Canada imposes a five percent federal value-added tax called the goods and services tax (GST), which applies to the supply of most goods and services in Canada and to imports of most goods into Canada. Five Canadian provinces (Ontario, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador) have harmonized their provincial sales taxes with the federal GST to make a single harmonized sales tax (HST), which applies to most supplies within these provinces. The HST includes the five percent federal GST and a provincial component, for a combined HST rate of thirteen percent in Ontario and fifteen percent in the other four provinces. The GST and HST are both applied under the same legislation (the Excise Tax Act, or the Act), follow the same set of rules, and are remitted to the government on the same GST return. Most GST registrants can claim an input tax credit (ITC)—in effect a refund—for any GST/HST they pay, so in the business-to-business context, the biggest concern is generally that GST/HST is collected and that ITCs are claimed correctly rather than what the total amount of GST/HST payable actually is.
Whether GST/HST applies to a particular transaction—and what the applicable rate of GST/HST is—is generally based on where the supplied goods are delivered, as identified in the transaction agreement. This makes determining the delivery point in a contract extremely important for tax purposes. Parties should carefully consider the delivery terms they use to ensure that they are collecting and paying GST/HST correctly. Furthermore, the Act contains a number of specific provisions that may apply to imports into and sales within Canada, which can cause unintended and often counterintuitive results, so these rules should also be taken into account.
Place of Supply in Canada
In determining whether GST/HST applies to the supply of tangible personal property, the Act generally focuses on where the tangible personal property is “delivered or made available.” The term “delivered” refers to the actual physical delivery to the recipient, and the term “made available” is generally considered to refer to constructive delivery in situations where physical delivery does not occur. Specifically, goods are considered to be “made available” where they have not been physically delivered to the recipient, but it is recognized that parties intended to transfer the goods to the recipient at that point.
The general rule is that if goods are delivered or made available to a recipient outside Canada, then the supply is considered to be made outside Canada and the sale is generally not subject to GST/HST. If goods are delivered or made available to the recipient within Canada, then the supply is generally considered to be made in Canada and the sale is subject to GST/HST.
One exception to the general rule occurs when supplies are made by a nonresident of Canada who is not registered for GST and is not carrying on business in Canada.1 In these circumstances, the Act deems the supply of the goods to have been made outside Canada, such that no GST/HST should apply on the sale of the goods regardless of where the goods are actually delivered or made available. As GST-registered purchasers must have retained certain documentation in order to claim an ITC, including the GST registration number of the supplier, if a supplier who is not registered for GST collects GST/HST on a supply, the purchaser will generally not be able to claim an ITC for the tax paid. For this reason, when purchasing goods, purchasers should make sure that the suppliers are registered for GST/HST and that the registration number they have provided is correct.2
It should also be noted that since GST/HST is payable at the time of importation,3 and since only a GST registrant can claim an ITC for the GST payable on importation, many nonresident companies choose to register for GST to deal with the importation of goods, even in cases where they might not otherwise be required to do so.
Place of Supply in Provinces
Special provincial place-of-supply rules are used to determine if a sale of goods is made in a particular province. The general rule for provincial place of supply follows the general rule for when a supply will be considered to be made in Canada. Specifically, goods are deemed to be supplied in a province, and the applicable rate of GST/HST for that province will generally apply to that sale, if the goods are delivered or made available to the recipient in that province.4 However, an override to the general rule deems goods to be delivered in a particular province if the supplier either:
(a) ships the property to a destination in a particular province that is specified in the contract for carriage of the property;
(b) transfers possession of the property to a common carrier or consignee that the supplier has retained on behalf of the recipient to ship the property to such a destination; or
(c) sends the property by mail or courier to an address in the particular province.
The Canada Revenue Agency (CRA) has stated that it will generally require the supplier to hire the carrier on its own account before it will allow the deeming rule in (a) and (b) above5 to apply, so care should be taken when setting delivery terms in the contract and when arranging for transport to ensure that the supplier’s actions do not change the place of supply from what the parties intend and to ensure that the correct amount of GST/HST is charged on the supply.
