person who does not wish to register for GST/HST purposes can get an input tax credit for the goods and services tax ("GST") and harmonized sales tax ("HST") (if charged and) paid at the border.  The answer is "no", the non-resident cannot claim an input tax credit if they do not get into the GST/HST system, post security and file GST/HST returns.

However, other options may be available depending on the facts (which can be arranged to permit recovery).  These options are available in a business transaction and are not available to a non-resident bringing goods to Canada for their own use (e.g. at a cottage in Muskoka). The two main options are:

1) use of a drop shipment certificate; and

2) structuring the importation in a way to permit another person to recover the money.

These options are not available in every situation.  They are complicated to describe and implement.  Often the assistance of a sales tax lawyer or accountant or consultant is requirement to make sure the transactions are structured perfectly.  Since the purpose of the structuring is to get money back from the Canadian government or accomplish tax relief, the Canada Revenue Agency may inquire about the facts to see if all "t"s are crossed and "i"s dotted.

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Amounts Paid To Canada Border Services Agency As Ascertained Forfeiture May Include GST

In the recent case of 208539 Alberta Ltd. v. The Queen, Justice D'Arcy of the Tax Court of Canada held that an importer of record may be entitled to claim an input tax credit (ITC) for GST imposed as a result of an ascertained forfeiture.  An ascertained forfeiture occurs when the Canada Border Services Agency (CBSA) issues a penalty with respect to imported goods after importation.  The CBSA is no longer in a position to seize the goods and charge a penalty to release the goods.  As a result, the CBSA sends the importer of record an assessment of a penalty.

In some cases, the ascertained forfeiture penalty may only include customs duties (or a multiple of the customs duties that would have been payable).  In these cases, the importer of record would not be entitled to claim an input tax credit.

In other cases, the ascertained forfeiture penalty states that an amount is being charged as GST that should have been paid with respect to the importation.  This was the situation in the case at hand.

Judge D'Arcy held that the importer of record was entitled to claim the ITC for the amount that was GST, but not the amount that was penalty or customs duties.

Another interesting aspect of the decision is the discussion on whether the documentary requirements for the ITC had been satisfied.  The CRA was arguing that the documentary requirements in subsection 169(4) of the Excise Tax Act  and Input Tax Credit Information (GST/HST) Regulations was not satisfied.  Judge D'Arcy was correct in holding:

The Appellant satisfied the paragraph 169(4)(a) documentary requirements once it provided the CRA with sufficient information to enable the amount of the input tax credit to be determined. As I noted previously, the First Customs Letter, the Second Customs Letter and Exhibit A2 together evidence the amount of Division III tax that Canada Customs collected from the Appellant ($17,039.93) and the fact that the Division III tax was paid by the Appellant in respect of the imported goods.
 

I would expect that there are a number of importers of record who are engaged in commercial activities who have not claimed their ITCs paid in respect of ascertained forfeitures and detentions penalties.  It will be important to ensure the correct person claims the ITC.  Time limits for claiming the ITC will also be a critical issue.  All that being said, there may be found money - if you have received a notice of ascertained forfeiture or retrieved goods from CBSA detention, it is time to review the documentation.

The Canada Revenue Agency Has Released A New Guide For Non-Residents Doing Business In Canada

Non-residents who are doing business in Canada and would like to comply with Canada's Goods and services tax (GST) and harmonized sales (HST) tax laws should review this new gide published by the Canada Revenue Ageny on June 15, 2011. "Doing Business in Canada - GST/HST Information for Non-Residents" is an important document to read.  It is over 38 pages on information that may or may not answer the questions that the non--resident may have about their GTS/HST obligations.

Whether or not a non-resident is actually doing business in Canada is a factual test.  There is no definition of "carrying on business in Canada" in the GST/HST laws.  Pages 7-8 of the CRA's document address the basics and a Canadian sales tax lawyer can help apply the CRA's test in a particular case.

The CRA document addresses many issues, including:

1. Should a non-resident register for GST/HST purposes?

2. How is GST/HST calculated?

3. What are the GTS/HST return filing requirements?

4. What are the place of supply rules for charging HST?

5. How is GST/HST applied on imported goods?

6. How is GST/HST applied on imported services and intangible property?

7. How is GST/HST applied on exported goods, services and intangible property?

8. What are drop shipments and how do the drop shipment rules work?

9. How do non-residents recover GTS/HST by way of a rebate?

The CBSA's 2011 Post-Release Verification Target List May Result in GST Assessments Too

The Canada Border Services Agency (CBSA) identifies categories of goods for post-release targeted verifications on an annual basis.  This list is important for importers of goods for customs purposes and also GST purposes.  If the valuation is too low, the CBSA will increase the value for customs duties purposes , which results in an increase in value for GST purposes.  Additional GST will be calculated and assessed and interest on that GST debt from the date of importation.

