Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada
GST/HST Rulings Directorate
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 247054
[Client Address]
[Dear Client]:
SUBJECT: GST/HST interpretation
Non-resident pharmaceutical company ineligible to register for the GST/HST
Thank you for your correspondence of [mm/dd/yyyy], […] concerning whether a non-resident pharmaceutical company is required to register for the GST/HST.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
[…]
Based on the information contained in [the] documentation provided […], we understand the following:
1. […] (“NonResCo”) is a public corporation duly organized and existing under the laws of […][Country X] that is in the business of researching, developing, selling and marketing pharmaceutical […] and medical […] (the “Products”).
2. […].
3. NonResCo is a non-resident of Canada.
4. […].
5. NonResCo owns 100% of the shares of […] ([…][Holding Co]). […][On] [mm/dd/yyyy], [HoldingCo] acquired 100% of the common shares of […] (“CanCo”).
6. CanCo is incorporated in […][Province A] and is located […][at a location in Province A]. CanCo is currently registered for the GST/HST.
7. CanCo was acquired by [HoldingCo] because of their proficiency in […]
8. NonResCo and CanCo entered into [#] outsourcing agreements ([…] the “Outsourcing Agreements”) which set out the terms for CanCo to provide contract pharmaceutical manufacturing services (the “Manufacturing Services”) for NonResCo. Approximately 10% of CanCo’s revenue comes from the Manufacturing Services they supply to NonResCo […].
9. […][The] Outsourcing Agreements […][specify] that, […][generally] the agreements remain in force for a period of [#] years from their effective dates […].
10. NonResCo acquires all of the raw materials and equipment (“Resources”) necessary for the manufacture of the Products and which are to be used by CanCo in providing the Manufacturing Services.
11. NonResCo and CanCo entered into a Memorandum of Understanding (the “MOU”) effective [mm/dd/yyyy] that sets out the conditions for CanCo to possess and use NonResCo’s Resources for the purposes of manufacturing the Products under the Outsourcing Agreements.
13. […][The] MOU specifies it is in effect from [mm/dd/yyyy] until the earlier of the date all Outsourcing Agreements have terminated or expired, or when NonResCo and CanCo agree in writing to terminate the MOU.
14. […][The] Outsourcing Agreements [specify] that, for the purpose of the Outsourcing Agreements and all services to be provided thereunder, NonResCo and CanCo are considered to be independent contractors and not agents or employees of the other. Neither of them has the authority to make statements, representations or commitments of any kind, or take any action, that is binding on the other, except as may be explicitly provided for in the agreements or authorized by the other party in writing.
15. […][The] Outsourcing Agreements [specify] that the Manufacturing Services will be performed by CanCo’s employees at its premises, unless NonResCo and CanCo agree in writing that services can be performed by a subcontractor at that person’s premises.
16. […].
17. Purchasing pharmaceutical manufacturing equipment involves a significant investment, so CanCo gets their customers to lend them the necessary equipment so that CanCo can focus on supplying the Manufacturing Services. Consequently, NonResCo acquired a specialized production line/equipment named […] (the “Equipment”) that is installed at CanCo’s premises and that CanCo uses exclusively to manufacture the Products for NonResCo pursuant to the Outsourcing Agreements.
18. NonResCo does not charge CanCo for using the Equipment in manufacturing Products.
19. NonResCo had […][number under 5] employees collaborate with CanCo to assemble and fine tune the Equipment at CanCo’s premises in Canada.
20. The area of CanCo’s premises dedicated exclusively to the Manufacturing Services supplied to NonResCo is about [#] square metres (roughly 10% of CanCo’s total premises) and the Equipment occupies most, and is the centrepiece, of that space.
21. […][The] Outsourcing Agreements and […] the MOU [specify] that CanCo shall use the Resources only to perform the Manufacturing Services for NonResCo and not for any other purpose unless NonResCo provides prior written consent.
