GST Taxation on Imports and Input Tax Credits
Every person required to pay a duty on importing goods into Canada under the Customs Act or who would be liable to pay a duty if the goods were subject to a duty is required to pay Goods and Services Tax (“GST”) on those goods. A person includes an individual or a corporation.
GST is Canada’s federal value-added tax which is imposed at a rate of 5% of the value of the goods sold. In Ontario and all four maritime provinces, the provincial sales tax has been combined with GST to create Harmonized Sales Tax or HST, HST applies at a rate of 15% in all four maritime provinces, and 13% in Ontario. GST is structured as an end consumer tax. When a person who supplies goods or services to end consumers pays GST in the course of their commercial activities, they will normally be able to deduct input tax credits (“ITCs”), which is GST paid on purchases or inputs, to offset the GST which must be collected and remitted from their customers. For example, Computer Manufacture Inc. paid GST to acquire the parts to build a computer for Susan (or Susan Corporation Inc.), the end consumer. When Computer Manufacture Inc. charges GST on its sale of the computer to Susan, it will offset the amount of that GST it remits to the Canada Revenue Agency (“CRA”) by the amount of GST paid to acquire the computer parts. To affect this offset, Computer Manufacture Inc. will claim ITCs on its GST return for the amount of GST paid on the purchase of the computer parts (as well as GST paid on other inputs such as electricity or rent).
Similarly, an ITC can be claimed on the GST paid on imported goods. Only one person can claim this ITC for each good. However, determining who is entitled to claim the ITC for the GST paid on importation of goods can be a complicated issue dependent on the circumstances and may require expert advice from a GST lawyer. The general rule, per subsection 169(1) of the Excise Tax Act, is that a GST registrant is entitled to claim an ITC for the GST paid on importation of goods if that registrant imported the goods for their own consumption, use or supply in the course of the registrant’s commercial activities. This registrant is known as the “de facto” importer. Relevant factors for determining who is the de facto importer includes the place of supply of the goods.
Section 178.8 of the Excise Tax Act is intended to deal with business arrangements where a person is the recipient of a supply of goods made outside of Canada and imported into Canada for the person’s consumption, use or supply where the physical importation is effected by and accounted for by another party. The person in these circumstances is known as a “Constructive Importer”. The other party is referred to as the supplier.
Subsection 178.8(2) is intended to ensure the Constructive Importer can claim the ITC on the GST paid on import even though the Constructive Importer did not physically effect the importation of the goods and/or account for the import of the goods. The Constructive Importer will need to obtain copies of import documentation from the supplier in order to claim the ITCs. The supplier is not entitled to claim the ITC on the GST paid on import, subject to the election exception discussed later in this article, because the supplier – despite handling the physical importing of goods – is not importing the goods for its own consumption, use or supply.
GST532 Agreement and Revocation of an Agreement Between Supplier and Constructive Importer
The Constructive Importer and supplier may jointly elect to allow the supplier to claim the ITC on the GST paid on import. If the Constructive Importer and supplier so elect, the taxable supply of goods is then deemed to have occurred in Canada. The supplier must collect GST on its supply of goods to the Constructive Importer, but can claim an ITC on the GST paid on import. The Constructive Importer can no longer claim an ITC on the GST paid on import, but instead can claim an ITC on GST paid to the supplier.
The election is made or revoked using form GST532. The election can be made for single or multiple transactions, for supplies during a specified period or an ongoing basis. The election can be made at any time. The election does not need to be filed with CRA, but both the supplier and Constructive Importer must keep a completed copy of the GST532 form for at least six years after the end of the year to which the agreement applies. Both parties are required to sign the completed form.
If the election is made after the supply of goods occurs, the supplier becomes retroactively entitled to claim the ITC and liable to collect the GST as described above. If the supplier already claimed the ITC and collected the GST as would have been required had the election been made at the time of the supply, there will be no penalties or interest. The constructive importer can no longer claim the ITC for the tax paid on the import of goods. If the constructive importer has already claimed the ITC, the limitation period for assessing or reassessing the net tax of the constructive importer is extended to be four years after the election is made.
Pro Tax Tips: Import Documents are Relevant Evidence
Those engaging in importation and paying the related GST should ensure they retain all necessary copies of import documents. In the event of a CRA tax audit, these documents will be important evidence in determining which party was properly entitled to claim the ITC for the GST paid upon importation of goods. GST rules for importation are complex of goods and usually require expert advice from a Canadian GST/HST lawyer. Though not within the scope of this article, there are other pertinent rules such as Section 180 of the Income Tax Act which is a flow-through rule allowing a GST registrant in certain circumstances to claim the ITC on the GST paid on importation of goods where the importer paying the GST on import is a non-resident and not registered. To better understand the applicable GST rules for importation, or assistance with a tax audit, contact our experienced Canadian tax lawyers.