Interpretation of Commercial Service

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-151

Date of Issue

June 15, 1994

Subject

The establishment of criteria for interpreting the words "commercial service" for the purposes of claiming an input tax credit (ITC)

Legislative Reference(s)

Subsections 123(1) - Definition of commercial service and 169(2) of the Excise Tax Act

National Coding System File Number(s)

11645-3, 11735-14.

Effective Date

January 1, 1991

Text

Issue and Decision:

Where goods are imported by a registered non-resident person for purposes of having a "commercial service" performed on the goods, the goods would generally be considered as for use, consumption or supply in the course of the registered non-resident's commercial activities. In such circumstances the registered non-resident would be entitled to claim an ITC for the tax payable under Division III to the extent the goods are for use, consumption or supply in the course of the person's commercial activities pursuant to subsection 169(1) of the Act.

In contrast, where a registrant imports goods of an unregistered non-resident person for the purposes of providing a taxable supply of a commercial service to the non-resident person in respect of the goods, the registrant will be entitled to an ITC for the tax payable on the importation of the goods pursuant to the special rules provided under subsection 169(2) of the Act.

Subsection 123(1) of the Act defines "commercial service" as a service in respect of tangible personal property other than a service of shipping supplied by a carrier and a financial service.  The current definition of "commercial service" does not enumerate the various types of services included in the term, in contrast to the definition preceding the amendment. It is therefore necessary to establish guidelines in order to interpret subsection 169(2) of the Act. More specifically, in order to determine the ITC entitlement under subsection 169(2) of the Act it is necessary to determine the requisite degree of relationship between a commercial service and an imported good.

The following services will be considered by the Department as "commercial services" in respect of imported goods: performing a manufacturing, production or processing operation on the property; assembling, blending, mixing, cutting to size, diluting, bottling, packaging or repackaging the property or applying coatings or finishes to the property; inspecting, testing, evaluating, repairing or maintaining the property; or recording or storing instructions or data on the property in such manner and form that the instructions or data can be read by data processing equipment. These are the same services that were enumerated in the former definition of "processing service".

In addition to the previously enumerated examples there may be other types of services which could be considered as a "commercial service", where it can be stated that a "functional" relationship exists between the service and the property. A functional relationship will be considered to exist between the service and the property where the purpose of the service arises from or relates to the property itself.

Second, it will be necessary to determine if the functional relationship between the service and the property is more direct than indirect in the circumstances. Whether the relationship between the service and the property is more direct than indirect must be determined based on the particular circumstances of the case.

SAMPLE RULING #1

Statement of Facts

1. WheelCo is a non-resident, non-registrant wheel manufacturer.  ChromeCo, a resident, registered corporation, supplies the service of chrome plating wheels.

2. WheelCo contracts with ChromeCo for ChromeCo to chrome plate WheelCo's wheels.

3. ChromeCo imports the wheels for chrome plating pursuant to the contract with WheelCo and pays the Division III tax at the time of importation.

4. WheelCo retains ownership of the wheels.

Ruling Requested

Is ChromeCo entitled to claim an ITC for the Division III tax pursuant to subsection 169(2) of the Act?

Ruling Given

Yes. Pursuant to subsection 169(2) of the Act, ChromeCo is entitled to claim an ITC as Division III tax was paid by ChromeCo upon importation of the wheels for the purpose of supplying a "commercial service" to a non-resident non-registrant.

Rationale

"Commercial service" is defined as any service in respect of tangible personal property other than (a) a service of shipping the property supplied by a carrier, and (b) a financial service".

The wheels that were imported are not for use, consumption or supply in the course of ChromeCo's commercial activity, however, the process of chrome plating wheels is directly related to the wheels. Therefore, the chrome plating is considered to be a service in respect of tangible personal property (wheels) and is a "commercial service" for purposes of subsection 169(2) of the Act.

SAMPLE RULING #2

Statement of Facts

1. ManufacCo is a non-resident, non-registrant, supplier of construction equipment.

2. CustomerCo has purchased construction equipment from ManufacCo.

3. ImportCo, a resident registrant, supplies to ManufacCo the administrative services necessary to clear the goods for Customs purposes and to complete the delivery to CustomerCo.

4. In order to facilitate the importation of the construction equipment, ImportCo is the documented importer of record for Customs purposes and pays the Division III tax on the goods.

Ruling Requested

Is ImportCo entitled to claim an ITC for the Division III tax pursuant to subsection 169(2) of the Act?

Ruling Given

No. Pursuant to subsection 169(2) of the Act, ImportCo is not entitled to claim an ITC as tax was not paid by ImportCo for the purpose of supplying a "commercial service" to a non-resident non-registrant.

Rationale

"Commercial service" is defined as any service in respect of tangible personal property other than (a) a service of shipping the property supplied by a carrier, and (b) a financial service".

A direct relationship would not be considered to exist between the administrative services provided by ImportCo and the construction equipment. The construction equipment would not be considered to be for use, consumption or supply in the course of ImportCo commercial activities.

The object of ImportCo's services supplied to ManufacCo is to provide Customs clearance services to facilitate the importation of goods. As a result, the service provided by ImportCo would not be considered as a "commercial service" for purposes of claiming ITCs pursuant to subsection 169(2).

SAMPLE RULING #3

Statement of Facts

1. CatalogCo is a non-resident, non-registrant. WrapCo is a Canadian resident registered for the GST.

2. CatalogCo contracts with WrapCo to package their catalogues and send them to Canadian residents.

3. WrapCo imports the catalogues and pays the Division III tax on the goods.

Ruling Requested

Is WrapCo entitled to claim an ITC for the Division III tax pursuant to subsection 169(2) of the Act?

Ruling Given

Yes. Pursuant to subsection 169(2) of the Act, WrapCo is entitled to claim an ITC as tax was paid by WrapCo for the purpose of supplying a "commercial service" to a non-resident non-registrant.

Rationale

"Commercial service" is defined as any service in respect of tangible personal property other than (a) a service of shipping the property supplied by a carrier, and (b) a financial service".

A functional relationship would be considered to exist between the packaging service and the catalogues.

The placing of catalogues in envelopes and the sending of catalogues is for a purpose arising from or relating to the catalogues.

The placing of catalogues in envelopes and the sending of catalogues is directly connected to the catalogs. Therefore, WrapCo's services would be considered to be a service in respect of tangible personal property (catalogues) and is a "commercial service" for purposes of subsection 169(2) of the Act.