Post-release verifications occur after goods are released by the CBSA and are intended to verify the information provided by businesses when goods are reported for customs purposes (compliance with Canada's customs laws).  There are three main types of post-release verifications.

A) Random Post-Release Verifications: These verifications are random. The CBSA randomly selects importers from their records and conducts an verification to measure compliance with Canada's customs laws and revenue seepage. In other words, the importer's number just came up.

B) Targeted Post-Release Verifications: These verifications are not random. The importer is selected due information provided to the CBSA concerning non-compliance with Canada's customs laws.

C) Post-Release Verifications Based on National Priorities: These verifications occur as a result of the CBSA setting national priorities that are determined through a risk-based assessment and evergreen process. The CBSA picks H.S. tariff codes on an annual basis to target for verifications and semi-randomly picks importers of those goods for a targeted verification. Often the importers with significant volumes of the goods are selected for verification and importers who have not been audited recently. The CBSA is asking the question whether the importing community is making mistakes with respect to a particular type of goods.

The CBSA's Post-Release Verification list for 2011 are:

Type of Goods H.S. Codes Comments
Gloves Headings 40.15, 42.03, 61.16, 62.16,39.26, 42.03

On list previously and significant non-compliance identified

Focus of verification will be tariff classification & tariff treatment

Cotton Yarn Headings 52.05, 52.06, 52.07

Focus of verification will be tariff classification & tariff treatment

Furniture Parts Heading 94.03

Focus of verification will be tariff classification & tariff treatment

Organic surface-active agents - soap and other than soap Headings 34.01 and 34.02

Focus of verification will be tariff classification & tariff treatment

Copper and articles thereof Various goods under Chapter 74

Focus of verification will be tariff classification & tariff treatment

Stone vs. articles of stone 25.14, 25.15, 25.16, 68.01, 68.02, 6803.00.90, 6803.00.10.10

Focus of verification will be tariff classification & tariff treatment

Juice products Heading 20.09

On list previously and significant non-compliance identified

Focus of verification will be tariff classification & tariff treatment

Textile Bags 3923.29.90.90

Focus of verification will be tariff classification & tariff treatment

Ski apparel Various goods under chapters 39, 61 and 62 Focus of verification will be valuation of goods
Parts of gas turbines 8411.99.20.11, 8411.99.20.19, 8411.99.290.90 Focus of verification will be valuation of goods
Light-duty automotive goods Various god under chapter 87 Focus of verification will be valuation of goods
Bulk shipment of ore Chapter 36 Focus of verification will be valuation of goods
Plastic household goods Heading 39.24 Focus of verification will be valuation of goods
Motor car, bus and lorry tires Various goods under heading 40.11 Focus of verification will be valuation of goods
Video recording apparatus 8521.90.90.00 Focus of verification will be valuation of goods
Pumps for liquids 8413.11.10, 8413.19.10, 8413.70.99 Focus of verification will be valuation of goods
Article of jewelery and parts Heading 71.13 Focus of verification will be valuation of goods
Mattresses Heading 54.07, and Chapters 55 and 60 Focus of verification will be origin of goods
Electric generators Heading 85.01 Focus of verification will be origin of goods
Vegetable fats 1516.20.90.41, 157.90.99.00 Focus of verification will be origin of goods
Pumps for liquids 8413.11.10, 8413.19.10, 8413.70.99 Focus of verification will be origin of goods
Cocoa powder 1805.00.00, 1806.10.10, 1806.10.90 Focus of verification will be origin of goods

This does not mean that all importers who import the goods on the 2011 hit list will be audited. It does mean that some importers of the good on the list will be audited in 2011/2012. Importers of the goods on the list should conduct their own internal verifications and determine whether they are importing goods in compliance with previously issued ruling letters, case law, CBSA policy and other statements of the law. If an importer identifies errors prior to being contacted by the CBSA for a verification, that importer may be permitted to make a voluntary disclosure of its non-compliance and the CBSA may waive the penalties that would have been payable if the CBSA discovered the non-compliance during a verification.

For more information, please contact Cyndee Todgham Cherniak at 416-760-8999.

OECD Seeks Comments on "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality"

In December 2010, the Organization for Economic Co-Operation and Development (OECD) released for comment a document entitled "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality".  The deadline for filing comments is March 22, 2011.

