The long arm of the Canadian Goods and Services Tax.

Although Canada is the closest and largest commercial trader with the U.S., constant vigilance of cross-border business is critical to avoid surprises. Consider the recent Canadian case of Adv Ltd. v. The Queen.

A U.S. company carried on a mail order business in New York. Canadian business was solicited through direct mail and advertisements in Canadian magazines. Customers placed their orders via mail to an Ontario address. An independent company picked up the orders for delivery to the New York facility.

The issue was the applicability of the Canadian Goods and Services Tax (GST). It should be noted that this company's Canadian activities were insufficient to give rise to a Canadian permanent establishment for Canadian income tax purposes by virtue of the U.S.-Canada income tax treaty. The GST, however, is purely Canadian-domestic and not governed by the treaty. Furthermore, the creation of a Canadian nexus for Canadian GST purposes involves a much lower threshold.

The Canadian GST is imposed on every recipient of a taxable supply made in Canada, based on the value of the consideration of the supply. The vendor of the goods is required to collect the GST and remit it to the government. A GST taxable supply is made in Canada if the goods are delivered or made available in Canada to the recipient of the supply. If delivered outside Canada, the supply is outside the GST tax net. Thus, the US. taxpayer in question had to face the simple issue of where the supply occurred.

The U.S. taxpayers claimed that, on receipt of an order, delivery occurred in New York (outside GST net), since a common carrier picked up the goods at that location. The court disagreed and found that the common carrier was not acting on behalf of the buyer. All of the shipping documents clearly indicated that risk of loss was on the seller.

The taxpayer also argued the buyer took delivery in the U.S. based on customs documentation. On each document there was a cargo control number, exporter name, importer name, number of packages, description of goods, weight of the package and value. The court disagreed and found these customs formalities not to be relevant.

The taxpayer also argued that the purchaser was billed for shipping and insurance in transit. Again the court disagreed and found this to be simply part of the price of the goods. Thus, these transactions were found to be within the GST net.

All U.S.-based mail order firms should review this case if selling into Canada.

From Bill Zink, CPA, Chicago, Ill.