From the Editor's Pen is a monthly feature focusing on current issues in commodity taxation, edited by Michael Firth of PricewaterhouseCoopers LLP, Brent F. Murray of Wilson & Partners LLP, and Sheila Wisner of CCH Canadian Limited. This article first appeared in CCH’s Canadian GST Monitor No. 251 dated August 2009.

With the July 23 announcement of British Columbia's impending harmonization in 2010, Canada will have harmonization on the east and west coasts as well as in central Canada, with non-participating provinces in between. Details of British Columbia's announcement are summarized by Brent Murray in this month's "Whats New" column. One significant characteristic is British Columbia's proposed HST rate of 12%, instead of 13% as proposed for Ontario and currently in effect in New Brunswick, Nova Scotia, and Newfoundland and Labrador. Hence, under a harmonized regime, an understanding of the place of supply rules will be critical to businesses which operate nationally. Computer systems will need to recognize that a supply is made in a harmonized regime, and also in which harmonized province that supply is made, to apply the appropriate HST rate.

The HST place of supply rules in the Excise Tax Act ("ETA"), as enacted for the 1997 harmonization of New Brunswick, Nova Scotia, and Newfoundland and Labrador should be reviewed in preparation for Harmonization 2010. It is possible that, after 12 years, amendments to the rules will be proposed as they are studied more closely in anticipation of Harmonization 2010. The brief summary presented here cannot possibly cover all the details of the place of supply rules; it is only a starting point to the many necessary considerations. The term "participating provinces" is used to refer to all provinces that will have harmonized effective July 1, 2010, which as currently announced includes New Brunswick, Nova Scotia, Newfoundland and Labrador, Ontario, and British Columbia.

Under subsections 165(1) and (2) of Division II, only supplies made "in Canada" are subject to GST and HST, respectively. If the supply is made in Canada, one must then determine if it is a zero-rated supply—if it is, no tax is exigible. If it is not a zero-rated supply, and the supply is made in a participating province, tax will be levied at the HST rate for that province; if it is in a non-participating province, tax will be levied at the GST rate.

Section 144.1 supplements the Canadian place of supply rules with provincial place of supply rules, by reference to Schedule IX to the ETA. This section also clarifies that a supply made in Canada that is not made in any participating province is deemed to be made in a non-participating province.

Tangible Personal Property

Section 1 of Part II of Schedule IX provides that a supply of tangible personal property ("TPP") is made in a participating province if the supplier delivers or makes the TPP available in the participating province to the recipient of the supply. The location of the supplier is irrelevant—the critical connection is where the goods are delivered or made available to the recipient pursuant to paragraph 3(b) of Part II. TPP is deemed to be delivered in a particular province if the supplier sends the property by mail or courier to an address in the province.

Paragraph 3(a) of Part II deems property to be delivered in a particular province where the supplier ships the property to a destination in the province, or transfers possession of the property to a common carrier retained on behalf of the recipient to ship the property to that particular province. The first rule applies to a situation where goods are delivered to the recipient by the supplier using its own vehicle or by hiring (on its own account) a common carrier to do so. The second rule applies to a situation where the supplier retains a common carrier or consignee on behalf of the recipient to ship the TPP to a participating province. The key issue in applying this rule is whether the vendor retains the common carrier on behalf of the recipient. If the recipient itself retains the carrier without the involvement of the vendor, then the supply would be made in the province where the carrier took possession of the TPP.

Paragraph 136.1(1)(a) of the ETA provides that where a supply of property is made by way of lease or licence or similar arrangement, a separate supply of the property is made for each "lease interval". As a result, the place of supply must be determined for each lease period, and may change during the life of the lease. The general rule, which applies to all TPP other than specified motor vehicles, is that a lease of TPP will be supplied in a participating province if the "ordinary location" of the property at the beginning of the lease interval is in the participating province. This rule is derived from section 136.1 and paragraph 2(a) of Part II of Schedule IX. Paragraph 2(b) contains place of supply rules where TPP (other than a specified motor vehicle) is leased for a period longer than three months, such that the place of supply is in the province in which the property is ordinarily located at the time the supply is made.