Determining Delivery Point
In determining where goods are “delivered or made available,” the CRA position is that the place where title transfers is generally not determinative. Rather, where a good is delivered or made available to the recipient is determined by reference to the terms of the contract (often Incoterms or other delivery terms).6 If there are no delivery terms set out in the contract, then the parties will often need to look to the relevant Sale of Goods legislation to determine where delivery will be considered to be made. As various Sale of Goods Acts have different delivery points, it is very important that contracts contain terms setting out the place of delivery, and that the right contractual terms are used, so there is clarity about how the GST/HST applies to a particular transaction. That said, in our experience the delivery terms used in contractual agreements are often based on standard forms, with little consideration of how the terms used affect the GST/HST treatment of the supply, and even whether the terms are being used correctly.
Many companies use Incoterms in their sales contracts. Incoterms are essentially trade terms established by the International Chamber of Commerce that set out each party’s obligations under the contract, including who is responsible for insurance, freight, etc., and where the goods are to be delivered. As the place of delivery can differ under each Incoterm, the particular Incoterms used should be examined to determine whether, and at what rate, GST/HST applies. Since many companies use Incoterms, we have included a list of some commonly used Incoterms from the Incoterms 2010 rules and have set out where delivery occurs under each term.
Incoterms®
- Free Alongside Ship (FAS): Goods are delivered by placing them alongside the ship nominated by the purchaser at the named port of shipment.
- Free on Board (FOB): Goods are delivered by placing them on board the vessel nominated by the purchaser at the named port of shipment (please note the need for a ship).
- Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP), Cost and Freight (CFR), and Cost, Insurance, and Freight (CIF): Goods are delivered when handed over to the contracted carrier at an agreed-upon place.
- Ex Works (EXW): Goods are delivered to the seller’s premises or another named place of delivery, not loaded on the vehicle.
- Free Carrier (FCA): Goods are delivered to the carrier or another person nominated by the purchaser at the seller’s premises or another agreed-upon point.
- Delivered at Terminal (DAT): Goods are delivered when unloaded from the arriving means of transport at a named terminal at the named port or destination. The seller is not responsible for clearing the goods for import, paying import duties, or carrying out import customs formalities.
- Delivered at Place (DAP): Goods are delivered when placed on the arriving means of transport, ready for unloading at the named destination. The seller is not responsible for clearing the goods for import, paying import duties, or carrying out import customs formalities.
- Delivered Duty Paid (DDP): Goods are delivered when placed on the arriving means of transport, ready for unloading at the named destination. The seller is responsible for clearing the goods for import, paying import duties, and carrying out import customs formalities.
As these descriptions show, most Incoterms require a place to be named either as the place of destination or the place of delivery. For instance, “FCA Seller’s premises in Toronto” would indicate that delivery is in Toronto, whereas “FCA Purchaser’s premises in Montréal” would indicate that delivery is in Montréal. However, in practice, many companies list only the Incoterms themselves (i.e., just “FCA”) and not the place of delivery or destination, which can create significant confusion as to where delivery actually occurs. Even worse, without a clear delivery term, the CRA has more flexibility to argue that the place of delivery occurs in whatever spot is the least convenient for the company.
Common Issues With Incoterms®
As discussed above, the use of Incoterms can lead to situations where the application of GST/HST is no longer in sync with the parties’ intentions. Some of the more common issues that can arise are described below.
Use of CIF, CFR, CIP, and CPT
Even where Incoterms are used correctly, care should be taken to ensure that delivery occurs at the place that the parties intend. For example, if the Incoterm CIF, CFR, CIP, or CPT is used, delivery occurs when goods are handed over to the contracted carrier at an agreed-upon place and not when the goods reach the named destination. Therefore, if the carrier receives the goods outside Canada, the delivery point is outside Canada and no GST/HST should apply to the transaction. If, however, the carrier receives the goods inside Canada, the delivery point would normally be inside Canada and, if the seller is GST-registered, the seller would be forced to charge GST/HST on the transaction unless a specific zero-rating provision applies (such that no tax needs to be charged).
In other words, if goods are shipped from Toronto to New York using the Incoterm “CFR New York,” delivery will be considered to be made in Toronto, when the goods are handed to the carrier and not in New York. As a result, the seller, if registered for GST, will have to charge HST of thirteen percent on the supply unless it is zero-rated. There is a zero-rating provision for goods purchased for export, but several conditions must be met before this rule applies, including that the goods cannot be purchased for resale in Canada prior to export and that the seller must receive proof of export. If multiple sales of the same goods happen at the same place and using the same term (e.g., “CFR New York”), then the initial sale would not be zero-rated, as the purchaser would have resold the same goods in Canada prior to export, and HST should apply. As shown in this example, if goods are being shipped from Canada to a place outside Canada, it is usually not a good idea to use the Incoterms CIF, CFR, CIP, or CPT unless the seller intends to charge GST/HST on the initial sale or there is another compelling reason to do so.