Canada is a member of the OECD.  Canada imposes the goods and services tax (GST) and harmonized sales tax (HST), which are value-added taxes.  As a result, the OECD guideline may be incorporated into Canadian law in the future.  As a result, it will be important for Canadian businesses who operate multi-nationally and may be affected by the guideline to prepare thoughtful comments.

This document succinctly summarizes some of the important principles behind GST/HST style taxes and, therefore, may be VERY useful to litigants in explaining why an auditor's approach is incorrect.  I have considered its usefulness in the context of may GST/HST disputes. 

For example, proposed guideline No. 1 is "The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation."  This is a basic principle and I can hear you saying "YES".  I can hear you saying "Why did the auditor assess me as a supplier when I am engaged in a taxable business?"

Read this document!

Would You Like the HST Map to Right?

Of course you would.  The "HST Map" to getting to "Right" is exactly what you want.  What should you do to get the right result every time?  What should you do to collect the right amount of HST every time you make a supply?  What should you do to calculate the right amount of input tax credits and recaptured input tax credits every time you file a GST/HST return?  What should you do to recover the maximum amount of credits, refunds & rebates allowed?  What should you do so that the Canada Revenue Agency says you are in the "Right" place when they complete any audit?

Unfortunately, these maps do not exist on supermarket shelves - but they can be generated or customized on a business-by-business basis by commodity tax lawyers and accountants.  Where "Right" is for you depends upon the facts and where you want to go.  Just as there are many cities and towns with the same name, there are many different "Right" destinations on an HST map.  If you do not know where is "Right", how are you going to determine the path to take to get there? How can you be sure you are taking the correct route to "Right"?  If you follow the directions someone else uses to get to "Right" you may be at the wrong "Right".

Once you can identify the destination of "Right", then a customized map can show you how to get there.  The customized map will set out the process that you must follow to get to your chosen "Right" destination.  The directions are a critical part of the map to "Right".

The HST map may take the form of a memorandum or opinion letter.  Sometimes the process involves seeking additional directions, which would be in the form of an advance GST/HST ruling from the Canada Revenue Agency.

It is possible to hire a commodity tax lawyer or accountant to prepare a customized HST map if you would like to get to "Right" and stay there.  These maps do exist - believe it or not.  Would you like one?

I should add one closing note that the Department of Finance may move "Right" on you when you are not looking.  Just like with the television show "Lost", you may find that you are no longer where you thought you were/should be.  Maybe the producers were thinking about the tax authorities when they came up with the plot for "Lost" --- hmmmm

Do You Really Want to Have an HST Map to Right?

Yesterday I had a discussion with a friend who was deciding on whether to write to the Canada Revenue Agency, GST/HST Rulings Directorate for a GST/HST ruling on an issue.  The discussion started that the client had followed advice given years ago that its supply was exempt.  The client had not collected GST for a number of years.  With the implementation of harmonized sales tax, the cost of being wrong has increased from 5% to 13% (in Ontario).  The client contacted my friend to revisit the issue.  The client does not want to be assessed - this is understandable.

The problem with writing in for an advance GST/HST ruling is that the CRA may not give the desired answer.  The CRA may disagree with the original analysis.  The CRA may see things differently.  The CRA may have given other rulings that are inconsistent with the ruling requested.  What if the CRA determines that the supply is taxable now, was previously taxable, and that the exemption did not apply to past supplies? What if the CRA determines that they were not in the "Right" place? There is a risk.

When there is a risk that the CRA will not give the ruling requested, the affected party (i.e., the client) must answer the question "Do you want to get to "Right"?  If the client wants the "Right' answer and to know where is "Right", the client should obtain an advance GST/HST ruling (which is binding) or an interpretation (which is not binding).  If the clients wants to continue to treat its supplies as exempt, then the client does not want to be at "Right".  If the client plans to ignore the ruling if it does not reaffirm what they want to do/are doing, the client does not want to be at "Right" and would increase its risk by applying for an advance GST/HST ruling.

It is important to determine whether the client (or you) want to have the "Right" answer or merely the answer the client (you) want.  They are not necessarily the same thing.

If the client (you) want to get to "Right", it is possible to prepare a customized map.  If the client(you) are not sure whether you really want to get to "Right", more thought is required on whether you do not care if you stay at 'Lost".

What Can I Do To Motivate You To Make Positive Steps Towards Better GST/HST Compliance

I would like to offer you words of encouragement to make positive improvements towards better goods and services tax (GST), harmonized sales tax (HST) and other sales and local taxes (SALT) compliance.  I would like to motivate you to make your working lives easier if you are blessed with the task of GST/HST/SALT recording and reporting.

