Canexi Accounting & Tax Solutions Blog

What Are Incoterms?

Incoterms are standardized international commercial terms published by the International Chamber of Commerce (ICC). They define:

• Where the buyer takes possession of goods
• Who bears the risk of loss during transit
• Who pays for shipping and insurance
• Who handles customs clearance

There are 11 Incoterms grouped into four categories: E terms, F terms, C terms, and D terms. The category determines at what point in the delivery chain the buyer assumes possession.

Place of Supply Rule Under Canadian Tax Law

The CRA's fundamental principle is: The place of supply is determined by where the buyer takes possession of the goods.

This is the "destination principle"—tax applies based on where consumption/delivery occurs, not where the supplier is located. The place of possession, as defined by Incoterms, directly determines which provincial HST/GST rate applies.

Incoterms and Tax Rates: Category by Category

E Terms (Earliest Delivery Point)

EXW (Ex Works)

Under EXW, the buyer takes possession at the seller's premises. The buyer is responsible for all transport, insurance, and risk from the moment of pickup.

Tax implication: The place of supply is the seller's location.

Example: An Ontario seller selling "EXW Toronto" charges 13% HST to all customers—Alberta, BC, Quebec, or anywhere in Canada. The buyer takes possession in Ontario, so Ontario's HST rate applies.

Practical note: EXW is rarely used in modern e-commerce because it's extremely buyer-unfavorable (buyer assumes all risk immediately). However, when used, it simplifies tax compliance for the seller: one rate, applied uniformly.

F Terms (Free to the Buyer's Carrier)

F terms represent the transition point where the seller places goods with a carrier of the buyer's choice. The buyer takes possession when the goods are handed to the carrier at the named place.

FCA (Free Carrier)

Under FCA, the seller delivers goods to a carrier at a named place. The buyer takes possession at that named location.

Tax implication: The place of supply is the named place in the FCA term.

Example 1: Ontario seller sells "FCA Toronto" to an Alberta buyer. The buyer takes possession in Toronto (Ontario), so the seller charges 13% HST.

Example 2: Ontario seller sells "FCA Calgary" to an Alberta buyer. The buyer takes possession in Calgary (Alberta), so the seller charges 5% GST only.

FOB (Free On Board) and FAS (Free Alongside Ship)

FOB and FAS function similarly to FCA for maritime transport. The buyer takes possession at the named port/location.

Example: "FOB Montreal" to a Quebec buyer = 5% GST + 9.975% QST^ applied (Quebec place of supply).

^assumed the seller has made more than $30,000 in annual Quebec sales or is registered for QST; otherwise, the buyer may need to self-assess QST.

Practical implication: F terms require explicit documentation of the named delivery point. The supplier must clearly state "FCA [City]" in the invoice and sales contract.

C Terms (Carrier Paid To Destination)

This is where many sellers make critical mistakes. Under C terms, the seller pays for freight and insurance to the destination, but the buyer takes possession at the point of shipment, not the destination.

CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To) – any mode of transport; 

CFR (Cost and Freight), CIF (Cost, Insurance and Freight) – maritime transport

All C terms share the same tax implication: the buyer takes possession when goods are handed to the first carrier at the seller's location, even though the seller is paying for transport all the way to the destination.

Tax implication: Place of supply = seller's location, not the destination.

Example 1: Ontario seller sells "CFR Montreal" to a Quebec buyer. The buyer takes possession when goods are handed to the carrier in Ontario. The Ontario seller charges 13% HST (Ontario place of supply), even though the seller is paying all freight costs to Montreal.

Example 2: Ontario seller sells "CPT Calgary" to an Alberta customer. The buyer takes possession when goods are handed to the carrier in Ontario. The seller charges 13% HST (Ontario place of supply), not 5% GST.

Why this matters: Sellers often assume that because they're paying for shipping to a destination province, the destination province's tax rate applies. This is incorrect. C terms are deceptive—the seller funds the transport, but the buyer takes early possession at pickup, creating an Ontario place of supply.

This distinction is crucial for interprovincial trade. A seller in Ontario paying for freight to Calgary while using CFR terms must charge 13% HST, not the 5% they might intuitively expect.

D Terms (Delivered at Destination)

D terms represent the seller bearing maximum risk and responsibility. The seller arranges and pays for all transport; the buyer takes possession only when goods reach the destination.

DAP (Delivered at Place), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid)

All D terms place the buyer's possession point at the destination.

Tax implication: Place of supply = destination (buyer's location).

Example 1: Ontario seller sells "DAP Calgary" to an Alberta customer. The buyer takes possession in Calgary. The seller charges 5% GST only (Alberta place of supply).

Example 2: Ontario seller sells "DDP Vancouver" to a BC customer. The buyer takes possession in Vancouver. The seller charges 5% GST + 7% PST^ = 12% total (BC place of supply).

^assumed the seller has made more than $10,000 in annual BC sales or is registered for PST; otherwise, the buyer may need to self-assess PST.

