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
[Addressee]
Case Number: 200294
Dear [Client]:
Subject: GST/HST RULING - Drop shipment of […][machinery parts]
Thank you for your correspondence of June 3, 2019, concerning the application of the goods and services tax/harmonized sales tax (GST/HST), in particular the drop shipment rules, to the supply of construction services […]. We apologize for the delay in this response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand the following:
1. […], […][Corporation A], is a non-resident person based in […][Country A] (NonResCo).
2. NonResCo is not registered for purposes of the GST/HST and does not carry on any business in Canada.
3. […] (Operator) is […] based in [city] with premises at […][Location A] in [city, province].
4. The Operator is registered for purposes of the GST/HST.
5. The Operator and NonResCo have entered into a contract dated [mm/dd/yyyy], […] (collectively, the “Agreement”).
6. The “Site” refers to the Operator’s premises at [Location A] in [city, province]. ([…])
7. Under the terms of the Agreement, […], NonResCo agrees to supply and install at Operator’s Site […][Parts], with fully integrated operational electrical and control systems, […]. The Plant includes the machinery, apparatus materials and all things to be provided under the contract for incorporation into the Works. ([…])
8. The Agreement specifies that NonResCo is responsible for […] (the Works). ([…])
9. The Works are to be completed and the Operator is set to take over […] at [Location A] Site on or before [mm/dd/yyyy]. ([…])
10. NonResCo shall provide all the necessary equipment, superintendence, labour and all necessary facilities for implementing the Works at the Site. ([…])
11. NonResCo shall apply in writing to the […][Project Manager] for permission to deliver any Plant or any of its equipment to the Site. No Plant or equipment may be delivered to the Site without the [Project Manager]’s written permission. NonResCo shall be responsible for the shipment, risk of loss or damage, unloading and reception on Site of the Plant and equipment.
NonResCo shall deliver the Plant at [Location A] in [city, province], Canada within the time specified in the Agreement […].
[…]
12. NonResCo shall set out the Works in relation to the original points, lines and levels of reference given by the Project Manager in writing […]. ([…])
13. […]
14. NonResCo shall submit to the [Project Manager] and the Operator for their approval the […][Project Plan] which shall conform in all respects with the specifications […]. ([…])
15. […]
16. […], NonResCo shall provide all the equipment necessary to complete the Works. […]
17. NonResCo shall observe all applicable regulations regarding safety on Site […]. ([…])
18. NonResCo shall be entitled without charge to use for purposes of the Works electricity and water as may be available on Site. ([…])
19. […]. On completion of the Works, NonResCo shall remove all of its equipment and leave the whole of the Site and the Works clean and in a workmanlike condition, […]. ([…])
20. NonResCo shall afford to […] persons lawfully upon the Site all reasonable opportunities for carrying out their work, […]. ([…])
21. No persons other than the employees of NonResCo and its subcontractors shall be allowed on the Site except with the consent of the [Project Manager]. ([…])
22. During the performance of the Work, NonResCo shall be responsible for internal security and protection of all Plant and Works. […]. ([…])
23. NonResCo shall be responsible for the provision of adequate first-aid facilities at the Site for all personnel employed or retained by NonResCo or any of its subcontractors in the performance of the Work. […]. ([…])
24. NonResCo shall be responsible for fire prevention and fire protection practices in connection with the performance of the Work. […].
[…]
25. NonResCo shall furnish and maintain, or arrange to obtain, at each of its work areas adequate waste disposal and toilet facilities and potable water for the use of its employees. In addition, NonResCo shall comply with all laws, standards, codes and regulations relating to sanitation at the Site, […]. ([…])
26. […]
27. The Operator shall in reasonable time grant NonResCo access to and possession of the Site, which may, however not be exclusive to NonResCo. […]. ([…])
28. NonResCo shall perform such tests (“Tests on Completion”) in accordance with the Operator’s requirements […] to show that the Works meet the performance specifications and agreed tolerances specified in the Agreement […] after demonstrating to the [Project Manager] that the Works are complete except in minor respects that do not affect the use of the Works for their intended purpose. ([…])
29. The Works shall be taken over by the Operator when they have been completed in accordance with the Agreement, […]. ([…])
30. NonResCo shall be responsible for the care of the Works or any Section thereof from the Commencement Date (the date of the execution of the Agreement) until the Risk Transfer Date […]. ([…])
31. […]
32. […]
33. NonResCo shall insure the Works for their full replacement value […] from the Commencement Date until the Risk Transfer Date against any loss or damage […]. ([…])
34. NonResCo shall insure its equipment for its full replacement value […] against all loss or damage. ([…])
35. NonResCo shall insure against liability to third parties for any death or personal injury and loss of or damage to any physical property arising out of the performance of the Agreement […].