The Canada Revenue Agency (CRA) motivates us to act by fear of negative events, such as an audit and/or assessment.  The CRA motivates compliance by threat of penalties and interest assessments.  They are not wrong in approaching GST/HST in this manner as it is a self-reporting system --- follow the rules of suffer negative consequences.  Many businesses are motivated by money and fear and this system works for some. However, it does not work for many. 

Almost all businesses have just completed the task of filing a GST/HST return.  Annual filers filed their first GST/HST by today's deadline.  Quarterly filers have filed their second GST/HST return (for Q4 2010) by today's deadline.  Monthly filers filed their December 2010 GST/HST return by today's deadline. 

How many of you have spent hours of frustration in performing the calculations and rechecking documentation and numbers in order to file the GST/HST return?  How many of you could not verify whether you were to remit GST at 5% or HST at 13% or 12% or 15%?  How many of you had to self-assess GST/HST and were unsure what to do?  How many of you needed to complete documentation for a refund/rebate and were not sure what to do?  How many of you could not trace your point of sale rebates, your exempt sales and your zero-rated sales (sales when you did not charge GST/HST)?  How many of you walked away from the task wanting to scream at assistants and others within your organization?  How many called someone in your organization and "idiot" or other unpleasant name (if you did, go apologize).

Would you like this task to be easier for the next reporting period?  Are there answers you need in order to perform the task better next month or quarter or year? Is there training that you or your employees need? Would you like to take better control over this reporting process?

If you want to make the tasks related to GST/HST reporting easier, you can. Take the negative experience and make a list of why it was a negative experience to file your GST/HST return.  Write down what worked and what did not.  GST/HST compliance will improve if you fix the things you listed as not working properly. 

Did you have difficulties making sure you claimed 100% of you input tax credits? Fix it.

Did you have difficulties making sure you recaptured input tax credits where required? Fix it. 

Did you have difficulty reconciling various reports? Fix it. 

Were you lacking information that you needed to make decisions? Fix it.

Do you need help to fix it? Find people who understand GST/HST to help you. They do exist.

You can do this.  You can improve your job. You can spend more time with family and friends during GST/HST reporting time. You can be the force of positive change and others will be grateful. what are you waiting for --- another SALT return?

If You Are Assessed Customs Duties, Remember to Claim ITCs For Assessed GST

I see a lot of determinations by the Canada Border Services Agency (let's just call them assessments) relating to Harmonized System (H.S.) tariff classifications and valuations relating to imported goods.  When the CBSA decides you used the wrong H.S. tariff classification number and, therefore, the applicable duty rate is actually higher than the duty rate used at the time of importation, the CBSA assesses GST on the new customs duty included value for duty.  Similarly, if the CBSA disagrees with the valuation method that you used such that the value for duty was too low, the CBSA will assess GST on the new customs duty included value for duty. This often means that the GST portion of the assessment is equal to or greater than the customs assessment.

In many cases, importers do not realize that they are paying GST (instead of customs duties).  Some do not review the details.  Some just pay the bill of a customs broker without even receiving the CBSA documentation. In some cases, the documentation goes to the purchasing department and never gets to the person in charge of GST.

I have seen many cases where the importer of record does not claim input tax credits (ITCs) to recover the GST paid to the CBSA in respect of the imported goods.  If the importer of record in a business, they may be entitled to claim ITCs. If the goods are imported by a consumer, they are not entitled to recover the additional GST/HST paid to the CBSA.

Anyone who has been assessed by the CBSA in the past few years should determine whether they have claimed their ITCs.  I would be happy to help you determine what you are entitled to claim as an ITC.

Please Do Not Throw Your Notice of Assessment in a Drawer & Forget About It

It is bad enough to receive a notice of assessment from the Canada Revenue Agency (CRA) or the Ontario Ministry of Revenue or the Canada Border Services Agency (CBSA) or some other tax authority.  You clearly did not want to be in a position that you have to pay an amount of money (especially large assessments) to the government.  However, ignoring the notice of assessment is not the right option to choose concerning what to do next. 

If you do not agree with the amount stated on the notice of assessment as the amount (or the imposition of a penalty amount or the interest calculation) or the basis for the assessment or do not know why you received the assessment and want to have the taxing authority make a correction, you usually must file a notice of objection/notice of appeal/request for redetermination or take a positive step to request further consideration of the matter.  In almost every taxing statute, there are statutory time periods (also called "limitation periods") which are often 30 or 90 or 180 days depending on the tax at issue and the legal route to resolve the dispute.  If you throw the notice of assessment in a drawer, you may miss the filing deadline and lose your opportunity to file a notice of objection, appeal or request for a redetermination. This would be bad for you.

