Goods and Services Tax / Harmonized Sales Tax
Many imported goods are subject to import taxes such as GST which is levied on many imported goods pursuant to the Excise Tax Act at the rate of 5%. Many non-resident importers seem to have trouble with import taxes. A short outline of some of the key issues is set out below.
In Canada, many provinces have harmonized their sales tax rules with the GST and impose HST at rates varying from 13% to 15%. A person who is registered for GST/HST may claim an input tax credit (“ITC”) to recover GST/HST in many cases. A person must obtain a business number in order to register for the GST/HST. GST/HST paid or payable on purchases, importations and operations related to the consumption, use or supply in commercial activities may be recovered as an ITC.
Two divisions of the Excise Tax Act establish tax points relevant to non-resident importers of goods. Confusion about the two tax points seems to be one of the biggest issues for non-resident importers.
Division II of the Excise Tax Act provides for the imposition of GST/HST on the domestic supply of goods, referred to as taxable supplies made in Canada (“Domestic Supply GST/HST”). Generally, Domestic Supply GST/HST is imposed on the domestic supply of goods made in Canada by GST/HST registrants including registered non-resident importers. The Excise Tax Act sets out rules providing for when and whether Domestic Supply GST/HST should be imposed.
Division III of the Excise Tax Act provides for the imposition of GST/HST on imported goods (“Import GST/HST”). Import GST/HST is paid and collected under the Customs Act and interest and penalties are imposed, calculated, paid and collected as if they were a customs duty levied on goods under the Customs Tariff and the Customs Act.
A full discussion of Canada’s import tax provisions is beyond the scope of this article. Suffice to say that there are several GST recovery traps for non-resident importers. For example, non-resident importers should be aware of a rather complex deemed or “constructive importer” provision, namely, section 178.8 of the Excise Tax Act. The object of this provision is to provide for the determination of whether a supplier or recipient is entitled to claim an ITC. In general, it applies when the supplier: (1) supplies goods to the recipient outside of Canada; (2) agrees to act as the importer; and (3) pays Import GST on the goods at the time of importation.
In such case, the recipient of the supply which was made outside of Canada is deemed to be the importer (that is, the constructive importer). Only the recipient of the supply is entitled to claim an ITC on account of Import GST paid at the time of importation. The constructive importer rule is in harmony with the position of the Canada Revenue Agency that where the place of supply is outside of Canada, and the supplier is the importer, the supplier is not the user or consumer of the goods and is not importing them in the course of commercial activities. As such, it should not be entitled to an ITC.
One potential solution to this issue is as follows. A recipient (constructive importer) can claim the ITC if the supplier provides it with the import documents under subsection 178(2) of the Excise Tax Act. An election is available under subsection 178.8(3) and a supplier who is registered for GST can, in many cases, elect to have goods deemed to be delivered in Canada. After making this election, the supplier may claim an ITC for Import GST/HST, if it collects the Domestic Supply GST/HST from the recipient.
However, an election may not be a preferred option except in the case of related party transactions. Recall that under the election process, a supplier must provide the recipient with import documents. This is something that an importer may want to avoid especially if those documents refer to the supply price of goods (revealing the profit margin that the supplier stands to gain on the sale of the goods). Further, it may be cumbersome to provide the import documents and risky to rely upon the recipient to refund the ITC.
If a non-resident importer contracts to supply goods outside of Canada, another course of action is to ensure that the recipient in Canada imports them. In such case, the recipient is liable to declare the goods and pay the Import GST. Although, if it is registered for GST/HST, the recipient may claim an ITC on account of the Import GST/HST.
This article has outlined some issues that non-resident importers may need to address when planning to import goods into Canada. With the right knowledge and advice, non-resident importers can avoid major pitfalls, may recover Import GST/HST, and avoid unnecessary business costs.
Read Part I of this series here.