For specified motor vehicles that are supplied by way of lease, licence, or similar arrangement for a period of more than three months, the supply is regarded as being made in the province in which the vehicle is required to be registered under the appropriate provincial motor vehicle registration laws at the time the supply is made.

Services

Generally, a service is considered to be supplied in a province if all or substantially all of the Canadian element of the service is performed in that province. If a service is performed in a participating province, it will be taxed at the applicable HST rate; if performed in a non-participating province it will be taxed at only the GST rate. Paragraph 2(b) and section 3 of Part V of Schedule IX contain the place of supply rules respecting services that are performed in more than one location. The intention of the rules is to tax the service in the province where the supplier is located, provided at least a minimal amount of the service is performed in that province. The place of supply will be the province hosting the business establishment of the supplier from which the supply agreement was negotiated. This is subject to an anti-avoidance rule where only a small portion of the services are performed in that province.

Schedule IX contains special place of supply rules for certain interprovincial services. Section 5 of Part VI of Schedule IX provides that a supply of a freight transportation service will be deemed to be made in a province if the destination is in that province. Section 2 of Part VI of Schedule IX provides that the supply of a passenger transportation service that is part of a continuous journey taken within Canada will be regarded as supplied in a participating province if the origin of the continuous journey is in that province. Section 2 of Part VIII of Schedule IX addresses telecommunication services (other than a service of granting sole access to a telecommunication channel). A supply is considered to be made in a province if the telecommunication is:

• both emitted and received in that province;

• either emitted or received in that province, and the billing location for the service is located in that province; or

• emitted in the province and received outside the province, and the billing location for the service is not in a province where the telecommunication is emitted or received.

Intangibles

The place of supply rules for intangible personal property ("IPP") are contained in Part III of Schedule IX, and are essentially the same as the rules for services. If the IPP can only be used in a participating province, then it is taxed at the appropriate HST rate; if it can be used in more than one province, then one looks to where the supplier is located in order to determine the place of supply. Specifically, section 2 of Part III of Schedule IX deems a supply of IPP to be made in a particular province if the IPP:

• relates to real property, and all or substantially all of the real property situated in Canada is situated in the particular province;

• relates to TPP, and all or substantially all of the TPP that is ordinarily located in Canada is located in the particular province;

• relates to services, and all or substantially all of the services to be performed in Canada are to be performed in the particular province; or

• does not relate to any of the above, and all or substantially all of the Canadian rights in respect of the property can only be used in the particular province.

Section 2 of Part III of Schedule IX provides that if the IPP relates to real property, TPP, or services that are situated or performed in more than one province, then the supply will be subject to the applicable HST rate if the place of negotiation of the supply is in a participating province. If the IPP does not relate to real property, TPP, or services and the rights can be used in more than one province, then the supply will be subject to HST if the place of negotiation of the supply is in that participating province. The supply of IPP rights exercisable in more than one province will not be subject to HST if the place of negotiation is in a non-participating province or is outside of Canada (subject to anti-avoidance rules).

Real Property

Section 1 of Part IV of Schedule IX provides that a supply of real property is made in a province if the property is situated in the province. If the real property is situated partly in a participating province and partly in a non-participating province or outside Canada, the provision of each part of the property is deemed to be a separate supply, for separate consideration equal to the portion of the total consideration which is attributable to each part.

Readers may also refer to Technical Bulletin B-078—Place of Supply Rules under the HST, "Harmonization 2010 Part II—The Transition" in Canadian GST Monitor #250 (July 2009), and Steven K. D'Arcy's article "Ontario Becomes a Participating Province" in Canadian GST Monitor #247 (April 2009). It is emphasized that the author by no means suggests that the rules described herein will necessarily be the rules finally enacted in respect of Harmonization 2010, but instead writes this article as a review of the fundamental place of supply rules as they currently exist in the Excise Tax Act.