21 September 1994 GST/HST Interpretation 11680-7(glr)[2] - Services Supplied by to Unregistered Non-residents

                                                                        Telephone: (613) 954-8585
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I refer to your E-mail message of August 18, 1994, addressed to Mr. Garry Ryhorchuk of my staff, regarding the objection filed by XXXXX and the possible application of the drop-shipment provisions contained in subsections 179(1) and (2) of the Excise Tax Act to the services supplied by XXXXX to unregistered non-residents. As requested, the following comments are provided concerning the Summary of Decision prepared by Mr. XXXXX.

Before discussing the application of the drop-shipment provisions, I would like to point out that the original discussion paper dealing with services supplied to non-resident importers of green coffee beans was dated December 3, 1992, and not December 3, 1991, as stated in the Summary of Decision.

I will now deal with the drop-shipment provisions contained in subsections 179(1) and 179(2) in reverse order:

1. Subsection 179(2)

I agree with Mr. XXXXX analysis that, because XXXXX does not obtain drop-shipment certificates from the GST-registered consignees, the provisions of subsection 179(2) are not applicable to the services XXXXX supplies to unregistered non-residents.

2. Subsection 179(1)

Mr. XXXXX is partially correct in his analysis of the provisions contained in subsection 179(1). This subsection does deem a registrant who makes a taxable supply of a commercial service in respect of tangible personal property (i.e., goods) and who is drop-shipping the goods in Canada to a third person (i.e., consignee) on behalf of unregistered non-residents, to have made a taxable supply of the goods to the non-resident, and not a supply of a service. The subsection requires the Canadian registrant to collect the GST calculated on:

•   the fair market value of the goods, plus

•   any consideration for the supply of the service to the unregistered non-resident in respect of the goods that is not included in the fair market value of the goods.

However, contrary to Mr. XXXXX analysis, subsection 179(1) does not deem the supply of the goods to be made outside Canada.

In order for XXXXX to be deemed to have made a supply of zero-rated green coffee beans, and not the supply of a commercial service, all the requirements of subsection 179(1) must be met. The following is an analysis of the wording of subsection 179(1) and whether or not XXXXX meets the requirements:

•   Paragraph 179(1)(a) - There must be an agreement between a registrant and an unregistered non-resident. XXXXX does have agreements with unregistered non-residents, therefore, this requirement is met.

•   Subparagraph 179(1)(a)(i) - The registrant must be acquiring physical possession of tangible personal property (other than property of a person who is resident in Canada) for the purpose of making a taxable supply of a commercial service in respect of the property to the non-resident. XXXXX does acquire physical possession of green coffee beans, which are the property of non-residents, for the purpose of making a taxable supply of commercial services, such as storage, reconditioning and sampling. Therefore, this requirement is met.

•   Subparagraph 179(1)(a)(ii) - The registrant must cause physical possession of the property to be transferred, at a place in Canada, to a third person (i.e., consignee) or to the non-resident person. In XXXXX case, the requirements of this provision are not met. Although ownership of the green coffee beans does transfer from the non-resident to the consignee while the coffee beans are in XXXXX possession, it is the consignee (i.e., Canadian purchaser) that picks up the goods at XXXXX warehouse. Therefore, it is the consignee, and not XXXXX, that is causing physical possession of the coffee beans to be transferred in Canada. In addition, XXXXX does not transfer physical possession of the coffee beans to the non-resident.

As all of the requirements of paragraph 179(1)(a) are not met, the commercial services supplied by XXXXX to unregistered non-residents cannot be deemed to be a supply of zero-rated coffee beans.

I should mention that if XXXXX were transferring physical possession of the property to the consignees, the storage services (and other commercial services) supplied by XXXXX to the non-residents could be deemed to be a supply of the green coffee beans which, of course, are zero-rated. However, this is not the result intended by the Department of Finance when the drop-shipment provisions were introduced. As evidenced by the wording of subsections 179(2) and 179(3), a service of storing or shipping the property is excluded from being deemed to be made outside Canada. The intent was that supplies of these services made in Canada remain taxable when supplied to unregistered non-residents. XXXXX[.]

I will now discuss other provisions of the Act which could apply to XXXXX services. XXXXX services are performed entirely in Canada, therefore, paragraph 142(1)(g) of the Act deems the supplies of the services to be made in Canada. Schedule VI, Part V, section 7 to the Act is the general zero-rating provision for services supplied to non-residents. However, the services supplied by XXXXX would be excluded from zero-rating because the services are:

•   primarily for consumption, use or enjoyment in Canada (paragraph 7(a)); and

•   in respect of tangible personal property that is to be delivered in Canada (paragraph 7(c) as it read prior to June 10, 1993); or

•   in respect of tangible personal property that is situated in Canada at the time the service is performed (paragraph 7(e) - effective June 10, 1993).

The services supplied by XXXXX are, therefore, subject to the GST at 7%.

If you have any questions or require further information, please contact Mr. Ryhorchuk at 952-6743.

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

c.c:       R. Allwright,
GTP: XXXXX
G. Ryhorchuk
XXXXX