One of the most common GST/HST compliance issues relates to the application of the general place of supply rules that determine if the sale of goods is deemed to be made inside or outside Canada when those goods are imported. The obvious implications are that GST/HST will generally apply only to the sale of goods made in Canada.
Those rules generally deem a sale of goods to be made in Canada if the goods are to be delivered or made available in Canada to the customer and, alternatively deem the sale to be made outside Canada if the goods are to be delivered or made available outside Canada .
In this post, we’ll outline how the Incoterms® 2010 (as published by the International Chamber of Commerce, derived from International Commercial Terms) are likely to affect the determination as to where the delivery of the goods take place for GST/HST purposes under the general place of supply rules relating to the sale of goods that are imported into Canada.
A few words about the “Non-Resident Deeming Rule”
The Non-Resident Deeming Rule takes precedence over the general place of supply rules and applies to deem the sale of goods to be made outside Canada for GST/HST purposes. This specific rule applies when the goods supplier is a non-resident of Canada, who is not registered for GST/HST purposes, and who also does not make that sale in Canada in the course of a business carried on by the supplier in Canada.
Typically, a non-resident supplier selling goods to be delivered in Canada who does not carry on any business in Canada will generally not be required to register for GST/HST purposes. The Non-Resident Deeming Rule would deem their sales of goods to be made outside Canada regardless of where the delivery takes place (and therefore also regardless of any Incoterm applicable to the sale), as long as the supplier is not registered for GST/HST purposes at the time of sale .
Canada Revenue Agency (“CRA”) Interpretation
The phrase “delivered or made available” is not defined in the by the Excise Tax Act (“ETA”).
The CRA, who administers the GST/HST, assigns to that phrase the same meaning as that assigned to the concept of “delivery” under the law of the sale of goods as follows :
- “Delivered” refers to those situations where delivery of the goods under the applicable law of the sale of goods is effected by actual delivery.
- “Made available” refers to those situations where delivery of the goods under the applicable law of the sale of goods is effected by constructive delivery (i.e., actual physical possession of the goods is not transferred to the recipient of the supply yet is recognized as having been intended by the parties and as sufficient in law). For example, situations arise where a person sells goods to another person and agrees to hold the goods as bailee for the buyer.
In any given case, it is CRA’s view that the place where the goods are delivered or made available may be determined by reference to the place where the goods are considered to have been delivered, under the law of the sale of goods applicable in that case.
The CRA also states that, generally, the place where the goods are delivered or made available can be determined by reference to the terms of the contract. This is where the use of Incoterms® 2010 is likely to determine where the goods are delivered for GST/HST purposes.
It is important to add that one cannot necessarily always rely on the Incoterms® 2010 to determine the place of “legal” delivery. The use of the Incoterms® 2010 may be subject to restrictions imposed by the sale of goods law applicable to the particular sale. It is conceivable that under certain legal jurisdictions, the use of incoterms or any other contract term may contravene with such law or be restricted by it in making the determination as to where delivery takes place. It may be advisable to seek legal counsel to ensure there is no legal impediment in relying solely on the incoterms or other terms of the contract to determine the place of delivery.
It is also important to point out that the CRA may not automatically rely on the terms of the contracts. The CRA will take into consideration all the relevant facts and if those facts contradict the intended purpose of those terms, the CRA may ignore the terms on the basis that they do not reflect the reality of the transaction.
The use of the Incoterms® 2010 to determine the place of delivery for GST/HST purposes
One of the objectives of the Incoterms® 2010 rules is to determine where and when the seller delivers the goods to the buyer. The Incoterms do not deal with the transfer of ownership of the goods nor with the payment terms. The place where title passes and the terms of payment do not generally determine where legal delivery takes place.
The concept of “delivery” has multiple meanings in trade law and practice, but in the Incoterms® 2010 rules, it is used to indicate where the risk of loss of or damage to goods passes from the seller to the buyer.
The following table summarizes how each Incoterms® 2010 rule determines where the delivery takes place .
| Incoterms® 2010 Rule | Place of Delivery |
| EXW (Ex Works) |
The seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place. This rule applies for any mode or modes of transportation. |
| FAS (Free Alongside Ship) |
The seller delivers the goods when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. This rule is to be used only for sea or inland waterway transport. |
| FCA (Free Carrier) |
The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. This rule is to be used only for sea or inland waterway transport. |
| FOB (Free on Board) |
The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. This rule applies for any mode or modes of transportation. |
|
CFR |
The seller delivers the goods on board the vessel or procures the goods already so delivered. The seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. This rule is to be used only for sea or inland waterway transport. |
|
CPT |
The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between the parties). The seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. This rule applies for any mode or modes of transportation. |
| DAT (Delivered at Terminal) |
The seller delivers the goods when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. This rule applies for any mode or modes of transportation. |
| DAP (Delivered at Place) |
The seller delivers the goods when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. This rule applies for any mode or modes of transportation. |
| DDP (Delivered Duty Paid) |
The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. This rule applies for any mode or modes of transportation. |
How the CRA applies the Incoterms® 2010 for GST/HST purposes
General comments made by the CRA since the implementation of the Incoterms® 2010:
- Generally, the place where legal delivery of the goods occurs may be determined by reference to the delivery terms that the parties have agreed to. If an Incoterm is used in an agreement of sale in accordance with its intended circumstances then generally, subject to any evidence to the contrary, the place where legal delivery of the goods occurs can be determined by reference to the where delivery is considered to occur under that Incoterm.
- Where the trade term FOB is used with a reference to a location that is outside Canada in an agreement for the sale of a good that is sent to the recipient in Canada, legal delivery of the good will generally be considered to occur outside Canada. In such a case, the supply of the good will be deemed to be made outside Canada and the supplier will not be required to collect tax in respect of the supply. Alternatively, where the trade term FOB is used with a reference to a location that is in Canada, legal delivery of the good will generally be considered to occur in Canada, in which case the supply will be deemed to be made in Canada, and therefore generally subject to tax .
In conclusion, the use of Incoterms® 2010 is a key element in helping a GST/HST registered seller determining whether legal delivery of the goods to be imported in Canada are sold in Canada or not for GST/HST purposes.
If you would like any additional guidance regarding the application of the place of supply rules for GST/HST purposes on the sale of goods and the potential impacts to both the seller and the buyer, contact our Indirect Tax practice lead – Frédéric Pansieri.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.