22. Raw materials and parts (such as those needed for the Equipment) required for CanCo to complete the Manufacturing Services are generally purchased by NonResCo outside of Canada, imported and provided to CanCo at no charge.
23. There may be circumstances where CanCo purchases parts and raw materials and NonResCo reimburses CanCo for their cost.
24. […].
25. CanCo holds a certain amount of inventory of NonResCo’s raw materials that fluctuates based on NonResCo’s order volume.
26. NonResCo and CanCo agree and acknowledge to the following conditions related to NonResCo’s Resources:
a. CanCo is required to follow NonResCo’s instructions in using NonResCo’s Resources.
b. CanCo is required to provide secure storage for NonResCo’s Resources and notify NonResCo promptly if there are any adverse events associated with the Resources. If the Resources are relocated or disposed of, CanCo must obtain approval to do so from NonResCo. Costs involved in such relocation or disposition will be paid by NonResCo.
c. CanCo is required to maintain the Resources by ensuring they are clean, sanitary and in good condition to the same degree as their own property and at their usual cost.
27. NonResCo owns intellectual property related to the manufacture of their Products, such as formulas used to manufacture Products and the business know-how and trade secrets to manufacture within specific parameters.
28. NonResCo allows CanCo to use confidential information concerning this intellectual property as part of the Manufacturing Services. NonResCo does not charge CanCo for using the intellectual property to provide the Manufacturing Services.
29. CanCo can only use NonResCo’s confidential information in order to provide the Manufacturing Services to NonResCo, and cannot make commercial use of any part of the confidential information for any other purpose whatsoever.
30. As of [mm/dd/yyyy], a technology (knowledge) transfer (the “Technology Knowledge Transfer”) from NonResCo to CanCo for the production procedure is ongoing and CanCo’s commercial production will begin after the transfer is complete […][on mm/dd/yyyy]. The World Health Organization in Annex 7 of the WHO Technical Report Series No. 961, 2011, WHO guidelines on transfer of technology in pharmaceutical manufacturing, explains that a transfer of technology is a systematic procedure that is followed to pass documented knowledge and experience gained during development or commercialization to an appropriate, responsible and authorized party and it embodies both the transfer of documentation and the demonstrated ability of the receiving unit to effectively perform the critical elements of the transferred technology, to the satisfaction of all parties and any applicable regulatory bodies.
31. Once the Technology Knowledge Transfer is complete, CanCo is responsible for conducting the Manufacturing Services and NonResCo’s involvement is limited to offering support in the event unexpected technical issues occur.
32. CanCo’s employees have to provide a certain amount of manual intervention in using the Equipment as certain parts […] of the Equipment are not automated.
33. CanCo is solely responsible for any loss, damage, injury, or death arising from its performance of the Manufacturing Services and shall indemnify and hold NonResCo harmless from liabilities or expenses that arise from CanCo’s performance of the Manufacturing Services.
34. CanCo must pay for and maintain all licences, permits and regulatory government approvals that are necessary for them to provide NonResCo with the Manufacturing Services. […].
35. CanCo represents and warrants that in performing the Manufacturing Services they will not infringe on any foreign or domestic third person patent, copyright, trade secret, or other intellectual property or contractual right. […].
36. The Technology Knowledge Transfer also includes transfer to CanCo of the technology and processes necessary for CanCo to conduct quality control (that is, quality testing) of raw materials (ingredients) and finished Products. So, once the Technology Knowledge Transfer is complete […][on mm/dd/yyyy], CanCo will be fully responsible for meeting the quality control standards set by NonResCo.
37. CanCo is responsible for repairing the Equipment when necessary so that manufacturing down time can be minimized. However, CanCo will notify NonResCo of the need for any repairs that are more significant than what is considered general maintenance, and if significant repairs are required, NonResCo can offer support to CanCo. NonResCo pays for all repairs to the Equipment.
