Interlining and GST/HST
In Canada’s transportation and logistics industries, interlining is a widespread practice that aids the efficient transfer of freight over long distances. However, understanding the tax implications—specifically around GST (Goods and Services Tax) and HST (Harmonized Sales Tax)—is crucial for carriers and freight companies. Failing to understand and apply the correct tax rules can lead to a number of unwanted and unnecessary situations, including compliance problems, audits, and penalties.
What Is Interlining?
Interlining occurs when two or more carriers cooperate to deliver under a single contract or a single bill of lading. Long-distance shipments that require different modes of transportation or that have to cross provincial or international boundaries often use this method.
According to Part VII, Schedule VI of the Excise Tax Act, R.S.C., 1985, c. E-15:
“11. [Interlining of freight] – 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.”
For example, a Canadian trucking company might pick up a shipment in Ontario and then transfer it to another carrier in Manitoba to deliver it to British Columbia. In these situations, handling GST/HST properly is important. According to Canada Revenue Agency (CRA) guidelines, when an owner-operator, for example, provides a freight transportation service on behalf of a carrier, and the carrier invoices the customer, the owner-operator’s service is zero-rated. This is because the owner-operator acts as an interlining carrier rather than the invoicing carrier.
GST/HST, Zero-Rating & Input Tax Credits
Interlining services are zero-rated. This means the GST/HST rate applied to the services is 0%. In contrast, for example, to the 13% taxpayers pay for most supplies and services in the province of Ontario.
This allows the taxpayer to track the taxable service so that input tax credits (ITC) can be claimed for the GST/HST paid on the expenses incurred to provide the interlining services.
To establish a zero-rating, according to the Tax Court of Canada decision in 2269619 Ontario Inc. v. The Queen, 2016 TCC 211 (CanLII):
1) It has to be a “freight transportation service”, which means a service of transporting tangible personal property as defined by subsection 1(1) of Part VII of Schedule VI;
2) The supply has to be made by a “carrier”, which is a person who supplies a freight transportation service as defined by subsection 123(1) of the Excise Tax Act;
3) The supply has to be made to a second “carrier”. The second carrier must be the person who is contractually obligated to pay the first carrier;
4) The service is part of a “continuous freight movement”, which means “the transportation of tangible personal property by one or more carriers to a destination specified by the shipper of the property, where all freight transportation services supplied by the carriers are supplied as a consequence of instructions given by the shipper of the property”; and
5) The second carrier is neither the “shipper”, as defined by subsection 1(1) of Part VII of Schedule VI, nor the “consignee”.
GST/HST Compliance
Without the proper implementation of services and corresponding documentation/agreements to support the interlining arrangement as well as expenses incurred, a CRA auditor may disallow the zero-rating, the respective ITCs and assess GST/HST plus penalties and interest. Leaving the service provider having to appeal the audit reassessments while managing CRA collections.
Accordingly, it is essential to understand the GST/HST implications of interlining agreements, especially when services cross provincial lines or involve zero-rated international freight. If CRA decides to audit, simple discrepancies and unintentional non-compliance can result in large tax reassessments, penalties, denied ITCs and major disruptions to business activity.
SpenceDrake Tax Law – Tax Lawyer
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.