Use of FOB
FOB is one of the most frequently used, and misused, delivery terms. Much of the confusion derives from the fact that FOB has two different meanings, one in U.S. commercial law and the other provided by Incoterms. Under the Incoterm meaning of FOB, delivery occurs at the point of shipping when the goods are placed on a vessel (i.e., a boat) for shipping. In other words, delivery is only at the shipment point, and the term is intended only to apply to water transport. Under U.S. commercial law, FOB delivery can occur at either the shipment point (FOB shipment point) or at the delivery point (FOB delivery). Thus, under U.S. commercial law, this delivery term also requires a place of delivery to be named.
Given these differences, it is important to identify which definition of FOB is being used in the agreement, the U.S. commercial concept or the Incoterm. What’s more, parties should never just say that the goods will be delivered “FOB” without specifying exactly where delivery will occur, because if no place name is provided it may be unclear where delivery actually occurs. Alternatively, due to the confusion caused by the term FOB, it is often preferable for parties to use a different Incoterm entirely that will provide more clarity. Without an explicit declaration of which definition of FOB is being used in the agreement, the correct GST/HST treatment is often difficult to determine.
Contractual Modifications
It should be noted that Incoterms are just contractual trade terms and can be adjusted in the contract between the supplier and recipient, allowing for more flexibility with how GST/HST is applied. A simple clause, such as
“Notwithstanding the use of the term [insert applicable Incoterm] Incoterms 2010, delivery of and transfer of title of the goods shall pass to the Purchaser at [insert desired place of delivery]”
will often be sufficient to specify where delivery will occur, and thus how GST/HST would apply to the particular transaction.
However, Incoterms should be modified only as a last resort. The reason is that while the agreement may clearly set out where delivery occurs, it may be difficult to explain this to an auditor, who will be used to the Incoterm having a specific (and different) meaning. In addition, though the term may be fixed in the agreement, companies must also ensure that their processes and systems are adjusted so the delivery location can be easily determined. For instance, if a company’s computer systems can only set the delivery term as “EXW Incoterms 2010—Seller’s Premises in Toronto,” but the Incoterm has been modified to have delivery made at the purchaser’s premises in Montréal, then someone else looking at the system in the future will have no way to determine where delivery is actually considered to have been made and, even worse, is likely to assume delivery happened in Toronto. In these circumstances, it is generally much better for the parties to select a different Incoterm that yields the preferred GST/HST result for the supply of goods in question while keeping the other commercial terms the same.
Interprovincial Sales
It is important to note that the issues described herein are not limited to sales made into Canada. As some provinces have harmonized their provincial sales taxes with the GST, the GST/HST rate that applies to a transaction will (subject to the override rule described above) depend on which province the goods are delivered into. In Québec, Manitoba, Saskatchewan, and British Columbia, there are also distinct provincial sales tax regimes that might apply to a transaction (for example, Québec’s sales tax generally applies in the same manner as the GST). As such, it should be noted that determining where delivery occurs for domestic supplies is often as critical as it is for international trade.
“Constructive Importer” Issue
When goods are imported into Canada, the GST/HST is generally paid by the importer of record, the person who presents the accounting documentation to the Canada Border Services Agency (CBSA) in order to have the imported goods released. As the importer of record paid the GST, he or she would generally claim ITCs for the GST/HST paid. However, the CRA was concerned that GST-registered companies could sell goods to a Canadian consumer with a delivery point outside Canada (such that the seller did not have to charge GST/HST on the sale), but then would act as the importer of record and claim an ITC for the GST paid on importation. In this situation, while the Canadian purchaser, if a consumer, would technically be required to self-assess the applicable GST/HST, in practice very few consumers actually self-assess, leading to tax leakage.
Section 178.8, the Constructive Importer Rule, was added to the Act in 2007 to deal with this issue. Under the Constructive Importer Rule, any GST paid on importation of certain supplies8 received by a “constructive importer” (generally the person who received delivery of the goods outside Canada and who brings the goods into Canada for his or her own consumption, use, or supply) is deemed to have been paid by the constructive importer and not by anyone else. This means that only the constructive importer, and not the importer of record (if a different person), can claim ITCs for the GST paid or payable on importation. For example, if a GST-registered seller delivered goods to a purchaser outside Canada (such that no GST/HST would be chargeable on the supply), arranged for freight to ship the goods to the purchaser in Canada (e.g., by using the CFR Incoterm), and agreed to act as the importer of record, the purchaser would be the “constructive importer” because the purchaser acquired the goods outside Canada, and the goods were imported only after this time. Under the general Constructive Importer Rule, the GST-registered seller would be unable to claim an ITC for the GST it paid on importation, and only the purchaser would be allowed to claim the ITC (if registered for GST and entitled to claim ITCs).