Some tax statutes allow for you to ask the head of the taxing authority or a court or tribunal for an extension of time to file the notice of objection, appeal or request for a redetermination.  However, usually you must make the request within the statutory time period for the objection/appeal/redetermination.  For example, if you have a 90 day period to file a notice of objection, you must ask for your extension of time before the 90 day period expires.  You must explain the reason for needing an extension of time - and saying that you forgot about the notice of assessment is not a good excuse.  You must also demonstrate that you intended to file an objection/appeal/redetermination - and saying that you threw the notice of assessment in a drawer shows that you planned to ignore it.

Pulling the notice of assessment out of the drawer one week or one day before the statutory objection/appeal/redetermination deadline is problematic as you will have to find someone to help you file your objection/appeal/redetermination under extreme stress and you will forget important facts and potentially winning arguments.  You will reduce your likelihood of success when you do not leave yourself and your advisors enough time to do a good job.

Finally, I hear from many clients who pull the notice of objection out of the drawer years after the limitation period for filing an objection/appeal/redetermination has expired.  At that point in time, they are being pursued by the collections department of the taxing authority and the amount of interest after time can double the liability.  At some time, it will catch up with you.  When you are pursued by collections officers or receive a director's liability assessment for the original assessment amount plus interest compounded daily at 6% or more, you will wish that you did not thrown the original assessment in a drawer.  At that stage, there is even less a professional can do to correct any mistakes made by the auditor.

Bequested Goods Are Not Subject to HST on Importation

I was sent a question as to whether harmonized sales tax (HST) will be imposed on imported goods that have been the subject of a bequest to the importer.  I wanted to answer this question since my own Grandmother passed away this year --- so this one is for Alice (and the writer of the question).

Goods that are classified under H.S. tariff item 98.06 may be imported as a non-taxable importation (in other words, no HST on importation).  H.S. tariff item applies to:

(a) Personal and household effects of a resident of Canada who has died (on the condition that such goods were owned, possessed and used abroad by that resident);

(b) Personal and household effects received by a resident of Canada as a result of the death or in anticipation of death of a person who is not a resident of Canada (on condition that such goods were owned, possessed and used abroad by that non-resident), or

(c) ll the foregoing when bequeathed to a resident of Canada.

It will be important to communicate effectively on the import documentation that the goods are the subject of a bequest (or belonged to a resident of Canada who passed away while outside Canada).  Please use H.S. tariff code number 98.06 on the Customs invoice. It will be helpful to name the deceased person and/or the estate of the deceased person.  If the goods are the subject of a bequest, be prepare to provide to a Canada Border Services Agency officer a copy of the Will or the Receipt and Release that identifies the goods that are the subject of a bequest. 

If the goods belonged to a Canadian resident who passed away abroad, the goods should be listed by the coroner or an official in the foreign jurisdiction as belongings of the deceased person.  There will be many situations where such documentation is not possible.  In such cases, a reasonable attempt should be made to corroborate that the criteria of the H.S tariff code have been satisfied.

Please remember that this H.S. tariff code has been misused by some and that is why your difficult time is going to be the subject of an inquiry by CBSA officers. 

Appraisal/Valuation Issues Re Non-Commercial Jewelry Imports Can Lead to GST/HST Issues

I have many clients who are individuals and business owners who have had their jewelry seized and detained by the Canada Border Services Agency (CBSA) upon return to Canada. Such detentions have a GST and/or HST effect since GST and HST is calculated based on the value for customs duty purposes.  If the jewelry is a non-commercial importation by an individual (in other words, an individual acquired the jewelry outside Canada for personal use), then the GST/HST is an additional cost (if the goods exceed the exemption limit).

In many cases (too many cases) the client has a receipt in which a value is stated, but the secondary screening officer does not accept the sales documentation as valid. The CBSA officer believes (often without any probable grounds except the person did not answer questions satisfactorily or "they looked nervous about something") that the invoice understates the value.

In many cases, the CBSA charges the importer criminally with smuggling or providing a false document and a civil penalty. The CBSA officer often detains the jewelry and assesses a penalty of 30%-70% of a value to be determined. The CBSA then sends the seized jewelry to be appraised. As a result, the effect is serious --- and costly to resolve.

