24 September 2004 GST/HST Interpretation 42434 - GST/HST Treatment of Interchange Fee

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'agence.

Dear XXXXX:

Thank you for your letter XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. We apologize for the delay in responding to you.

Our understanding of the facts is as follows:

1. XXXXX (the Print Manager) is operated by XXXXX a public institution for GST/HST purposes.

2. The Print Manager engages in various print and non-print media activities for XXXXX (the Customers). Its three main non-print media activities are:

(a) XXXXX photography - This includes:

(i) location and studio photography in digital or traditional film format.

(b) Digital imaging - This includes:

(i) converting files, negatives, slides, prints and flat artwork into digital images; and

(ii) submitting digital images to clients through e-mail and / or copying digital images to writable compact discs (CD).

(c) Graphic design - This includes providing custom designed logos, newsletters, brochures, annual reports, books and promotional material, illustrations, charts and graphs for publications, display or poster presentation, and computer graphics.

3. A Customer will either e-mail or verbally request that the Print Manager perform one or more of the three non-print media activities. The Print Manager does not enter into written contracts with the Customer XXXXX.

4. The Print Manager employs photographers, photographic technicians and graphic designers to perform the work involved in carrying out the XXXXX photography, digital imaging, and/or graphic design activities, as the case may be.

XXXXX Photography and Digital Imaging

5. A Customer will request digital images of certain events, scenes, objects, etc. Depending on the situation, the Customer might give the Print Manager specific instructions regarding the content of the pictures, or leave the content of the pictures to the photographer's discretion.

6. In accordance with the Customer's needs, the photographer will take pictures using either traditional or digital cameras. If a Customer needs a picture that can immediately be posted on a Web page, then the photographer will use a digital camera to produce a digital image. If a Customer does not have an image photographed in digital format, then the photographer will use a traditional camera to produce a photograph which will be converted into a digital image. In either case, all negatives, photographs and/or digital images are given to the Customer and are not owned or archived by the Print Manager.

7. The Print Manager charges the Customer for the XXXXX photography work performed by the photographer, whether those services are performed on location or at the studio. This charge is for the cost of the photographer's labour (calculated at an hourly rate) and any costs associated with the work.

8. The Print Manager charges the Customer for image scanning and e-mailing (i.e., a digital imaging activity). This charge is for the cost of converting a photograph into a digital image and transferring the digital image to the Customer via e-mail. E-mail is the common method of providing the digital images to the Customer XXXXX. This amount is in addition to the charge for the XXXXX photography.

9. The Print Manager will also copy the digital image to CD, but only if requested by the Customer. Some Customers request a copy of the digital image on CD so that there is a permanent digital archive of the image for future use, or to protect the digital image from being lost or destroyed.

10. Where a Customer requests a copy of the digital image on CD, the Print Manager charges the Customer for CD image transferring (i.e., a digital imaging activity). This charge is for the cost of copying the digital image to a writable CD, which is then given to the Customer. This amount is in addition to the amounts charged for the XXXXX photography and for image scanning and e-mailing.

11. The digital image copied to the CD is identical to the digital image e-mailed to the Customer. The Customer might, on the rare occasion, request that the digital image on the CD be further manipulated than the digital image delivered to it via e-mail.

12. Where a Customer requests a copy of a digital image on CD, the Print Manager also charges the Customer for the writable CD. This charge is for the cost of the actual CD to which the digital image is copied. This amount is in addition to the amount charged for CD image transferring. A writable CD is a type of compact disc to which any data that is written cannot be erased.

13. A Customer entered into a verbal agreement with the Print Manager for the creation of digital images (e.g., public buildings, people, etc.) to be sent electronically by e-mail. In performing the XXXXX photography and digital imaging work, the Print Manager instructed one of its photographers to take pictures of the objects using a traditional camera. Once the film was developed, the Print Manager scanned the photographs into a computer and sent the resulting digital images to the Customer by e-mail. In addition, the Print Manager copied the digital images to a CD at the Customer's request. The Print Manager returned all negatives, photographs and copies of the digital images to the Customer and issued an invoice itemizing amounts for the photographer's work XXXXX, the image scan and e-mail XXXXX, the copying of the digital image to the CD XXXXX, and the CD itself XXXXX. The Print Manager only charged GST on the supply of the CD to the Customer.

Graphic Design

14. A Customer will request graphic designs such as logos, posters, Web pages, brochures, newsletter, etc.

15. In accordance with a Customer's graphic design needs, the graphic designer will use various computer applications to develop a rough layout of the graphic design for the Customer's evaluation and approval. Depending on the situation, the graphic designer may have to refine or modify the rough layout and prepare additional rough layouts for final approval. Once the Customer has given its approval, the graphic designer will produce the finished graphic design for delivery to the Customer. All rough layouts are destroyed and the finished graphic design is given to the Customer and is not owned by the Print Manager.

