Under the Excise Tax Act (“ETA”) a supplier who sells goods within Canada must collect GST/HST on the taxable supply. The supplier must then remit the net tax to the government.
However, where the Canadian supplier sells a good to a recipient outside of Canada, the recipient is not liable to pay GST; therefore the supplier is not obliged to collect it. Under the ETA, goods sold outside of Canada are not subject to taxes and are “zero-rated”. Zero-rated supplies are taxable at the rate of 0% under Canadian tax systems.
Some examples of zero-rated supplies include the following:
- sales of certain prescription drugs;
- sales of certain medical devices;
- sales of basic groceries;
- sales of certain property used in the farming and fishing sectors;
- sales of certain goods that are marketed exclusively for feminine hygiene purposes; and
- sales of certain goods or services exported outside Canada.
A recent Tax Court of Canada decision examined the requirements for zero-rated exports under the ETA and the criteria used to determine the place of delivery.
The taxpayer sold luxury jewellery and watches at its three retail locations in Vancouver, British Columbia to Canadian and non-resident retail customers.
Most of its loyal clientele were members of the Chinese community who lived in and around Vancouver and had businesses and/or family ties in China. Some of these customers purchased and paid for jewellery and/or watches at one of the locations and the jeweller retained physical possession of the goods until the day the customer was to depart from Canada by air to China. Several of the customers asked for a tax exemption because they considered the goods to be exports outside of Canada and the jeweller accommodated their requests by treating the goods as zero-rated and not charging taxes on the goods.
The jeweller’s customs broker’s solution was to obtain a stamped form, as part of a procedure, to serve as proof of export that the goods left Canada tax free. The procedure was only engaged at the customer’s request and if the customer was also flying from Canada. Where a customer insisted on taking possession of goods after purchasing in-store, GST was charged even if they were departing from Canada.
As part of this process, once a customer obtained a boarding pass, a senior sales employee of the jeweller went to the Vancouver International Airport with a partially completed customs form and the goods to meet the customer before they proceeded to the customs office. After it had been approved by a customs officer, the customer obtained the jewellery either before or after the security gate.
However, the Canadian government determined that the goods sold were “delivered or made available in Canada” pursuant to paragraph 142(1)(a) of the ETA and were not zero-rated supplies pursuant to section 12 of Part V of Schedule VI of the ETA.Consequently, a reassessment in the amount of $2,298,898 was issued for a failure to charge, collect and remit GST/HST for the goods.
The jeweller appealed the reassessment.
The jeweller argued that the term “ships” in paragraph 12(a) of the ETA should be given a broad interpretation to mean to send, or cause to be sent, goods by any means. It claimed that the goods were caused to be sent to destinations outside Canada, shipped by air, transported with the customer and their personal baggage and effects to their destinations and that, since the goods left on the flight with the customer, they were shipped to a destination outside Canada.
The court set out the legislative scheme underlying zero-rated goods in Canada:
“Zero-rated supplies are set out in Schedule VI. Section 12 of Part V of Schedule VI zero rates from taxation a supply of tangible personal property where the supplier either ships such property specified in the contract for carriage, or sends it by mail or courier, to a destination outside Canada, or transfers possession of it to a common carrier or consignee retained, by either the supplier on behalf of the recipient or by the recipient’s employer, to ship it outside Canada. If these conditions are met, under subsection 165(3) the tax rate of a “zero-rated supply, a taxable supply, is 0%.”
At issue was whether the goods were “shipped” under the ETA and therefore zero-rated and whether the goods sold to customers were delivered or made available to them in or outside Canada.
The court adopted a narrow construction of the ETA and concluded that “[a]s no third party carrier was engaged under a contract for carriage, [the jeweller] did not ship the Jewellery within the meaning of paragraph 12(a).”
Additionally, the court found that “there was a full voluntary transfer of possession, without restriction, when supplies of Jewellery were physically handed to Customers who accepted possession of the Jewellery. As such, the supplies were “delivered or made available in Canada”.”
As a result, the court concluded that the jewellery sales were taxable supplies deemed to be made in Canada and were not zero-rated supplies; therefore the jeweller was required to collect and remit GST/HST under the ETA.
If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.