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In-Port DAP Sales Taxable in Canada?

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A common misconception when it comes to oil and gas trading with Canada is that, for GST/HST purposes, there will never be any obligations on foreign sellers selling on a DAP basis.* This is not true, and there can indeed by GST/HST collection and remittance obligations on US and international sellers, if certain conditions are met.

To understand why these misconceptions exist, one needs a deeper appreciation of the Canadian GST/HST legislation, found in Part IX of the Excise Tax Act(“ETA”), and also to get deep into the mindset of the Canada Revenue Agency (“CRA”), which administers the ETA and enforces GST/HST compliance.

Legislative Background

The first thing to understand is that the Canadian GST/HST system generally operates in three distinct ways, under Divisions II, III and IV of the ETA.   US and International Traders will generally be concerned with the two former Divisions.

Division II GST/HST is applied on all supplies made “in Canada”, and the total tax burden varies by the province in which the supply is made (and can range from 5% to 15%).

Division III GST is a 5% tax that applies on every commercial good imported to Canada.

This is where the misunderstanding presents itself, because it is possible to avoid any obligation for Division III GST through structuring a transaction DAP “port” (e.g., because the purchaser under these Incoterms takes on the responsibility for all import formalities, and will generally account for the imported goods, paying the applicable duties and Division III GST), BUT that does not guarantee that the Division II GST/HST will not also apply to the same transaction. If fact, depending on how the transaction has been structured (and the nature of the parties), one often sees BOTH Division II and Division III taxes applying.

CRA Administrative Policy

Complicating matters, the CRA has recently been auditing and assessing US and international petroleum companies on this very issue, applying quite restrictive interpretations to sections arguably meant to alleviate a transaction like an “in-port DAP” sale from the application of both taxes – e.g., see section 144of the ETA – and these complicated issues are currently being litigated in the Tax Court of Canada.

These issues generally affect US and international fuel traders that that are GST registered or who carry on business in Canada, and will either required re-structuring of contemplated transactions, or the charging and collection of Division II GST/HST.

These issues often require specialized indirect tax advice!

*“Delivered at Place”, per Incoterms 2020. Note that similar misconceptions exist under similar past Incoterms, specifically where the customs formalities lie with the Buyer (e.g., DAT, DES, DDU, etc.).

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