Conditions for Zero-rating
Expressed in language everyone understands, a sales representative service is zero-rated where it is provided to client outside and relates to a sale made by that client outside . For many, that is all that needs to be known. However, tax provisions are expressed in much more precise and legalistic language and, whether tax does or does not apply to a service can hinge on the nuances of that legalistic language. For this reason, the technical language of the tax provision will be used in explaining the details of the conditions necessary for zero-rating.
1. Supply to a non-resident
The first condition is that the service must be supplied to a non-resident client. Whether a client is or is not a resident of is a matter that is not determined by their mailing address. It is determined by examining a whole host of facts and applying long-established legal principles. Thankfully, for purposes of this provision, the CRA does not require the supplier to prove that its client is a non-resident. What the CRA does require is that the supplier provides evidence that its client is a non-resident and, for this purpose, will accept a written declaration by the client saying that the client is a non-resident
Secondly, the service rendered has to be that of “arranging for, procuring or soliciting orders for supplies made … by…” the non-resident. Typically, the principal activity of a sales representative should come within the scope of arranging for, procuring or soliciting orders for supplies made by its client.
Nevertheless, it is very common for a sales representative to undertake activities which, when viewed in isolation, are not arranging for, procuring or soliciting orders in the strict sense. Examples would include the provision of after sales support, storage or logistics services, and the collection of receivables. If such “extra” services are provided in return for the sales or commission, it is reasonable to regard them as part of or incidental to the service of arranging for, procuring or soliciting orders. However, if a separate fee or charge is made for these services, they may not qualify for zero-rating as sales representative services, and may be subject to GST.
3. Supply made to by the client outside
Finally, the service has to relate to supplies made by the non-resident outside . To know if this condition applies, a fairly intimate knowledge of the terms under which the client sells its is required.
In the case of supplies of , supplies are made outside where the are:
- delivered by the supplier of the outside ; or,
- delivered by the supplier of the in where the supplier is a non-resident who is not registered for GST.
Exactly what is necessary to establish that the client delivers outside can vary widely from case-to-case.
Where the product originates outside of Canada and is shipped to a destination outside of Canada, the circumstances will generally dictate that the supplier delivered the product outside of Canada . Where the originates outside of Canada and is shipped to a destination the terms of sale will usually indicate the place of delivery. Ideally, the client’s sales agreements with its customers or customer invoices will specify the delivery location or quote trade terms such as “FOB (Freight on Board) Origin” or “Ex Works” that clearly denote that delivery occurred at the client’s premises outside . In the absence of such indicators, factors such as who imports the , where title transfers and who has the risk of loss while the are in transit may be helpful in determining the delivery point.
Where the client delivers in Canada, the issue can be somewhat problematic because while the CRA will generally accept that a client is a non-resident and not registered for GST based on the client’s written declaration to that effect, the CRA could question whether the client is required to register for GST, and a sales representative is generally not in a position to adequately address that issue.
Understanding and abiding by the provisions that zero-rate sales and purchasing representative services is only part of the struggle. The true test is surviving a challenge by the CRA.
For all its non-resident clients, a sales representative should have on hand copies of the non-resident declarations (as mentioned above) written agreements specifying that the service rendered is that of arranging for, procuring or soliciting orders, and documentation that the service relates to a supply made to by the client outside Canada. If evidence to this effect is missing or insufficient, the CRA will make determinations based on the available evidence and may decide that zero-rating does not apply.
. The appropriate wording and format appears in Appendix A of GST/HST Memoranda 4.5.1 Exports – Determining Residence Status as is the format for a similar declaration that a person is not registered for GST. Each can be found at http://www.cra-arc.gc.ca/E/pub/gm/4-5-1/4-5-1-e.pdf