38. Before [mm/dd] of each year, NonResCo will provide CanCo with a non-binding best estimate forecast of the quantities of Products that might be required to be manufactured by CanCo for the next 12 month period, […].
39. CanCo agrees to have sufficient capacity during the one year forecasted period to satisfy the requirements set forth in the forecast and deliver accordingly.
40. Included in […][your correspondence] is […] (the “Proposal”) that was issued by CanCo on [mm/dd/yyyy], and that NonResCo accepted, for CanCo to carry out the manufacture of up to [quantity] of […][NonResCo’s Product].
41. […]
42. The purpose for CanCo to carry out the R&D Technology Knowledge Transfer batch is to gain hands-on experience performing the procedure and handling the final Product; […].
43. […][The proposal specifies that] NonResCo will provide CanCo with detailed information on test methods for purity […]. Specifically, NonResCo will provide CanCo with a standard test method. […].
44. […].
45. The Proposal includes [$] that CanCo bills NonResCo for project management so that an assigned project manager […] can oversee the project.
46. The costs in […] the Proposal include up to one hour per week of consulting time on the project provided by CanCo through teleconferencing. If the project requires additional consulting time beyond that, CanCo will invoice NonResCo at the rate of […].
47. CanCo holds finished Products that they manufacture for NonResCo in a third party warehouse in […][Province A] for short periods of time (for example, a month) before shipping them to NonResCo in [Country X].
48. The Products manufactured by CanCo in Canada for NonResCo are not sold in Canada.
49. NonResCo may accept or reject any and all Products manufactured by CanCo that are in material breach of the warranties specified by the Outsourcing Agreements and hold CanCo liable for their replacement cost including reasonable […] transportation.
50. If NonResCo […] rejects a Product […][that is in] material breach of warranty, NonResCo has in their sole discretion the right to either have the rejected portion of the Product batch replaced as soon as possible at no further cost, or to receive a refund of […][the] portion of the […] manufacturing costs […][they paid for the] Product that is unusable. […]. If CanCo […] fails to remedy the breach, NonResCo is entitled to terminate the Outsourcing Agreements.
51. Upon reasonable request by NonResCo, CanCo will periodically meet with NonResCo to hold informal meetings on the progress of the Manufacturing Services. […].
52. Upon reasonable notice, CanCo may agree to NonResCo visiting CanCo’s premises during business hours to observe CanCo’s progress on manufacturing the Products, to inspect the work CanCo is doing and the materials they are using, and to consult with CanCo’s employees about the Manufacturing Services.
53. With reasonable prior notice so that CanCo can ensure they have the necessary capacity, NonResCo can perform an annual audit of CanCo which usually involves two auditors on-site for two days. Additional audits or qualifications may be subject to additional fees that are mutually agreed on by NonResCo and CanCo based on duration or frequency. For the Proposal, CanCo outlines the following costs they will charge NonResCo to support an extended scope audit or one that is not otherwise covered: […]
54. CanCo will cooperate with NonResCo concerning physical inventory counts and yearly reporting so that NonResCo can comply with […] in [Country X]. NonResCo has the right to audit any books and records related to the Resources during regular business hours.
55. Regulatory filings and Product related activities may result in on-site review activities, and NonResCo and CanCo will discuss the scheduling of such review activities, or CanCo can refuse the review.
56. NonResCo entered into the […] ([…] “Services Agreement”) with CanCo to provide CanCo […] business and management services (“Business and Management Services”) effective [mm/dd/yyyy].
57. The Services Agreement specifies that NonResCo shall make available to CanCo services that are mutually determined to be appropriate for NonResCo to […] assist CanCo in conducting CanCo’s business operations during the term of the Services Agreement. The services may include management, financial, operational, administrative services, information systems, commercial, research and development, technical, and other services agreed on by CanCo and NonResCo.
58. The Services Agreement remains in effect until [mm/dd/yyyy] but will be renewed automatically for successive terms of one year. […].