While the Constructive Importer Rule was intended to deal with specific abuses, unfortunately it also can apply in situations where there is no abuse, often leading to unintended results. For example, if goods are sold by a GST registrant from the United States to Canada using the DAP or DAT Incoterm with the named destination being in Canada, the place of delivery will generally be considered to be in Canada, although the purchaser will generally be responsible for acting as the importer of record and clearing the goods into Canada. However, under the Constructive Importer Rule, the seller (and not the purchaser) would be the constructive importer.9 In these circumstances, the purchaser would be required to pay the GST on importation and GST/HST on the sale in Canada, but the purchaser would get an ITC only for the GST/HST paid on the sale in Canada, and only the seller could claim an ITC for the GST paid by the purchaser on importation (subject to the exceptions to the rule set out below). This is generally a terrible result for purchasers, so care should be taken to ensure that these circumstances do not arise (i.e., by using different delivery terms, or making one of the elections described below).
Exceptions to Constructive Importer Rule
Under the Constructive Importer Rule, it is possible to make an election10 that provides for an exception to the general rule. Specifically, the parties to a cross-border transaction can elect to deem the supply by the seller to be made in Canada, as long as the seller is registered for GST purposes. If this election is made, the seller (and not the purchaser) would be the only party entitled to claim ITCs for the GST paid on importation; however, the seller will also have to charge GST/HST to the purchaser, as the supply will be deemed to have been made in Canada. Instead of making this election, it may be possible to make agreements and issue tax adjustment notes between the parties in order to effectively allow the importer of record (i.e., the party that actually paid the GST on importation) to claim a rebate or refund for the GST paid.11 As the various subsections of the Constructive Importer Rule are fairly technical, parties should carefully go through the subsections of the rule in detail or review them with their advisors before relying on one of the exceptions above.
Section 144 of the Act
The Act contains a deeming provision in Section 144 that provides an exception to the supply-in-Canada rule that could potentially be used to resolve some issues raised when applying GST to cross-border transactions. Specifically, Section 144 states that goods that are imported in accordance with the Customs Act but are not “released” before the goods are delivered or made available in Canada to the recipient are deemed to have been supplied outside Canada. “Release,” as defined in the Customs Act, refers to authorizing the removal of goods from a customs office, sufferance warehouse, bonded warehouse, or duty-free shop for use in Canada, unless they have already been authorized for delivery directly to the place of business of the recipient, in which case the goods are considered to be released upon arrival at that place of business.12 When Section 144 applies to a transaction, as the delivery is deemed to take place outside Canada, the supplier does not have to collect or remit GST/HST on the sale to the purchaser, and the purchaser will generally be the constructive importer and the party entitled to claim ITCs for the GST it paid on importation. Thus, GST is paid only once, at the time of importation.
For example, assume that a seller has entered into an agreement with a GST-registered purchaser under a delivery term where the goods are considered to be delivered to the purchaser in Canada, but the purchaser agrees to act as the importer of record and pay GST on importation (e.g., DAP with a location in Canada). If Section 144 does not apply, then as mentioned earlier, the purchaser will have to pay GST/HST on the supply in Canada and will also pay GST on importation, but only the seller will be able to claim an ITC for the GST paid on importation. If the goods are considered to be imported into Canada and delivered to the purchaser prior to their release, Section 144 should apply so the sale by the seller will be deemed to be made outside Canada, such that no GST/HST would apply to the initial sale. Rather, the purchaser would import the goods into Canada, should only pay GST on importation, and should be entitled to claim ITCs for the GST paid on importations, because that purchaser would be the constructive importer of the goods. This interpretation of Section 144 would greatly cut down on instances where a Canadian company would have to act as the importer of record, pay GST on the import, and then pay the GST/HST on the sale in Canada on the grounds that the goods were deemed to have been delivered in Canada.
