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Claiming Input Tax Credits on GST Paid at the Border

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Whenever a person imports commercial goods into Canada they are required to pay the GST at the border at the time of importation pursuant to Division III of Part IX of the Excise Tax Act (the “ETA”).   This GST rate is currently set at 5%. 

Those who are insufficiently familiar with Canada’s GST/HST system may find themselves treating this tax as a hard cost, or charging the GST/HST to Canadian customers and then keeping it as a form of reimbursement for the tax previously paid at the border.  Neither approach is correct.  

 Generally speaking, a GST/HST registrant who imports goods for consumption, use or supply in the course of their commercial activities should be entitled to Input Tax Credits (ITCs) for the GST paid on importation.  These ITCs are claimed in the registrant’s GST/HST returns and offset the GST/HST collected from the registrant’s customers in the ordinary course of their business.

In order to successfully claim ITCs for the GST paid on importation, however, it is critical to pay attention to the rules, and ensure that you have appropriate supporting customs import documentation in the event of a CRA review or audit. 

The person who causes the goods to be imported is called the “de facto importer”.  Typically this is a GST/HST registrant who purchases goods abroad for import into Canada.  Under the default rules the de facto importer is the only person entitled to claim ITCs in respect of the GST paid on importation. 

Where the Importer of Record on Canadian customs documentation is someone other than the de facto importer (e.g. a related party), it is highly likely that ITCs claimed by the de facto importer will be denied. 

While we occasionally see situations where the Importer of Record claims ITCs for the GST paid on the importation, the CRA will generally reassess the Importer of Record to deny the ITCs in such a situation because only the de facto importer is entitled to claim the ITCs under the default rules.

While the CRA introduced section 178.8 to try and ensure that de facto importers (referred to in this section as Constructive Importers) would receive the ITCs they are entitled to, the wording of the section may not result in the clarity the CRA intended. 

In section 178.8 the CRA has also introduced a mechanism allowing a Constructive Importer and a supplier to enter into an agreement to allow the supplier to claim the ITCs for the GST payable on importation, and to collect GST/HST on the supply of the goods to the Constructive Importer.  The CRA has provided Form GST 532 as a recommended form for such an agreement, but a similar written agreement should suffice. 

The CRA has written at length on these, and other related rules, in GST/HST Policy Statement P-125R which includes 25 examples and 134 footnotes!  Registrants may find the examples informative, however caution should be exercised when relying on CRA examples, particularly if the facts are not a 100% match for your fact situation. 

Unfortunately, claiming ITCs on GST paid at the border is an area where many importers fail to turn their mind to the rules until the CRA Auditor is on their doorstep.  This can lead to costly and time-consuming disputes with the CRA auditor, and may require the filing of a Notice of Objection, or a Notice of Appeal to the Tax Court, depending on how the situation unfolds. 

We recommend all importers be proactive, and contact a tax professional to review your current importation procedures to ensure that the GST component is functioning in compliance with the legislative requirements as it should be.  

If you need assistance claiming ITCs for GST paid on importation contact us!

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