If you operate a business as a truck driver through which you deliver shipped goods to third parties, you may be eligible to claim Input Tax Credits (“ITCs”) for Goods and Services Tax (“GST”) and/or Harmonized Sales Tax (“HST”) you incur on the expenses of your business. “Interlining” is a term used by freight industry professionals to describe a relationship whereby a shipping/delivery company contracts with a separate delivery company, the “interliner”, to deliver goods on behalf of a “shipper”. Because this relationship is considered a zero-rated supply under the Excise Tax Act, the interliner does not have to collect and remit GST/HST to the Canada Revenue Agency, but is nonetheless able to claim ITCs for expenses they incurred while interlining. Our top GST/HST tax lawyers deal with GST/HST issues on a daily basis and can provide practical advice to ensure your business makes use of all available GST/HST benefits in the Excise Tax Act.
There are three main types of supplies described in the Excise Tax Act: taxable supplies, zero-rated supplies and exempt supplies. Supply in GST/HST parlance means the provision of property or a service in any manner, whether by sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. Under section 165 of the Excise Tax Act, GST/HST is payable by the recipient, usually the consumer, of a taxable supply at the particular province’s tax rate for either GST or HST, and subsection 165(3) states that the “tax rate in respect of a taxable supply that is a zero-rated supply is 0%”, which means that zero-rated supplies are a subset of taxable supplies. Taxable supplies are defined in subsection 123(1) of the Excise Tax Act “as a supply that is made in the course of a commercial activity” and “commercial activity” is defined broadly in that same subsection to essentially include any business or concern in the nature of trade carried on for profit, but the definition specifically excludes activities that involve the provision of “exempt supplies”. This leads to the inference that businesses involving zero-rated supplies are considered commercial activities for GST/HST purposes.
The classification of zero-rated supplies as commercial activities is important because section 169 of the Excise Tax Act allows for GST/HST registrants to claim input tax credits for all GST/HST paid by the registrant, to the extent that the GST/HST was incurred to make a supply in the course of their commercial activities. Therefore, despite the fact that a business which involves the production and sale of a zero-rated supply does not have to collect GST/HST, the business is still entitled to claim ITCs on their GST/HST return for GST/HST spent by the business on the inputs necessary to produce the zero-rated supply.
Schedule VI of the Excise Tax Act lists all zero-rated supplies for GST/HST purposes and Part VII specifically deals with transportation services. Section 11 of Part VII, which describes the interlining relationship, reads as follows:
A supply of a freight transportation service made by a carrier of the property being transported to a second carrier of the property being transported, where the service is part of a continuous freight movement and the second carrier is neither the shipper nor the consignee of the property being transported.
A “freight transportation service” is defined in Part VII of Schedule VI of the Excise Tax Act to include the transportation of tangible personal property, including mail and other property or services, but does not include baggage transportation provided as part of a passenger transportation service. “Continuous freight movement” is defined as a freight transportation service provided by one or more carriers, to a destination specified by the shipper of the property, where all freight transportation services are supplied by the carriers according to the instructions of the shipper. Lastly, “shipper” is defined as a person who transfers possession of the property being shipped to a carrier at the origin of the continuous freight movement, but does not include a carrier related to the continuous freight movement. Therefore if Ford, the shipper, contracts with Fedex, the carrier, to have a car part delivered from Detroit to an automotive shop in Toronto, and Fedex subsequently uses the services of a local delivery company, the second carrier, to deliver the part to the final destination, the relationship between Fedex and the local delivery company is one of interlining and therefore no GST/HST is collectible by the local delivery company on amounts paid to it by Fedex.
Although most tax-planning commentaries seem to focus purely on reducing income tax, it is important for SMEs, sole proprietors and corporations alike to be aware of their status and/or obligations under the Excise Tax Act to ensure that they are taking advantage of all available GST/HST tax credits. If a business qualifies as a zero-rated supply in Schedule VI of the Excise Tax Act, the business does not have to collect GST/HST on the sale of its product, but is still entitled to recoup any GST/HST incurred in the production of the product, or zero-rated supply. One example of a zero-rated supply in the Excise Tax Act is interlining, which describes the business relationship between several delivery companies, or carriers, who combine their services to transfer possession of tangible personal property from the shipper to its final destination. In such a case, only the first carrier in the chain is liable to collect and remit GST/HST to CRA, while all subsequent carriers do not have to collect GST/HST but are nevertheless able to claim ITCs for GST/HST spent in the course of their business activities. Our GST/HST Tax Lawyers are experts on the Excise Tax Act and can analyze your business structure to ensure that it is optimally structured for GST/HST purposes and that you are claiming all input tax credits to which you are entitled.
Nathaniel completed his Juris Doctor degree at Osgoode Hall Law School where he excelled in the areas of tax law and legal writing and research.He successfully completed all of the requirements of Osgoode’s Taxation Law Curricular Stream
Carson Pillar articled with us and then joined our tax law firm as an associate Canadian tax lawyer having been called to the Ontario bar in June 2016. Carson runs our Calgary tax office. Carson earned his Juris Doctor from Western University and graduated in 2015.
Ian Thomas joined our Toronto tax law firm as an articling student (student at law) in July 2016 and upon becoming a Canadian tax lawyer in June 2017 he becomes our latest tax associate. Ian earned his Juris Doctor from Osgoode Hall Law School and graduated in 2016.
Tigra Bailey has now joined our tax law firm as a summer tax law student and is expected to return as an Articling Student in 2017-2018. Tigra is completing her Juris Doctor at Queen’s University and her expected graduation date is in 2017.
Ildi has joined the law firm of Rotfleisch & Samulovitch PC in June, 2000 and brings over 25 years of legal secretarial experience to the firm. She started as a Legal Secretary and after obtaining Certificates from The Institute of Law Clerks of Ontario
Jamin Chen joins our tax law firm as an articling student in September 2016 after earning his Juris Doctor from Allard Hall at the University of British Columbia.