It is common knowledge that GST is payable on goods coming into Canada from outside the country. However, depending on the delivery terms of those goods, GST/HST could also be billed by the supplier when the goods are invoiced. This is dependant on the delivery terms, or Incoterms agreed. This means that depending on whoever acts as the importer of record for the goods when they cross the border, a purchaser could end up paying GST twice on the same goods.
Let’s go back to basics
In general, GST/HST applies to the “supply” of goods in Canada. The Excise Tax Act (ETA) considers goods to be supplied in Canada if delivered or “made available” in Canada. This means that the goods may not need to be delivered to a purchaser in Canada to be taxable in Canada.
By this definition, it is possible that goods being imported into Canada could result in GST being owed twice in respect of the same transaction depending on the seller’s obligations and the purchaser under the agreement.
How do you end up paying twice?
GST payable on commercial goods crossing the border is administered under the Customs Act (CA). The CA requires that levies imposed under the Excise Tax Act, among other acts are payable on goods at the time of importation. The tax is payable by the Importer of Record. This could be anyone – the purchaser, the seller, their representatives, or a third party.
Depending on the agreement between the parties, GST/HST could also apply to the purchase of the goods, notwithstanding the purchaser imported the goods. Whether GST/HST applies to the sale or purchase of the goods may depend on:
- Where the purchaser takes ownership or possession of the goods.
- Where the goods are made available to the purchaser.
- The terms of the purchase and sale (i.e., the Incoterms.
- Where the purchaser takes delivery of the goods.
Here is an example
Consider an American supplier that agrees to sell goods to a Canadian company. The Agreement of Purchase and Sale is concluded outside Canada. The purchasing system defaulted to completing the Incoterms on each purchase order as “Carriage paid to” (CPT) as most of the Canadian company’s purchases were made from Canadian suppliers. The purchaser decided to act as the importer of record of the goods. The American supplier is registered to collect GST/HST.
Under these circumstances, the purchaser will pay 5% GST on the value of the goods imported into Canada. However, since the terms of delivery of the goods were described as CPT, it seemed the goods would be made available in Canada. Since the supplier is registered for GST/HST purposes, the supplier would be obligated to charge HST on their invoice to the purchaser. While this tax may be recoverable, it involves paying GST twice in respect of a single transaction. Both taxes would be properly payable under these circumstances and could significantly affect cash flow.
How you can avoid this
Canada Revenue Agency auditors will look at Incoterms to determine whether a supply of goods can be considered as “made available” in Canada and, therefore, subject to GST/HST. The International Chamber of Commerce established Incoterms to provide a standard set of definitions or clarify each party’s obligations under a contract for the international shipment of goods. These Incoterms were never intended to have a tax purpose. However, proving the place of supply of goods to an auditor could be difficult without other documentation.
The double taxation in the example above could have been avoided if the American supplier had acted as the importer. A crucial part is being clear on the terms of delivery in the Agreement of Purchase and Sale.
Careful consideration should be given to the implications of the agreed Incoterms from a tax perspective. Businesses should also determine whether their purchasing system creates a defaulted Incoterm on their documentation. Any default settings should be turned off.
It may take a little longer to finalize an agreement when the delivery terms and obligations need to be clearly articulated. However, in doing so, the potential for double taxation can be entirely negated.
B. Hoffmann & Associates (BHA) are tax accountants that help medium and large corporations minimize the Canadian indirect tax they pay on an ongoing, consistent, and supported basis. They love the stories in an organization that, when put together, become the business.