[…]
36. Plant to be supplied pursuant to the Agreement shall become the property of the Operator once it has been delivered to the Site and has passed tests upon completion. ([…])
37. Before the Operator takes over the Works, NonResCo shall supply operation and maintenance manuals […].
38. NonResCo shall not subcontract the whole of the Works.
Except where otherwise provided by the Agreement, NonResCo shall not subcontract any part of the Works without the prior consent of the [Project Manager]. […].
NonResCo shall be responsible for the acts, defaults and neglect of any subcontractor, his agents or employees […]. ([…])
39. As permitted under the Agreement, NonResCo has retained the services of two local subcontractors, both registered for purposes of the GST/HST, for assistance with the completion of separate portions of the Works at the Site. […].
40. NonResCo has hired […] (“MechanicalCo”), a firm specializing in mechanical industrial projects, to assist with the offloading […] and the assembly […] of the Parts at [Location A] Site.
41. NonResCo has hired […] (“ElectricalCo”) to assist with the assembly of the electrical and control systems of the Works at the Site.
42. Both MechanicalCo and ElectricalCo have charged GST/HST […] to NonResCo on the consideration for the supply of their services to NonResCo.
RULING REQUESTED
You would like to know whether:
1) The supply of services made to NonResCo by its subcontractors, MechanicalCo and ElectricalCo, would be deemed to be made outside Canada by virtue of subsection 179(2) (“drop-shipment rules”).
2) The GST/HST paid on those supplies may be recovered as GST/HST paid in error under section 261.
RULING GIVEN
Based on the facts set out above, we rule that:
1) The supply of services made to NonResCo by its subcontractors, MechanicalCo and ElectricalCo, would not be deemed to be made outside Canada by virtue of subsection 179(2).
2) The GST/HST paid on those supplies cannot be recovered as GST/HST paid in error under section 261.
EXPLANATION
Under the Agreement, NonResCo agreed to supply the Parts on an installed basis (the Works) to the Operator at its premises at [Location A]. The Parts were shipped directly to the Site and installed, in fact, incorporated, into the real property at the Site. The Operator obtained ownership of the Works once the installation work was completed to the Operator’s satisfaction. NonResCo contracted with MechanicalCo to unload the Parts […] and to install them on Site at [Location A], that is, NonResCo hired MechanicalCo to provide the service of constructing the Works at the Site. NonResCo further contracted with ElectricalCo in order to have the electrical and control systems installed with respect to the Works at the Site. Under the circumstances, both MechanicalCo and ElectricalCo would have had to perform their construction services relating to the Works on Site at [Location A].
In order for the drop-shipment provisions of subsection 179(2) to apply in this case, there must be an agreement between a registrant and a non-resident person who is not registered under section 240 for the supply of a commercial service in respect of tangible personal property. The registrant must acquire physical possession of the property for the purpose of making a taxable supply of a commercial service in respect of the property to the unregistered non-resident person and must subsequently transfer physical possession of the property at a place in Canada to a third person or to the non-resident person.
[…], we understand […] that NonResCo entered into agreements with […][MechanicalCo and ElectricalCo] for the provision of construction services with respect to the Works. However, further to the Agreement between NonResCo and the Operator, we understand that the Parts were shipped directly to [Location A] Site, and the unloading, installation and other related services performed by the subcontractors on the Parts necessarily took place at the Site at [Location A] where the Works were incorporated into the real property held by the Operator. As a result, the subcontractors, MechanicalCo and ElectricalCo, would not have acquired physical possession of the property; rather their services would have been in respect of property that was already in the Operator’s physical possession at [Location A]. Accordingly, the drop-shipment rule does not apply and the commercial services supplied by MechanicalCo and ElectricalCo to NonResCo would not be deemed to be made outside Canada pursuant to subsection 179(2).
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 Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed. The interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the 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.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 343-553-3873.
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 or by fax to 1-418-566-0319.
Sincerely,
Anna Messore
Manager, GST/HST Rulings
Border Issues 2 Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
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