16 August 1994 GST/HST Interpretation 1994-08-16[2] - Application of the Drop-shipment Rules

Attached is a copy of a letter dated January 18, 1994 (File: I-XXXXX, written by XXXXX, to the above-referenced unregistered non-resident XXXXX The letter concerns, in part, the application of the drop-shipment rules in subsection 179(2) of the Excise Tax Act (Act).

I understand that XXXXX purchased one unit, which is part of a closed-loop cooling system, from a GST-registered Canadian vendor (vendor). The vendor shipped the goods to XXXXX Canadian customer. The vendor invoiced XXXXX for the unit and charged the GST at 7%.

In his letter, XXXXX discusses the drop-shipment provisions contained in subsection 179(2). However, he does not answer the question raised by XXXXX which is: "Does the GST apply to the supply of the unit by the vendor to XXXXX[.] A second question which should be dealt with is: "If the GST does not apply to the supply of the unit, how can XXXXX receive a refund or rebate for the tax paid to the Canadian vendor?"

Additional information should be obtained regarding the registration status of XXXXX Canadian customer and if the Canadian customer furnished the drop-shipment certificate to the vendor. Depending on the information received, there are three possible answers to XXXXX concerns, as follows:

1. If the Canadian customer was registered and furnished the drop-shipment certificate to the vendor, the supply will be deemed to be made outside Canada and not subject to the GST. The Canadian vendor may refund or credit XXXXX for the tax (section 232 of the Act) or, if the Canadian vendor will not issue a refund or credit, XXXXX may apply for a rebate of the tax paid (section 261 of the Act).

2. If the Canadian customer was registered, but did not furnish the drop-shipment certificate to the vendor, subsection 179(1) of the Act provides that the vendor is required to charge the GST to XXXXX calculated on the fair market value at that time. However, section 180 of the Act provides that an input tax credit may be flowed through from XXXXX to the Canadian customer.

3. If the Canadian customer was not registered, the supply of the unit by the vendor to XXXXX was subject to the GST, with no provision for a refund or rebate.

If you have any questions or require further information, please contact Mr. Garry Ryhorchuk of my staff at (613) 952-6743.

H.L. Jones
Director
General Tax Policy
Excise/GST
Policy and Legislation

Att.