In every case that I have seen, the appraisal exceeds the amount of the invoice. This may be because appraisers are used to overstating the value for insurance purposes. This may be because the appraiser is asking the wrong questions - such as what would a willing buyer pay a willing seller in Canada at a retail (B2C) sale? This may be because the appraiser has not been told to include a trade level adjustment (in the case of a commercial importation). In every case, it is the interest of the CBSA to get as high an appraisal as possible in order to collect more duties (including excise duties), taxes (GST (commercial and non-commercial goods), HST (non-commercial goods) or PST (non-commercial goods)) and penalties. It may be because an appraisal is a guess an exact science.

Anyone in these circumstances should look at the Government of Canada auction web-site for surplus and seized goods. The relevant area to review are "What has sold". Look at (1) jewelry, collectors items, arts and crafts, etc. and (2) seized assets (excluding vehicles). If you look at specific items that have sold, you will find many examples of jewelry that was appraised at one high amount and that sold in the government auction for less than half that value. I recently purchased a jade necklace valued at $50 on the auction site and I paid only $25. You will likely find better examples that are closer to the type of goods that have been seized from you. This is good evidence to present that a government appraisal is incorrect.

If you anticipate in advance that the CBSA may question your documentation on the purchase price of a good outside Canada, then improve your evidence. For example, get an appraisal completed by a reputable firm. Bring any sales promotional documents, such as sales catalogers or store advertisements. If an item was purchased at an auction outside Canada, bring the promotional materials. If your jewelry is a family heirloom, take photos of the jewelry and work with a reputable Canadian appraiser before bringing the goods to Canada.

A Thought About GST and Imports

Since the implementation of harmonized sales tax ("HST") in Ontario and British Columbia, the Government of Canada should re-think the imposition of goods and services tax ("GST") on imports of commercial goods. In connection with the implementation of HST, the CITCAs include provisions such that HST is not imposed on imported commercial goods.  What is the logic of continuing to impose GST on commercial imports? Wouldn't it be better for Canadian businesses and, in particular manufacturers, if the GST cash flow cost on imported commercial goods is removed?  If the Canada Border Services Agency can live with the HST regime for imports, why can't they also live with no GST on commercial goods and GST on non-commercial goods?  Wouldn't it be a more efficient use of government resources if the Canada Border Services Agency is no longer responsible for collection of GST on imported commercial goods and is not longer shares verification/audit functions with the Canada Revenue Agency?  For that matter, wouldn't it be better for businesses if they did not have to be subject to GST audits/compliance verifications by two separate government agencies who do not adequately share information and interpretations?  I am just saying ...

Canada Border Services Agency Publishes Fact Sheet on HST & Imports

The Canada Border Services Agency has published a Fact Sheet entitled "The Canada Border Services Agency's Implementation of the Ontario and British Columbia Harmonized Sales Tax" (June 2010), which sets out some of information importers should know about HST.

In short, HST will be applied in respect of non-commercial goods (a.k.a things individuals import for personal use).  The "official definition of a "non-commercial good" is: "Non-commercial goods" means "all goods, other than goods imported into Canada for sale, or for any commercial, industrial, occupational, institutional, or other like use."

Beginning July 1, 2010, the importation into Canada of non-commercial goods by or for a consumer that is a resident of Ontario or British Columbia, will be subject to the HST. The HST will apply to non-commercial goods destined for Ontario and British Columbia, regardless of where the goods enter into Canada. NOTE: Goods destined for Nova Scotia, New Brunswick, and Newfoundland/Labrador are also subject to HST.

MORE IMPORTANTLY - As is the case today, the provincial component of the HST will not generally apply to commercial goods that are imported by an HST registrant for consumption, use or supply exclusively in the course of the commercial activities of the registrant.

For more information, please see the Fact Sheet.

My Latest HST (and Customs Duties) Presentation

Here is a copy of my latest PowerPoint presentation that I delivered on May 25, 2010 entitled "Let's Talk About HST and Customs Duties".  Yes, it is an odd combination of information.  The presentation was delivered in the context of supply chains involving Canada (Ontario in particular).  The focus was on non-income tax compliance.

What Are The HST Place of Supply Rules For Customs Brokers?

On February 25, 2010, the Department of Finance released a News Release summarizing the proposed harmonized sales tax (“HST”) place of supply rules and shortly thereafter the Canada Revenue Agency released a GST/HST Technical Information Bulletin setting out its administrative position. On April 30, 2010, the Department of Finance released “Draft Regulations in respect of the Place of Supply of Property and Services” (the “Draft Regulations”). There is a separate HST place of supply rule for customs brokerage services.