59. CanCo agrees to pay NonResCo a fee for the Business and Management Services […]. The total Business and Management Services charged by NonResCo to CanCo was $[…] for the […] year, and $[…] for the […] year.
60. The Business and Management Services are performed almost entirely in [Country X], but NonResCo employees do occasionally travel to Canada to provide the services in person and directly to CanCo at their facilities in [Province A].
61. Certain NonResCo senior management teams attend CanCo’s board meetings and occasionally travel to Canada to do so in person.
62. […][Your correspondence] dated [mm/dd/yyyy] says the place where the business contracts are made is outside Canada if signed by NonResCo in [Country X]. We see no other indication in the documentation suggesting the place where business contracts are made is in Canada.
63. NonResCo does not have an office or branch in Canada and their name and business are not listed in a directory in Canada. The place of payment (such as for the supplies of Manufacturing Services) is outside of Canada as is the location of NonResCo’s bank accounts.
INTERPRETATION REQUESTED
You would like to know whether:
1. NonResCo is required to register for the GST/HST under subsection 240(1).
[…][and], if registration under subsection 240(1) is not required, whether:
2. NonResCo is eligible to register for the GST/HST under subsection 240(3).
INTERPRETATION GIVEN
Based on the information provided,
1. NonResCo is not required to register for the GST/HST under subsection 240(1).
2. NonResCo is not eligible to register voluntarily for the GST/HST under subsection 240(3).
EXPLANATION
Required registration (subsection 240(1))
Subject to several exclusions, subsection 240(1) requires a person register for the GST/HST if they make a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada. Excluded from this provision are non-resident persons who do not carry on any business in Canada.
Carrying on business in Canada
GST/HST Policy Statement P-051R2, Carrying on Business in Canada (P-051R2), sets out factors and principles to be considered in determining whether a non-resident is carrying on business in Canada for GST/HST purposes. As indicated in P-051R2, the determination requires consideration of all relevant facts. The factors to consider in determining whether a non-resident is, for GST/HST purposes, carrying on business in Canada include (the P-051R2 factors):
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 importance or relevance of a given factor in a specific case depends on the nature of the business activity under review and the particular facts and circumstances of each case. The determination of whether a non-resident is carrying on business in Canada for GST/HST purposes does not involve the mechanical application of a numerical test that is simply based on whether a specific number of the above factors are present in any given case. Rather, the determination requires judgment in establishing the importance of each factor in light of the type of supply that is being made in the context of the relevant facts.
P-051R2 states that in general, a non-resident must have a significant presence in Canada to be considered to be carrying on business in Canada, and specifically indicates in this regard that generally, isolated transactions carried on in Canada as part of a business that is carried on by a non-resident person outside Canada may not result in the person being considered to be carrying on business in Canada for GST/HST purposes, given that the factors would usually not be met to a sufficient degree.
NonResCo’s business activities
To determine whether NonResCo is carrying on business in Canada, it is first helpful to understand the nature of NonResCo’s business activities in Canada.
NonResCo hires CanCo to manufacture pharmaceutical products for NonResCo in Canada and NonResCo participates in this activity to a limited extent. For ease of reference, we’ll call NonResCo’s involvement in these activities their “Pharmaceutical Manufacturing Business.” NonResCo also supplies CanCo with Business and Management Services. Our view is that these are the activities of two separate businesses.
Manufacturing pharmaceutical products involves specialized know-how and techniques to manufacture products at precise specifications, whereas Business and Management Services could apply to a wider scope of businesses that have corporate tasks to complete including those of a financial or administrative nature. We contend that there is not a sufficient connection between the two business activities to say they are one business.
The Business and Management Services business
[…]. In Example No. 20 [of P-051R], the non-resident company is in the business of providing consulting and training services on how to improve business productivity and they enter Canada to perform that particular service. The example also considers the amount of time the non-resident is in Canada providing that service, and finds them to be carrying on business in Canada because their Canadian presence is found to be significant.
