Agent status for HST - no refund for exporting business?
If you export, or even just resell goods, your claim for HST refund might be denied by the CRA if you appear to make these transactions on behalf of the other party.
It has been a surprise for many exporting businesses, especially those who are the exporting car dealers as well as many other exporters, to find out that
the HST that was paid in Canada on goods which are sent overseas for export, is not refunded by the CRA.
Instead, many of these businesses came under review, as a result of which, it has been declared that these businesses are acting in an Agent capacity,
whereas their overseas customer(s) are the Principal buyer(s). The exporting business is therefore not the primary recipient of the supply (goods) according
to s. 163(1) of the Excise Tax Act (ETA), and the business is not entitled to a refund of GST/HST paid on exported goods. The denied claims quickly add up
to significant amounts putting the otherwise moderately successful business well below break-even. In a competitive market, charging a customer an additional
price to compensate for significant tax loss may not be suitable. Likewise, it may not be possible to request each and every overseas customer to register
a Canadian Tax Account in order to claim the GST/HST refund on exported goods on their own.
This puts the exporting business in a position where it should file the formal Notice of Objection with the CRA. It is important to remember that the appeal
is to be filed within 90 days since the date of the notice of (re)assessment.
In order to be successful with the appeal, it is important to get the right understanding of the laws and regulations used by the auditors in their decision
s. The governing law that deals with the GST/HST is the Excise Tax Act. The Act itself however, does not deal with the Agent vs. Principal issue in a lot of
detail. The only publications that appear to outline the CRA's view of the issue are:
GST/HST Info Sheet - Agents
available in November 2005 revision,
GST/HST Policy Statement P-182R Agency
Revised July 2003,
both are available online.
According to these publications, the key points in determination of Agency/Principal status are:
- Agreement by principal and agent to act in such capacity
- Whether principal is responsible for actions of its agent
- Control exercised by principal
The publications also inform about the opportunity for the taxpayer to request a ruling from the CRA, that will be binding.
The first criteria, as it is mentioned in the publication, does not always provide a clear indication since it depends on the internal agreement between the
parties, and the second criteria appears to be a variation of first. The more objective third criteria that determines the degree of control by the
Principal over the Agent's actions, can be subject of debate with the Agency.
As it is often stated by the auditors, the money advanced to the export business by overseas client(s), allows them to exercise control over exporting
businesses operations. It is claimed that if there were no funds advanced to the Canadian exporting business, it would not engage in purchase transaction on
its own, and not be able to pay the price of the good(s) and the HST.
It follows from the above that in order to prove that the business acts on its own, it would need to show that:
- the purchase transaction is independently conducted and paid for
- the goods are then stocked
- offered to the public
- after that they are sold and money is received
If the money is received at earlier stage, an appropriate explanation should be provided
On the opposite side, if the business is receiving instructions on what goods to purchase, and also has a limited number of customers who advance funds
prior to the time when the purchase by the exporter takes place, it would not appear to act as a Principal.
The question of who exercises control over the actions of the business also depends on many factors that show how the business is conducted in general.
The following criteria can be looked into in order to determine if the exporter is an independent entity or just acting on behalf of its principal:
- own business strategy
- period of operations
- recognized business name
- advertising and online promotional resources
- financial and operational capacity
- number of customers
- details of business contact
- work such as repair or processing performed on the goods before they are exported
- insurance on the inventory
- responsibility for shipping
Regarding the exporting contract it is worth noting that the presence or absence of one does not point to either Agent or Principal capacity of the exporter.
One may speculate however, that the audit may view an absence of the contract as reluctance to disclose the details of the agreement between the parties.
The following is a short resume of the typical correspondence by the audit regarding this issue:
"...it is our understanding from our discussions that ABC Export Canada Inc. sells goods and also purchases goods on behalf of its principals. For goods
purchased on behalf of the principals, we learned that monies are forwarded by the principals prior to the purchase of the goods. This money is used to
purchase the goods. These goods purchased on behalf of the principal are then shipped to the principal using shipping service. You earn a commission for
each item sold which can vary depending on the item purchased for shipping to the principal. Shipments of goods during the review period were not insured
and all risk of losses during shipping, if any occurred, were the concern of the principal. This was because you had received monies in advance to purchase
goods and did not have any responsibilities and obligations other than purchasing and shipping goods to the principal..."
"... Our review has found that you acted as an agent on behalf of your principal. Although all invoices are addressed to ABC Export Canada Inc. and that
ABC Export Canada Inc. appears to be the recipient of the goods, we find that it was your principal that paid for the goods through monies advanced to ABC
Export Canada Inc. prior to vehicle purchase transactions. We find that monies received from the principal acted as a control on its actions in making
purchases and that the principal bore all risk of loss in case the vehicle shipment was damaged or lost in transit ..."
"... You informed us during our meeting that you have no written agreement(s) with your overseas principals.
If the monies were not sent to ABC Export Canada Inc.by its principals it would not have been able to purchase the goods and would have forfeited the
We find that monies are sent to ABC Export Canada Inc. prior to payment for all goods purchased during the period under review.
The corporate tax filings (T2) of ABC Export Canada Inc. for the taxation year-end 20XX lists a retained earnings deficit balance of $1XX,XXX and a net
loss for income tax purposes of $4X,XXX. The reported net loss on the 20XX T2 Income Statement is $4X,XXX. The corporate tax filings (T2) of ABC Export
Canada Inc.for the taxation year-end 20XX lists a retained earnings deficit balance of $6X,XXX and a net income for income tax purposes of nil. The reported
net income on the 20XX T2 Income Statement is $2X,XXX. These amounts reported indicate that ABC Export Canada Inc. is not able to make the purchases of
goods as indicated by you.
Pursuant to subsection 169(1) of the Excise Tax Act (ETA), we find that for the period under review ABC Export Canada Inc.was not the recipient of the
supply. We find ABC Export Canada Inc.was acting as an agent when goods were purchased on behalf of its principal using monies from the principal.
Monies were provided to ABC Export Canada Inc. by the principal prior to the vehicle purchase transactions. Goods were sent immediately to the principal
after purchase. As a result, we are proposing to disallow all input tax credits amounts claimed for purchases, and related repairs, using monies from the
principal(s) in the amount of $ X,XXX."
An interesting point is being made with regards to profits and retained earnings of the company, which in audit's view are limiting the purchasing
capability of the business. Accounting rules would tie the ability to buy with the financing and credit options available rather than earnings of present
and past years. However, it is perhaps the intention of the audit to point to the fact that the business relies on financing from its principal. On the
other hand the business may have independent financing sources, such as bank loans, private lenders advances, suppliers extended credit terms, as well as
equity or debt investments by its shareholders.
The overall matter of Principle-Agent definition appears to significantly rely on auditor's judgment, due to lack of detailed regulations by the Canada
Revenue Agency. On the taxpayer's side, it requires professional approach right from the start, as well as at the possible appeals stage, shall the
re-assessment be issued by the audit.
Our Ontariotaxmen team is ready to help, starting with a free consultation.
The above article is for reference only. Every taxpayer's situation is unique and
offers various opportunities for tax savings and right tax strategy.
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