Section 24 of the Draft Regulations sets out the HST place of supply rules for customs brokerage services:


24.(1) Where a supply of a service is made in respect of the importation of goods and the service is the arranging for their release (as defined in subsection 2(1) of the Customs Act) or the fulfilling, in respect of the importation, of any requirement under that Act or the Customs Tariff to account for the goods, to report, to provide information or to remit any amount,


(a) if the goods are accounted for as commercial goods (as defined in subsection 212.1(1) of the Act) under section 32 of the Customs Act, the supply is made in the province in which the goods are situated at the time of their release;
(b) if paragraph (a) does not apply and tax, calculated at the tax rate for a participating province, is imposed under subsection 212.1(2) of the Act, or would be so imposed if subsections 212.1(3) and (4) and section 213 of the Act did not apply, in respect of the importation, the supply is made in that participating province; and
(c) in any other case, the supply is made in a non-participating province.


(2) Subsection (1) does not apply to the supply of any service provided in relation to an objection, appeal, redetermination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing.


This means that:


Rule 1: If commercial goods are imported into Canada, the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson International Airport, the Ontario HST (13%) would apply. If the goods are released at the Vancouver Port, then British Columbia HST (12%) will apply. If the goods are released at the Halifax Port, the Nova Scotia HST (15%) will apply after July 1, 2010.

 

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Will HST Apply to Imports of Goods Into Ontario and British Columbia?

There is some misinformation about whether HST will apply to imports into the new HST provinces (Ontario and British Columbia) after July 1, 2010. I hope I can clear up some of the confusion.

The first place to look for the answer to the question of whether HST apply to imports into Ontario, you need to look at the Comprehensive Integrated Tax Coordination Agreement Between The Government of Canada and The Government of Ontario ("CITCA-O").  Part VIII of the CITCA-O addresses imports and provides as follows:

23. In this Part, unless otherwise defined for the purposes of Part IX of the Excise Tax Act, the term “non-commercial imported goods" means imported goods, other than goods imported into Canada for sale or for any commercial, industrial, occupational, institutional or other like use.

24. Unless otherwise provided in this Part, the importation into Canada of non-commercial imported goods by, or for, a consumer that is a resident (including a “seasonal resident" as defined for the purposes of the Seasonal Residents’ Remission Order, 1991) of the Province will be subject to the PVAT in respect of the Province in accordance with the rules generally applicable to the importation of goods into Canada under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province.

25. Canada will neither assess nor collect under this agreement any product-specific tax, levy or mark-up imposed by the Province in respect of the importation of goods subject to a specific tax collection agreement between Canada and the Province.

26. The PVAT in respect of the Province will not be applicable to the importation into Canada of any goods other than non-commercial imported goods in accordance with the rules under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province.

27. Goods, other than non-commercial imported goods, which are imported into Canada for consumption or use, or for supply in whole or in part, otherwise than in the course of commercial activities, in the Province by a person, will be subject to self-assessment of the PVAT in respect of the Province by the person in accordance with the rules under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province. PVAT in respect of the Province will also apply through the self-assessment provisions under Division IV of that Part.

28. The Province will assess and collect, at the time of vehicle registration in the Province, any PVAT in respect of the Province payable in respect of motor vehicles imported into Canada as non-commercial imported goods.

The BC CITCA has similar provisions.

What this all means is:

Rule 1. HST (called PVAT in the CITCA-O) is payable in respect of non-commercial imports of goods and will be collected by the Canada Border Services Agency (CBSA) at the border. For example, if an individual purchases a kindle from amazon.com for personal use, HST will be applicable. Generally speaking, if the importer does not have an import number (the RM extension on a business number), the CBSA will consider the importer to be bringing in non-commercial imports. Also, if the importer appears to be an individual and the "ship to" address is residential, the CBSA will consider the importer to be bringing in non-commercial imports. Please note that goods and services tax ("GST") will also be applicable.

Rule 2. There are exceptions to Rule 1. If an imported good is a non-taxable supply, an exempt supply or a zero-rated supply, HST will not be applicable. The import documentation (the B3 Customs Coding Form) will have to indicate the proper code in order to be relieved of HST.

Rule 3. Commercial importations of goods will not be subject to HST. That is, if a business imports goods, the CBSA will not impose HST at the border. The CBSA will still collect the GST.

Rule 4. In addition to Rule 3, Commercial importations of goods by businesses for consumption or use, or for supply in whole or in part, otherwise than in the course of commercial activities, in the Province by a person will be subject to HST and the importer will be required to self-assess any applicable HST on its GST/HST return. Depending on the place of supply rules, the HST rate applicable to the relevant province will apply.

