The GST/HST zero-rating rules for interline freight (which apply to both domestic and international freight movements) were supposed to be straightforward and help small Canadian freight carriers, their employees, and independent contractors (who are often tasked with moving the freight with company-owned or independently owned trucks). The complexity of these rules has led to interpretative difficulties, particularly by these small carriers, and the CRA administration of them has not helped.
By way of background, the zero-rating rules for interline freight go right back to the inception of the GST in 1991 and sections 1 and 11 of part VII of schedule VI to the ETA, the interline freight rules. The interline freight rules zero-rate interline settlements between freight carriers, whether the settlements are in respect of domestic or international movements. Additionally, payments by a trucking company to independent owner-operators are supposed to be included under the interline freight rules. According to the explanatory notes, the zero-rating of interline settlements was supposed to “substantially simplify the operation of the GST for freight carriers given the complex and ambiguous legal relationships that may exist between carriers and shippers.”
Under the rules, only the carrier who settles a domestic freight bill directly with the shipper or consignee (the first carrier) is required to collect GST on the bill. If the first carrier makes payments to other interline carriers to help move the property, the rules deem each interline carrier to have supplied freight transportation services to the first carrier—not to the shipper. Under the rules, those freight transportation services between carriers, and any other disbursements to the interline carriers, are zero-rated. The theory underlying these rules is that it would be easier for the government to collect the totality of GST/HST from the first carrier dealing with the shipper, rather than having each of the individual subcontracted carriers (expected to be small, owner-operated businesses) pay their portion of the net tax.
A recent Tax Court of Canada case, 2237065 Ontario Inc. v. The Queen (2019 TCC 189), has looked at this issue and clarified it. In 2237065 Ontario, the TCC considered an appeal from an interlining carrier (223 Ontario) that had supplied transportation services to another company. More specifically, the court considered whether the 223 Ontario could zero-rate those services. The CRA’s position was that the services were not zero-rated, and that the appellant, 223 Ontario, should have charged GST/HST to the recipient. The answer came down to an application of the interline freight rules.
On the facts of the case, the appellant was a corporation solely owned and operated by Shammy Mohan Das, who drove trucks on behalf of the company. Mr. Das incorporated 223 Ontario in 2009 because that was a condition of him beginning to work with Dhatt Transfreight Service Inc.—a common arrangement for individuals seeking to work with larger freight companies. Dhatt then engaged 223 Ontario as an independent contractor “performing as an interlining carrier” and Mr. Das began to drive Dhatt-owned trucks on 223 Ontario’s behalf.
This arrangement continued until 2013, when Mr. Das purchased a truck for 223 Ontario’s own use and 223 Ontario began to operate on its own. While working with Dhatt, 223 Ontario and Mr. Das were under the impression that since 223 Ontario was providing freight transportation services as an interlining carrier, 223 Ontario was not required to charge HST on supplies of those services.
On audit, the CRA took the position that 223 Ontario’s supplies to Dhatt were taxable because 223 Ontario did not meet the definition of a “carrier” under interline freight rules. Carrier is defined in subsection 123(1) of the ETA as “a person who supplies a freight transportation service,” and the interline freight rules further provide that a “freight transportation service” is a service that transports tangible personal property (with some exceptions). The CRA took the view that 223 Ontario was not a carrier because Mr. Das drove Dhatt’s trucks, providing services as a driver rather than freight transportation services. The CRA assessed 223 Ontario for $14,384.37 in unremitted HST over the relevant reporting periods.
In considering the appeal, the TCC relied on its earlier decision in Vuruna v. The Queen (2010 TCC 365) and the explanatory notes to the interline freight rules. The court concluded that there is no requirement in the ETA that a person physically perform a freight transportation service in order to be a carrier. In other words, to be a carrier, a person needs only to assume the lability as a supplier of the freight transportation service. This means that a shipper who subcontracts the physical transportation of the goods to another party is still considered a carrier even though it is not performing the physical shipping service himself or herself—all seemingly good news for the appellant.
However, while the TCC concluded that while Dhatt was a carrier, the same was not true for the appellant because 223 Ontario did not assume any liability as a supplier—it simply operated Dhatt’s trucks. As a result, the TCC concluded that, during the two periods, 223 Ontario was a supplier of driving services to Dhatt rather than a carrier supplying a freight transportation service. Consequently, 223 Ontario’s supplies were not zero-rated, and it should have collected GST/HST. The appeal was dismissed.
As an aside, Mr. Das also raised the issue during testimony that he had telephoned the CRA and was provided with incorrect advice on which he based his decision to not collect tax. This is a common issue raised by many self-represented taxpayers. The TCC dismisses this with the oft-cited rule from Moulton v. The Queen, 2002 CanLII 798 (TCC), which states that the court is not bound by erroneous departmental interpretations and advice.
By way of commentary, while 223 Ontario’s position is sympathetic—having relied on both the CRA and representations from Dhatt, which turned out to be erroneous—this case is another example of a taxpayer who failed to fully understand and appreciate the tax consequences of his business. Careful planning was required up front but was perhaps absent here. In hindsight, the distinction between supplying “driving services” to a “carrier” and supplying a “freight transportation service” as a “carrier” appears to be a fine one, and one wonders if there may be some merit in taking this issue forward to the FCA.
For now, the immediate takeaway is that even small transportation companies need to follow the old Benjamin Franklin axiom—“an ounce of prevention is worth a pound of cure”—and take proactive steps to fully appreciate the tax consequences of the services they provide.
Robert G. Kreklewetz is a Partner and Stuart G. Clark is Associate at Millar Kreklewetz LLP in Toronto.