16. The Print Manager charges the Customer for the graphic design work performed by the graphic designer (i.e., conceptual design). This charge is for the cost of the graphic designer's labour (calculated at an hourly rate) and any costs associated with the work.

17. Depending on the situation and the type of graphic design produced, the Print Manager may send the finished graphic design via proof, e-mail or CD. The Print Manager charges the Customer a separate amount for the proof where it provides the finished graphic design in that format.

18. Where a Customer requests the finished graphic design on CD, the Print Manager charges the Customer for file to CD. This charge is for the cost of putting the finished graphic design on a writable CD, which is then given to the Customer. This amount is in addition to the charge for the graphic design work. Typically, files are put on a CD for one of the following reasons:

(a) to enable the Customer to transfer the finished graphic design to a printer (including the Print Manager's own print-shop or a third-party printer); or

(b) because the finished graphic design is an electronic file by nature, such as a Web page; or

(c) for future use by the Customer.

19. The Print Manager engages in prepress operations (i.e., the making of metal plates for printing purposes) as part of its print media activities, but not as part of its graphic design operations. Depending on the situation, the graphic designer may send the finished graphic design to its own print-shop for prepress or it may send the finished graphic design to a different printer, but in either case, only at the Customer's request.

20. A Customer entered into a verbal agreement with the Print Manager for the creation of a graphic design (e.g., a logo, poster or Web page) on CD. In performing the work, the Print Manager instructed one of its graphic designers to prepare a rough layout of the graphic design which it submitted to the Customer for refinements and/or modifications. Once it obtained the Customer's approval on the layout, the Print Manager put the finished graphic design on a CD and issued an invoice to the Customer itemizing amounts for the graphic designer's work XXXXX and putting the graphic design on the CD XXXXX. The Print Manager only charged GST on the supply of putting the graphic design on the CD.

Interpretation Requested

You have asked the Canada Revenue Agency (CRA) to provide an interpretation with respect to the application of GST on:

1. the creation of digital images sent electronically by e-mail and copied on CD; and

2. the creation of graphic designs provided on CD, and whether submitting the graphic design via e-mail or Web submission to a printer (either internal or external) would change the application of tax.

Interpretation Given

1. XXXXX Photography and Digital Imaging

Policy Statement P-077R2, Single and Multiple Supplies, provides guidelines for determining whether a transaction consisting of several elements is to be regarded as a single supply or two or more supplies. This distinction is important in cases where a combination of elements is supplied, some of which would be taxable at 7% or 15%, and some of which would be zero-rated or exempt from the GST/HST, if supplied separately.

Generally, multiple supplies occur when one or more of the elements can sensibly or realistically be broken out of a transaction. Conversely, two or more elements are part of a single supply when one element of the transaction is so dominated by another element that the first element has lost any identity for fiscal purposes. In the case of the XXXXX photography and digital imaging activities described, the balance of the facts indicate that the Print Manager is making multiple supplies:

(a) there are two distinct and independent elements to the transaction:

(i) the creation of digital images, in which the location/studio photographer and the image scan/e-mail are elements; and

(ii) the making of a copy of the digital image on CD, in which the writable CD and CD image transfer are elements;

(b) separately, each of the two elements satisfy the Customer's needs for the supply of digital images;

(c) the Customer is made aware of the elements that make up the package of property and/or services;

(d) the structure of the transaction is that the second element is contingent on the provision of the first element (i.e., the making of the copy of the digital image on CD is contingent on the creation of the digital image, but not the other way around; and

(e) the Customer has the option to acquire the two elements separately.

Having determined that the Print Manager is making multiple supplies with respect to the XXXXX photography and digital imaging activities described, it is important to determine whether those supplies are of property or services, as this affects the manner in which the GST/HST is collected. Subsection 123(1) of the Excise Tax Act (the ETA), defines the term "property" to mean any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money. In contrast, subsection 123(1) of the ETA defines the term "service", in part, to mean anything other than property and money.

Technical Interpretation Bulletin B-090, GST/HST and Electronic Commerce (the TIB), outlines the Canada Revenue Agency's policies pertaining to transactions made by electronic means. A supply made by electronic means is characterized as either a supply of intangible personal property or a supply of a service. According to the TIB, there are three factors that generally indicate that a supply made by electronic means is a service:

•   the supply does not include the provision of rights (e.g., technical know-how), or if there is a provision of rights, the rights are incidental to the supply;

•   the supply involves specific work that is performed by a person for a specific customer; and

•   there is human involvement in making the supply.

In this case, each of the three factors listed above are present, indicating that the creation of the digital images is a supply of a service. The service of creating a digital image made by a public institution is exempt from the GST/HST pursuant to section 2 of Part VI of Schedule V to the ETA.