Unfortunately, the CRA interprets Section 144 very restrictively. Specifically, the CRA’s position is that Section 144 applies only if the goods supplied have been imported into Canada before an agreement to supply the goods has been entered into. This position stems from the CRA’s interpretation of Section 133 of the Act,13 which reads:
For the purposes of this Part, where an agreement is entered into to provide property or a service, the entering into of the agreement shall be deemed to be a supply of the property or service made at the time the agreement is entered into … [emphasis added].
Thus, according to the CRA, if an agreement to sell the goods is entered into before the goods arrived in Canada, those goods were not imported at the time the agreement was signed, and hence Section 144 cannot apply. Effectively, this interpretation limits the application of Section 144 to instances where someone: (a) imports goods into a custom-bonded warehouse (which is deemed to be outside Canada) without there being any agreement to sell the goods prior to their being imported and (b) then enters into an agreement to sell the goods when they are still in the warehouse and prior to the goods being released. As these circumstances very rarely arise in commercial transactions, if the CRA’s interpretation is correct, Section 144 would rarely apply.
Aside from the fact that there are a number of policy arguments as to why the CRA’s interpretation of Section 144 does not make sense, we note that several technical arguments also show why the CRA’s position is incorrect. In particular, the language of Section 144 does not explicitly refer to the time the supply is made, so it can be argued that the time the supply is deemed to be made is irrelevant, and that Section 144 should apply so long as the goods are: (a) imported in compliance with the Customs Act and (b) delivered or made available in Canada to the recipient after the goods are imported but before the goods are released.
We note that no relevant cases have interpreted the meaning of Section 144 in this context, so none of these arguments has been tested in court. As a result, importers and exporters should expect the CRA to continue to interpret Section 144 restrictively. Furthermore, as it is generally fairly easy to plan around these issues by using different Incoterms or other trade terms, it is likely better to plan around the issue rather than to have to become the first taxpayer to argue in court that the CRA’s position on Section 144 is incorrect.
Conclusion
Parties should take into account a number of provisions when determining whether GST/HST applies to cross-border transactions, imports into Canada, and transactions within Canada. That said, the delivery terms in the contract are what generally define whether GST/HST applies to a particular transaction. As the delivery terms in contracts are vital to determining whether GST/HST applies and at what rate, and sometimes who can claim an ITC for the GST/HST paid, parties should be vigilant when drafting contracts to ensure that their agreements are tailored to produce the GST/HST treatment they expect and so they are not assessed large amounts of tax, penalties, and interest in the future for failing to collect the correct amount of GST/HST or for incorrectly claiming ITCs.
Endnotes
- Section 143 of the ETA.
- The CRA has a website where companies that know a supplier’s name and GST number can confirm that the company is registered for GST. See www.cra-arc.gc.ca/gsthstregistry.
- In the commercial context, generally only the five percent GST applies on the importation of goods even if the goods are imported into an HST province. However, if the purchaser is a consumer or is not entitled to ITCs, HST will often apply when goods are imported into an HST province.
- The rules for whether a supply of tangible property is in a particular province are found in Part II of Schedule IX of the ETA. This paper discusses only the rules applying to the sale of goods. Specific rules may apply if goods are supplied other than through a sale (e.g., by lease).
- See question 25 of the Canadian Bar Association and Canada Revenue Agency Round Table meeting of March 7, 2013.
- Canada Revenue Agency, GST/HST Memorandum 3.3 – Place of Supply (Ottawa: Canada Revenue Agency, April 14, 2004) at paragraph 9.
- Incoterms 2010, ICC Rules for the Use of Domestic and International Trade Terms, published by the International Chamber of Commerce.
- Section 178.8 of the Act applies only to a “specified supply.” Specified supply is defined as the supply of goods that are imported after the supply is made or the supply of goods that has been deemed by Section 144 of the Act to be made outside Canada.
- This occurs because the seller will generally have received a specified supply of the goods on the basis that the seller acquired the goods outside of Canada, the seller did not resupply the goods outside Canada before importation, and the goods were imported into Canada for the seller’s consumption, use, or supply in Canada (i.e., the resupply of the goods to the purchaser in Canada).
- Under Subsection 178.8(3) of the Act.
- Under Subsection 178.8(7) of the Act.
- Customs Act, RSC 1985, c. 1 (2nd Supp.), ss. 2, 32.2(b).
- See the CRA’s response in GST/HST Questions for Revenue Canada 2014, Canadian Bar Association, questions 32 and 33.
Alan Kenigsberg is a partner at Osler, Hoskin & Harcourt LLP.