[…][We] believe there are significant differences in the facts applicable to NonResCo’s Business and Management Services business and those applicable to the non-resident in Example No. 20 that result in a different carrying on business determination.
The core business of NonResCo is researching, developing, selling and marketing pharmaceutical […] and medical […][Products]. So as opposed to Example No. 20 where the non-resident company entered Canada to provide services consistent with their primary business activity, the Business and Management Services supplied by NonResCo are better described as an ancillary activity, and we don’t view these activities as being a substantial aspect of NonResCo’s overall business activities.
It is also questionable whether NonResCo’s employees are performing these services in Canada for enough time to be considered carrying on business in Canada – many of the noted instances where employees of NonResCo enter Canada are not to provide Business and Management Services and […][your correspondence] said [that] NonResCo only occasionally entered Canada to provide the Business and Management Services. Regardless, we come to the conclusion that NonResCo’s physical presence in Canada providing Business and Management Services is not substantial, so it is not a business that is carried on in Canada by NonResCo.
Pharmaceutical Manufacturing Business
In determining whether NonResCo is carrying on business in Canada under the Pharmaceutical Manufacturing Business, we must consider the impact of NonResCo’s Equipment.
While it is true that the Equipment is owned by NonResCo and it is physically located in Canada for the purposes of manufacturing NonResCo’s products, the manufacturing has been contracted to CanCo as a sub contractor. The Equipment is not at the disposal of NonResCo – possession and control of the Equipment has passed to CanCo. It is CanCo whose business benefits from the revenues earned from manufacturing, and CanCo is the entity that carries out the day to day operations of the Equipment. For instance, consider the following activities conducted by CanCo: CanCo is responsible for losses, damages, injuries/deaths arising from the pharmaceutical manufacturing activities; CanCo cannot infringe on foreign or domestic patents, copyrights, trade secrets, etc.; and CanCo has to pay for all necessary licenses, permits and regulatory government approvals.
Further, we do not see any evidence that CanCo is either acting as an agent for NonResCo, or otherwise effectively carrying out NonResCo’s business in Canada.
To put it simply, NonResCo does not have a long term physical presence that is conducting some substantial aspect of their business in Canada. Once the “Technology Transfer” is complete, NonResCo has a very limited physical presence in Canada for the Pharmaceutical Manufacturing Business at all, as the Equipment is at the disposal of CanCo.
Our finding is that NonResCo does not have a substantial presence in Canada and is consequently not carrying on business in Canada for either of their two businesses.
Permanent establishment
Subsection 132(2) specifies that if a non-resident person has a permanent establishment in Canada, the person will be deemed to be a resident in Canada in respect of, but only in respect of, the activities they carry on through that establishment. Consequently, if NonResCo has a permanent establishment in Canada, the exclusion to their registration requirement under paragraph 240(1)(c) would not apply, so they would be required to register for the GST/HST if they make a taxable supply in Canada in the course of a commercial activity engaged in by them.
[…][Our finding is] that NonResCo does not have a permanent establishment in Canada […].
Voluntary registration
Subsection 240(3) allows a person to apply for registration that is otherwise not required if they meet one of the specified conditions. For our purposes, the relevant conditions specified in subsection 240(3) are whether NonResCo:
* Is engaged in a commercial activity in Canada;
* Is a non-resident person, who in the ordinary course of carrying on business outside Canada, has entered into an agreement for the supply by them of:
o services to be performed in Canada; or
o intangible personal property to be used in Canada or that relates to:
* real property situated in Canada,
* tangible personal property ordinarily situated in Canada, or
* services to be performed in Canada.
We’ll address these three possibilities next.
Has NonResCo…Entered into an agreement for the supply of IPP… (clause 240(3)(b)(ii)(B))
Clause 240(3)(b)(ii)(B) allows a person to register voluntarily if they are a non-resident person who in the ordinary course of carrying on business outside Canada entered into an agreement for the supply by them of intangible personal property (IPP) to be used in Canada, or that relates to real property situated in Canada, tangible personal property ordinarily situated in Canada or services to be performed in Canada. […].
