In a decision rendered last July 14th,1 the Court of Québec established the impact of commercial terms like "free on board" (F.O.B.) (North America), as well as international commercial terms like Incoterms® in connection with the application of the Act respecting the Québec sales tax (the QSTA), when determining if a taxable supply of corporeal movable property by way of sale is made in Québec (and, therefore, subject to QST) or outside the province (and consequently not subject to QST).
The plaintiff, Techtronic Industries Canada Inc. (Techtronic), operates a power handtool company out of an establishment located in Ontario. In addition to being a GST/HST registrant under the Excise Tax Act, Techtronic is also a QST registrant. In connection with its operations, Techtronic makes taxable supplies of tools by way of sale to customers located in Québec (the Québec Customers) but only collects the GST (and not QST) on these particular sales. Once Techtronic and a Québec Customer finalize the sale, Techtronic generally hires a carrier, in particular FedEx, to ship the tools to the Québec Customer. Sales are made pursuant to a document entitled Sales Policy that specifies that supplies destined to Québec Customers are made "F.O.B. Distribution Centre". As its distribution centre is located in Ontario, Techtronic took the position that the place of supply by way of sale of the tools was Ontario and that, consequently, these supplies were not subject to QST.
Disagreeing with the taxpayer's position, the Agence du revenu du Québec (the ARQ) issued a notice of reassessment against Techtronic for QST that it should have collected on taxable supplies of tools to Québec Customers based, in particular, on sections 22.7 and 22.9 of the QSTA.
Pursuant to section 22.7 of the QSTA, a supply of corporeal movable property by way of sale is deemed to be made in Québec if the property is delivered in Québec to the recipient of the supply. Section 22.9 of the QSTA in turn provides that property is deemed to be delivered in Québec where the supplier ships the property to a destination in Québec that is specified in the contract for carriage of the property, or 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.
Judge Hamel noted that the QSTA contains absolute presumptions that govern the determination of the place of supply upon the sale of corporeal movable property in an interprovincial context and ruled that the use of particular commercial terms cannot rebut these presumptions.
Section 22.9 of the QSTA on which the ARQ specifically relied to issue the notice of reassessment against Techtronic must, therefore, take precedence.
Reference to the commercial term "F.O.B. Origin" in the Sales Policy is made, among other things, to let Québec Customers know that, legally, they are assuming the risks of loss during transportation.
COMMERCIAL TERMS VERSUS SPECIFIC RULES UNDER THE QSTA
To find that the supply of tools by way of sale was subject to QST, Judge Hamel first considered the usefulness and scope of commercial terms with regards to QST. The Court noted that commercial terms do not have force of law and that the reference to "F.O.B. Origin" cannot take precedence over the special rules provided in the QSTA.
The Court agreed with the ARQ by referring, in particular, to the application of section 22.9 of the QSTA which provides as follows:
Property is deemed to be delivered
- in Québec where the supplier
- ships the property to a destination in Québec that is specified in the contract for carriage of the property or 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
- sends the property by mail or courier to an address in Québec; and
- outside Québec where the supplier
- ships the property to a destination in another province that is specified in the contract for carriage of the property or 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
- sends the property by mail or courier to an address in another province.
Techtronic contended that from a legal standpoint:
[Translation] In application of the commercial term "F.O.B. Distribution Centre" contained in the Sales Policy, Québec Customers would transfer possession of the corporeal movable property to themselves when FedEx receives them from Techtronic at its distribution centre located in Ontario. Consequently, the provisions of the QSTA cannot apply [.]
Pursuant to section 22.9 of the QSTA, a corporeal movable property (i.e., the tools) is deemed delivered to Québec if the supplier (i.e., Techtronic) ships the property to Québec or transfers the property to a common carrier (i.e., FedEx) to an address in Québec. This absolute presumption regarding the place of supply is applicable when possession of the tools is transferred to FedEx, whose services were retained by Techtronic on behalf of Québec Customers2, in order for the latter to ship the tools to Québec to these same customers. Judge Hamel expresses himself as follows:
[Translation] Even though the Sales Policy provides that sales of corporeal movable properties to Québec Customers are "F.O.B. Distribution Centre", this does not serve to nullify the legal effects of sections 22.7 and 22.9 of the QSTA where the conditions provided under section 22.9 of the QSTA are established, as the evidence showed.
According to Judge Hamel, to conclude otherwise would mean that, for all intents and purposes, the parties may contractually, by referring to the "F.O.B. Origin" notion, circumvent the mandatory provisions of the QSTA and the absolute legal presumptions under section 22.9 of the QSTA. Insofar as the factual conditions under section 22.9 of the QSTA are present, the particular commercial terms set out in the contract will, therefore, not have any impact.
This decision sheds light on the potentially limited usefulness of commercial terms from a QST standpoint. These commercial terms must be interpreted and applied as additional information, as the case may be, and not on a priority basis or contrary to the provisions of the QSTA, which constitute particular mandatory provisions with which a taxpayer must comply.
Lastly, it is important to note that the outcome would be quite another matter where a taxpayer did not reside in Québec, was not registered for QST and was not required to register because he or she does not carry on a business in Québec (even if he or she has activities there). Indeed, pursuant to section 23 of the QSTA, the supply of a movable property or service made in Québec by such non-resident taxpayer is deemed made outside Québec for QST purposes. In the present case, given that Techtronic was registered for QST purposes, section 23 of the QSTA could not apply.