GST on Imports into Canada
Canada imposes a value-added tax (goods and services tax, or GST) on imports of tangible goods. The “importer of record” (not necessarily the owner of the goods) is liable to pay the GST. GST is normally a “flow-through” from the perspective of the business that manufactures or sells the goods, and is borne by the consumer, subject to numerous exceptions and complications. The reason for this flow-through effect is that a company is often entitled to claim an input tax credit (ITC) to recover the GST that it paid on its inputs to produce or sell the goods.
A non-resident company that imports goods into Canada may face pitfalls, and end up bearing the cost of the GST instead of passing it on to the consumer or the next business in the supply chain. For example, in the case of Visa Jewellery & ThaiSilk Co. v. R., a non-resident company paid GST on jewellery that it imported into Canada to sell at an exhibition. The company claimed a GST rebate on unsold jewellery that was exported back to Thailand. The rebate was denied by the Tax Court of Canada. The better approach would have been to register for GST, in which case an ITC would have been available to offset the GST, without the need to seek GST relief under separate provisions of the Excise Tax Act.
Registering for GST may be mandatory or voluntary. If a non-resident is carrying on business in Canada, registering for GST is mandatory, and failure to register may result in penalties. “Carrying on business in Canada” is a legal term that is described in case law and policy of the Canada Revenue Agency (CRA). The relevant factors and principles set out in the case law and CRA policy are not always consistent. Determining whether a company is carrying on business in Canada requires a detailed, fact-specific analysis.
Non-resident businesses may be tempted to take the position that they are not carrying on business in Canada in order to avoid the administrative burden of the GST regime. This may be a mistake. Apart from potential exposure to the CRA to penalties, registering for GST generally allows a business to claim ITCs, as mentioned above. If registration is not mandatory, a business may register for GST voluntarily if it regularly solicits orders of tangible goods for export to (or delivery in) Canada.
If registration for GST is optional, however, it is not a forgone conclusion that GST registration is the best course of action. If a non-resident company does not have a so-called “permanent establishment” in Canada (as defined for purposes of the Excise Tax Act), it may be required to post security if it seeks to become a GST registrant. The company will be subject to the periodic GST filing and remittance requirements.
Non-resident companies may not be aware that Canada has a “federalist” system of government. Similar to the United States, different provinces in Canada have their own local tax rules. Some provinces that impose a sales tax that is combined with GST (referred to as harmonized sales tax, or HST). In most situations, HST applies to imports of non-commercial goods. Other provinces have a provincial sales tax that is not combined with GST.
Navigating the complexities of the GST/HST system is an exercise that depends on each specific business situation. Non-resident importers should seek professional advice on whether GST registration is mandatory or voluntary, and whether becoming voluntary GST registration produces the optimal outcome.
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 Law 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.
 Specifically, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland.