GST Double Tax Problem on imported goods
In a previous article, GST on Imports into Canada, we discussed the GST registration issues faced by importers that are not resident in Canada. Resident or non-resident importers in the supply chain may believe that their GST issues have been laid to rest simply by registering for GST. However, this is not always the case.
The complexity of the Excise Tax Act (ETA) may leave registrants without access to proper GST rebates or input tax credits (ITCs) in certain situations. Both non-resident vendors and their purchasers should seek advice regarding what steps may be taken to ensure they do not bear an inappropriate GST cost.
GST Problem When Importing Goods from a Registered Non-resident Vendor
A Canadian purchaser who imports goods from a registered non-resident vendor may be subject to a double tax without access to the usual offsetting ITCs. As discussed in a previous article it is often advisable for a non-resident to register for GST to avoid risks of penalties. But, a Canadian resident that does business with a GST-registered non-resident may suffer detrimental effects – at least in the absence of proper planning or advice.
A double tax problem is inherent in the GST legislation. Division III of the ETA requires the “importer of record” to pay 5% GST at the border (or higher, in those provinces that charge a harmonized sales tax). At the same time, Division II of the ETA requires every recipient of a “taxable supply” made in Canada’ to pay a tax on the supply. Generally, tangible property that is delivered or made available in Canada is deemed to be a supply made in Canada, and would typically be subject to a Division II tax. Thus, the vendor is obligated to charge and collect a tax from the purchaser. As a result of this transaction, the Canadian purchaser has paid a double tax on the imported goods.
Is there any GST relief in this situation? In GST/HST Policy Statement P-125R, the Canada Revenue Agency (CRA) has stated that the double GST paid by the importer of record may be fully recoverable, provided that the importer satisfies the ETA’s ‘use in commercial activities’ test. While the CRA’s policy statement is somewhat helpful, the ability to claim double ITCs may still be unsatisfactory to the purchaser, given that the temporary double taxation may put a dent in its cash flow.
Alternatives to Mitigate the GST Cash Flow Problem
One solution to the cash flow problem might be to have the vendor import the goods and pay GST at the border, and claim its own ITCs for the GST it paid. The vendor would then charge the purchaser GST, and the purchaser could claim offsetting ITCs.
Another method used to avoid a double tax on the purchaser is a constructive importer arrangement. In such an arrangement, the registered non-resident vendor sells goods to the Canadian purchaser for delivery outside Canada. Once the goods are delivered outside Canada, the vendor imports the goods into Canada as the importer of record and pays GST at the border. The vendor does not have to charge Canadian purchaser GST under Division II because the supply is made ‘outside of Canada’. However, the vendor may be surprised to find that it is not entitled to claim ITCs for the GST it paid, as a result of the constructive importer rules in the ETA. What options are available to the vendor to regain access to ITCs?
In some scenarios, it may be appropriate for the parties to elect, under subsection 178.8(3) of the ETA, to treat the supply as if it was made in Canada. This approach would shift ITC entitlement for the border tax back to the vendor. However, since the supply is now ‘made in Canada’, the vendor is obligated to charge the purchaser a Division II tax. This election may be undesirable to the purchaser since it would have to pay tax up-front, and attempt to recover it later through ITCs.
Non-resident vendors may also be unwilling to go through the section 178.8 election process. A more palatable arrangement for vendors may be to add a carefully drafted compensation clause in the parties’ purchase agreement, where the purchaser would pay the vendor an amount equal to cover the border tax. Such an agreement would allow the vendor to recoup their GST paid up-front, while enabling the purchaser to claim ITCs against the border tax as the constructive importer. This arrangement would benefit the parties by reducing administrative costs, since only the purchaser would have to go through the process of claiming ITCs.
While the constructive importer solution may be more efficient in many cases, a certain amount of trust is required. Since the Canadian purchaser is going to compensate the non-resident vendor up-front for the GST, it will need to rely on documentation provided by the vendor in order to recover its own GST. This risk can be mitigated with a carefully drafted agreement with the appropriate indemnities. Canadian purchasers involved in such agreements should also secure an undertaking from the vendor to provide sufficient documentary evidence that a border tax has been paid, lest they risk losing their own ITCs.
Importing goods presents a multitude of GST issues. However, with proper advice and structuring, these challenging rules can be navigated to obtain favourable outcomes for both parties to a transaction.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.
ETA subsection 123(1) defines a “taxable supply” as a supply made in the course of a “commercial activity”.
 Section 142 of the ETA.
 Section 143 provides that a non-resident’s supply of property (with exception of real property) or service inside Canada is deemed to be made outside of Canada unless: (a) the supply is made in the course of a business carried on by the non-resident inside Canada, or, (b) the non-resident is already registered for GST purposes. Since the non-resident is registered in this case, section 143 will not be available.
 A registered non-resident vendor’s failure to collect tax may result in tax penalties; see Toyota Tsusho America Inc. v R.,  GSTC 83, 5 GTC 1178.
 See example No. 10 in P-125R.
ETA subsection 169(1) states that the importer may only claim ITCs on imported goods to the extent that the goods are imported for use, consumption or supply in the course of commercial activities of the importer.
 In this case, ETA subsection 178.8(2) would deem the Canadian purchaser to have imported the goods and would assign ITC eligibility to the purchaser.