Example 3: Ontario seller sells "DDP Toronto" to another Ontario customer. The buyer takes possession in Toronto. The seller charges 13% HST (Ontario place of supply).

Practical note: DDP is increasingly popular in e-commerce because the seller handles all logistics, providing a seamless experience for the buyer. From a tax perspective, it clarifies the destination and therefore the applicable rate.

Interprovincial Trade Scenario: Imports and Self-Assessment

Understanding Incoterms becomes critical when goods cross provincial boundaries, particularly when importing goods from a non-HST province (e.g., Alberta) into an HST province (e.g., Ontario).

Scenario: An Ontario buyer purchases goods from an Alberta supplier under Incoterm "FCA Alberta."

    Place of supply for the purchase: Alberta (where buyer takes possession)

    Tax charged by Alberta supplier: 5% GST only

    Ontario buyer's obligation: When the goods are brought into Ontario, the buyer becomes an importer and must self-assess the provincial part of HST (8%) under CRA Section 220.05.

The self-assessment is necessary because goods are crossing from a non-HST province into an HST province. It's not a correction of the Alberta supplier's 5% GST rate—rather, it's an additional tax obligation triggered by importation.

Contrast scenario: If the Incoterm were "FCA Toronto," the Alberta supplier would charge 13% HST (Ontario place of supply), and no additional self-assessment would be required because the supplier already collected the full Ontario rate.

Practical Guidance for Modern E-Commerce

B2B Sales with Negotiated Incoterms

For business-to-business transactions where Incoterms are negotiated:

• Document explicitly: State the Incoterm clearly in the sales contract and invoice (e.g., "FCA Calgary," "DDP Vancouver")
• Apply the correct rate: Base the tax charge on the place of possession defined by the Incoterm
• Keep records: Retain copies of contracts showing the agreed Incoterm for CRA audit purposes

B2C E-Commerce (Platforms Without Explicit Incoterms)

For sellers on Amazon, Etsy, or Shopify where Incoterms are not documented:

• Apply the default rule: Assume the buyer takes possession at their shipping address (destination principle)
• Use platform automation: Configure your platform to charge tax based on customer location
• Document the assumption: Note in your tax records that "default Incoterm assumption applies—delivery at customer address per CRA guidance"

Importation Scenarios

For sellers importing goods from non-HST provinces:

• Understand the supplier's Incoterm: If "FCA [Alberta location]," the supplier charges 5% GST only
• Anticipate self-assessment: When goods are brought into Ontario, self-assess the 8% provincial HST component
• File correctly: Report the 8% self-assessed HST on your GST/HST return (typically line 405)
• Claim input tax credits: If 90%+ of imported goods are used in commercial activities, claim an ITC for the 8% self-assessed

Common Mistakes and How to Avoid Them

Mistake 1: Assuming C terms place the supply at the destination

A seller in Ontario using "CPT Calgary" assumes the place of supply is Calgary because they're paying freight there. Wrong. The buyer takes possession at Toronto (where goods are handed to the carrier), so 13% HST applies.

Correction: Understand that under C terms, the buyer's possession point is the carrier pickup location, not the destination.

Mistake 2: Not documenting Incoterms on invoices

Without clear documentation, the CRA will revert to the default rule: place of supply = buyer's address (destination).

Correction: Always state Incoterms explicitly on sales contracts and invoices. This protects both parties and prevents tax disputes.

Mistake 3: Ignoring self-assessment when importing goods

A seller imports goods from Alberta at 5% GST but forgets that Ontario is an HST province. They fail to self-assess the 8% provincial component.

Correction: Recognize that any goods crossing into an HST province trigger self-assessment obligations (Section 218.01), separate from the supplier's initial tax charge.

Conclusion

Incoterms and place of supply are intertwined in Canadian tax law. While most e-commerce platforms don't explicitly negotiate Incoterms, the principle governs tax compliance whenever goods cross provincial boundaries or are delivered to specific locations.

For Ontario e-commerce sellers:

• EXW and F terms with named locations require clear documentation to establish the place of supply
• C terms are deceptive—the buyer takes possession at pickup, not destination
• D terms place possession at the destination, making them simpler for tax purposes
• Default assumption (no Incoterms): Buyer's address = place of supply

Understanding these distinctions protects sellers from costly tax disputes, ensures compliance with CRA expectations, and clarifies cash flow implications of different delivery arrangements. When in doubt, document the Incoterm and consult a tax professional to confirm the correct rate.

*General Information Disclaimer (as of Last Updated Date, February 2026)* 

This blog provides educational insights on Canadian accounting, tax, and international SME topics based on current public CRA guidelines and standards. Laws change frequently, so content may become outdated—verify with official sources. Canexi Accounting & Tax Solutions provides general insights; this is not professional advice. As a non-public practice, we focus on advisory services—contact us for tailored guidance. We offer no guarantees or liability for decisions based on this material. Consult a qualified CPA for personalized needs.