NonResCo entered into the Outsourcing Agreements so that CanCo can supply NonResCo with Manufacturing Services, and not so that NonResCo could supply CanCo with intellectual property. Consequently, the portion of clause 240(3)(b)(ii)(B) that says “…entered into an agreement for…” is not met.
Further, as part of the Outsourcing Agreements, NonResCo provided CanCo with detailed instructions (proprietary business know-how and technical techniques) as to how to provide the Manufacturing Services. CanCo cannot use these instructions to manufacture any other products for any other person. In cases where a subcontractor is engaged to manufacture specialized products, the transfer of know-how and intellectual property will almost always be involved, but it is a necessary input to the manufacturing process itself, much like the raw materials, rather than a supply to the manufacturer. Consequently, NonResCo has also not entered into an agreement “for the supply by them of intangible personal property” that is to be used in Canada or that otherwise meets the eligibility criteria for voluntary registration under clause 240(3)(b)(ii)(B).
Is NonResCo…Engaged in a commercial activity in Canada (paragraph 240(3)(a))
Paragraph 240(3)(a) allows a person that is engaged in a commercial activity in Canada to register for the GST/HST voluntarily. In paragraph (a) of the subsection 123(1) definition, commercial activity of a person is defined to mean a business carried on by the person except to the extent the business is involved in making exempt supplies.
[…], our view is that NonResCo is not involved in commercial activities to the extent that would qualify for voluntary registration under paragraph 240(3)(a) of the ETA.
Has NonResCo, in the ordinary course of carrying on business outside Canada, entered into an agreement for the supply by them of services to be performed in Canada? (clause 240(3)(b)(ii)(A))
In determining the application of clause 240(3)(b)(ii)(A), we need to dissect three important components of this provision, that is, has NonResCo:
1. “…in the ordinary course of carrying on business outside Canada…”
2. “…entered into an agreement for the supply by them of services…”
3. “…to be performed in Canada.”
The first component requires NonResCo to have entered into such an agreement “in the ordinary course of carrying on business outside Canada.” It is not immediately evident whether NonResCo, as a pharmaceutical […] and medical […][Products] company, entered into the Services Agreement to provide CanCo Business and Management Services in the ordinary course of NonResCo’s business carried on outside of Canada. But let’s set this component aside for the moment and see if they otherwise fit within the provision.
[…][The] Business and Management Services are performed by NonResCo primarily in [Country X]. Travel by NonResCo to Canada is infrequent and is often for purposes unrelated to the Business and Management Services, such as for personnel of NonResCo to attend CanCo’s board meetings. Nothing in the Services Agreement indicates the services are to be performed (even partly) in Canada, and given the fees NonResCo charged CanCo for Business and Management Services for each of the […] and […] years was approximately $[…], it is unlikely much travel from [Country X] was expected when signing the Services Agreement.
Clause 240(3)(b)(ii)(A) specifies that to be eligible for voluntary registration, the non-resident must sign an agreement to provide services in Canada. We distinguish this from NonResCo’s situation where an agreement was signed for NonResCo to supply services that weren’t specified as to be performed in Canada, but in carrying out the performance of that agreement, NonResCo made the decision to perform a portion of the services in Canada.
Voluntary registration finding
NonResCo does not meet the criteria to register voluntarily, as they are not engaged in a commercial activity in Canada to the extent necessary to provide for voluntary registration, and they have not entered into an agreement for the supply by them of either services to be performed in Canada or intangible personal property to be used in Canada.
[…]
Disclaimer
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA's interpretative policy could affect the interpretation(s) or the additional information provided herein.
Contact
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-7281.
Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Chris White
Industry Sector Specialist
Border Issues Unit 2
General Operations and Border Issues Division
GST/HST Rulings Directorate
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