Although tangible personal property is not defined in the ETA, it generally includes objects or things that may be seen and touched, and that are movable at the time the supply is made. The copies of digital images on CD are considered to be a supply of tangible personal property. The supply of the property is subject to the GST/HST at a rate of 7%/15%, respectively, when made by a public institution, since it is excluded from being exempt pursuant to paragraph 2(e) of Part VI of Schedule V to the ETA.

2. Graphic Design

The supply of creating a graphic design involves a graphic designer using specialized technology and computer software to produce layouts and designs. Typically, graphic designing involves a high level of expertise and skill to create designs for use by print-shops in making printed copies of the graphic design, as requested by the client. If the client does not request printed copies of the graphic design, then the graphic design is sent to the client for future use. Technically, new property is produced in the form of a graphic design captured in an electronic file or plate (in the case of prepress activities). However, this property would not really have any use in and of itself by the recipient; it would only be useful when used in conjunction with printing to produce items such as brochures. For these reasons, and in this particular case, the facts support the view that graphic design activities are the supply of a service, and not the supply of property.

Consequently, where a graphic design for use in print media is created and the design is put on a CD for future use, the supply is a single supply of a graphic design service. Similarly, where a graphic design is created for use in non-print media (e.g., a Web page) and the design is put on a CD, the supply is a single supply of a graphic design service. In both situations, the supply of the graphic design service made by a public institution is exempt from the GTS/HST pursuant to section 2 of Part VI of Schedule V to the ETA.

In this case, we must also consider supplies made by the Print Manager in which the client requires the creation of a graphic design, along with the supply of printing. For example, a client requires brochures but in order to have the brochure printed, a graphic design is required. There are two possibilities to consider. The first is that there are two separate supplies to the client, one supply of creating a graphic design and a second supply of printing. The other possibility is that the elements of the transaction (creating a graphic design and printing) constitute a single supply.

According to Policy Statement P-077R2, a single supply will frequently take the form of a single transaction that includes a number of constituent elements - goods and/or services - provided together. These elements are often, but not always provided for a single amount. Multiple supplies may also take the form of a single transaction, but the constituent elements are considered separate supplies.

The first factor to consider is whether some elements are inputs or themselves supplies. In this case, the creation of the graphic design can be thought of as an input into the printing activity. Although the client receives the plate (in the case of prepress activities) for use in printing the desired product, ultimately the client is interested in receiving whatever tangible property it is that had been requested, e.g., brochures, etc. The client does not necessarily contract for both creating the graphic design and printing. These factors would support the view of a single supply.

Another factor to consider is the number of suppliers and/or recipients. In the case where the Print Manager is supplying both the graphic design work and printing, this would indicate a single supply.

Another point that indicates that the graphic design work and printing activities are a single supply is that when a client makes a request to have tangible property printed, e.g., brochures, the activities of graphic design and printing have a use to the client only when provided together. The provision of the plate (which is used to print the property) would not have a use to the client, if the plate was not used to print the property the client had requested. The client requires that graphic design work be provided together with printing. In addition, the ability to provide clients with the printed materials they have requested is contingent upon the input of the graphic design work into the process.

Therefore, on balance of these facts, it is reasonable to conclude that where graphic design work and printing are supplied together to the client, both activities will constitute a single supply.

Finally, the legislative scheme of the ETA supports the view that any supply which involves a predominantly property component was not intended to be characterized as a service. As a result, it can be argued that the legislative scheme of the ETA supports considering the supply of printing and the supply of graphic design work, where it is supplied together with printing, to constitute a single supply of tangible property.

Consequently, where a graphic design is created for use in print media and the design is put on a CD for prepress and printing by a third-party printer, the supply is a single supply of a graphic design service. The supply of the graphic design service is exempt from the GST/HST pursuant to section 2 of Part VI of Schedule V to the ETA when made by a public institution, even where the graphic design is submitted via e-mail or Web submission to the third-party printer.

Where a graphic design for use in print media is created and the design is put on a CD for prepress and printing by the person who created the graphic design, the person is making a single supply of tangible personal property. Specifically, the graphic design service is an input into the supply of the printed material. Similarly, the supply of printing and the supply of graphic design, where it is supplied together with prepress and printing, constitutes a single supply of tangible personal property. The supply of tangible personal property is taxable at the GST/HST rate of 7%/15%, respectively, when supplied by a public institution, since it is excluded from being exempt pursuant to paragraph 2(e) of Part VI of Schedule V to the ETA.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8224.

Yours truly,

Christopher Lewis
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2004/09/24 — RITS 45519 — Subsection 169(2) of the Excise Tax Act: Entitlement to Input Tax Credits