Rule 5. Businesses that are residents in an HST province that are not engaged in commercial activities or import services and/or intangible property for consumption or use  or supply in whole or in part otherwise than in commercial activities (meaning in exempt activities) will be required to self-assess applicable HST on imported taxable supplies of services and/or intangible property.

If you require additional guidance, please refer to the old GST/HST Technical Information Bulletin for the Maritime HST provinces (Nova Scotia, New Brunswick & Newfoundland/Labrador) TIB-081 "Application of HST to Imports" Note: when reading TIB-081, please remember that the place of supply rules are changing and TIB-081 will have to be updated.

Please be mindful of the CBSA's D-Memo D13-3-13 "Post-Importation Payments or Fees: Subsequent Proceeds" which takes the position that certain management and administrative fees and amounts paid by the importer to the exporter (or subsidiary to parent) after importation must be added to the price paid or payable. This could result in additional GST and HST being payable in respect of imported taxable supplies or property and/services. You will also have to be careful to ensure that some services that are added to the price payable for goods (and reported on a B2 Adjustment) are not duplicated in a self-assessment of GST/HST on a GST/HST return.

HST Place of Supply Rules for Customs Brokers

On February 25, 2010, the Department of Finance released a News Release about what will be the HST place of supply rules after regulations are promulgated. Interestingly, the Department of Finance is going to create a separate rule for customs brokerage services. "Customs brokerage services" are currently understood to mean:

"a service of arranging for the release of imported goods, or fulfilling, in respect of the importation, (whether before, at the time of or after the release) any accounting,, reporting or information requirements imposed under the Customs Act or the Customs Tariff Act or any requirements under either of those Acts to remit any amount."

Since I wrote on March 17, 2010 about the HST rules for imports, I thought I should share the funny little place of supply rules for customs brokers services.

In the February 25, 2010 News Release, the Department of Finance wrote:

Under the current rules, the place of supply of a service of arranging for the release of imported goods, or fulfilling, in respect of the importation, (whether before, at the time of or after the release) any accounting,, reporting or information requirements imposed under the Customs Act or the Customs Tariff Act or any requirements under either of those Acts to remit any amount is in a province if the goods are situated in that province at the time of their release.

It is proposed that this rule continue to apply in respect of commercial goods. However, in the case of non-commercial goods, generally if the provincial component of HST for a participating province is imposed in respect of the importation of the goods, the supply of the customs brokerage service will be regarded as made in that participating province.

The above rules will not apply to the supply of any service provided in relation to an objection, appeal, re-determination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing. These types of services will continue to be subject to the place of supply rules for services described in other parts of this document.

The changes to the Excise Tax Act or the Regulations still have to be made public and must undergo the applicable legislative steps to become law.

The CRA clarifies the place of supply rules in GST/HST Technical Information Bulletin B-103 "Harmonized Sales Tax: Place of suppy rules for determining whether a supply is made in a province" as follows:

Rule #1: If the importation is commercial goods (for which HST is not collected), the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson Airport, the Ontario HST would apply. If the goods are released at the Vancouver Port, then British Columbia HST will apply.

However, if goods are placed in a bonded warehouse in Montreal, HST would not be applicable to the brokerage charges.

Rule #2: If the customs brokerage services relate to an objection, appeal, re-determination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing (called herein "post-importation customs brokerage services"), Rule #1 does not apply. The general place of supply rules for services would be applicable.

The 5 main place of supply rules for services are applied in the following order:

(a) If the recipient's address or the address most closely connected with the supply in in the HST Zone, the applicable HST rate would be applied to the post-importation customs brokerage services;

(b) If the recipient does not have a Canadian address, the post-importation customs brokerage services will be considered to be supplied in the province in which the greatest proportion of the services is performed. For example, if the customs broker is located in Ontario and a customs broker in Ontario completes the B2 adjustments/appeals, then Ontario HST would apply.

(c) If 2 applies and the post-importation customs brokerage services are performed equally in two or more particular HST provinces, the HST province with the highest HST rate would be considered to be the place of supply.

(d) If 3 applies but a single HST province cannot be identified (same 13% rate in more than one province), the post-importation customs brokerage services will be subject to 13% HST.

(e) If the recipient does not have a Canadian address and the customs brokerage service is not performed primarily in an HST province or the HST Zone, then HST would not apply to the post-importation customs brokerage services.

Rule #3: If the importation relates to non-commercial goods, whether HST applies to the customs brokerage service will depend on whether the goods are subject to HST under the place of supply rules for goods.