8 November 2002 GST/HST Ruling 36734 - Tax Status of Supplies of CGI-scripts

Dear XXXXX:

Thank you for your letter to the XXXXX GST/HST Rulings Centre of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of cgi-scripts. Your request was transferred to us for response and we apologize for the delay in replying to your enquiry.

Statement of Facts

Our understanding of the facts is as follows:

XXXXX XXXXX doing business as XXXXX, is registered for purposes of the GST/HST and supplies cgi-scripts (i.e., software programs) over the Internet by way of sale from its permanent establishment in XXXXX.

When buying a cgi-script, the client will place an order on XXXXX's Web site (XXXXX) and the cgi-script is sent via e-mail, in a zipped file, or the client can download the file from the Web site. There is no restriction on who can access XXXXX's Web site and who can order a cgi-script. Along with the cgi-script, the client receives a complete installation guide that will walk them through the installation process.

Upon purchasing a cgi-script from XXXXX the client agrees to the following:

The client retains the right to one licence. For each single licence, the client may only put the purchased cgi-script on one domain. XXXXX does, however, offer a discount to a client who purchases additional licences (XXXXX) for its major cgi-scripts. The code produced by XXXXX that is related to the specific cgi-script remains the property of XXXXX and the client is not allowed to redistribute the cgi-script freely or for retail. XXXXX[.]

There are no restrictions with respect to where the cgi-scripts may be used and the place of negotiation (Section 1 of Part I of Schedule IX to the ETA defines "place of negotiation" to be "... the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works ...") for the supply is in XXXXX.

In addition, XXXXX provides bundled packages. These packages contain some or all of the modules (i.e., software programs) in its XXXXX series and, by bundling the modules, the client saves XXXXX % off the standard price of the individual module. The XXXXX contains all of the XXXXX modules, such as XXXXX, while the XXXXX contains all of the XXXXX modules, such as XXXXX. Besides the XXXXX modules, XXXXX offers a bundled package of the XXXXX and the XXXXX.

All of the prices on the Web site are in US dollars.

The above information was obtained from your incoming letter and from XXXXX's Web site.

Ruling Requested

You have requested clarification on the tax status of XXXXX's supplies of cgi-scripts.

Ruling Given

Based on the facts set out above, we rule that XXXXX's supply of a cgi-script or a bundled package of cgi-scripts is deemed to be made in Canada, pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act (ETA).

We further rule that XXXXX's supply of a cgi-script or a bundled package of cgi-scripts:

(a) to a person (other than a person noted in paragraph (b) below) is subject to the GST at a rate of 7%, pursuant to subsection 165(1) of the ETA; and

(b) to a non-resident person who is not registered under Subdivision d (This Subdivision includes the requirements for registration for GST/HST purposes.) of Division V of Part IX of the ETA at the time the supply is made is zero-rated under section 10 of Part V of Schedule VI to the ETA.

These rulings are subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

The supply of the right to use one of XXXXX's cgi-scripts is a supply of intangible personal property (IPP). The supply of a bundled package of cgi-scripts is also a single supply of IPP. A taxable [other than zero-rated] supply of IPP made in Canada is subject to the GST at the rate of 7% or HST at the rate of 15% [where the supply is made in a participating province (Nova Scotia, New Brunswick and Newfoundland and Labrador)]. A taxable supply that is zero-rated is taxed, under subsection 165(3) of the ETA, at a rate of 0%.

As stipulated in paragraph 142(1)(c) of the ETA, a supply of IPP, that is not related to real property, tangible personal property or a service, is deemed to be made in Canada if the IPP may be used [meaning "allowed to be used] in whole or in part in Canada. As the agreement between XXXXX and a client does not restrict use of the cgi-script exclusively to "in Canada" or "outside Canada", under this paragraph, the supply is deemed to be made in Canada since the cgi-script may be used in Canada.

Section 144.1 of the ETA deems a supply to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX to the ETA, made in the province; but the supply is deemed to be made outside the province in any other case. Also, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

As the cgi-script is IPP that is not related to real property, tangible personal property or services, paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA must be examined when determining the place of supply for the cgi-script. Pursuant to subparagraph 2(d)(i) of this Part, a supply of IPP is considered to be made in a province if all or substantially all [90% or more] of the Canadian rights ("Canadian rights", in respect of IPP, refers to that part of the property that may be used in Canada (section 1 of Part III of Schedule IX to the ETA)) in respect of the IPP may be used only in the province. Where there are no restrictions regarding the province or groups of provinces in which the IPP may be used, subparagraph 2(d)(i) and similarly, paragraph 3(d) of this Part are not applicable.

Pursuant to subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA, a supply of IPP will be considered to be made in a province if the place of negotiation of the supply is in the province, and the IPP may be used otherwise than exclusively [90% or more] outside the province. Where there are no restrictions regarding the province in which the cgi-script may be used, it will always be the case that the cgi-script may be used otherwise than exclusively outside the province where the place of negotiation occurs. As the place of negotiation is in XXXXX, the supply of the cgi-script by XXXXX is deemed to be made in XXXXX, a non-participating province. As such, XXXXX is required to collect the GST at a rate of 7% on the supply of the cgi-script (other than a zero-rated supply) even if the person licensed to use the script is located in a participating province.

The next step is to ascertain whether there is a zero-rating provision that could apply to XXXXX's supply of the cgi-script. Under section 10 of Part V of Schedule VI to the ETA, the supply of, or right, licence or privilege to use, IPP that is intellectual property is zero-rated when supplied to a non-registered non-resident person. Intellectual property includes an invention, patent, trade secret, trademark, trade name, copyright, or industrial right. Under these conditions, XXXXX is able to zero-rate its supply of a cgi-script made to a non-registered non-resident client.

It is the supplier's responsibility to verify that the recipient of a supply is a non-resident person who is not registered for purposes of the GST/HST. For your information, we have enclosed GST/HST Memoranda Series section 4.5.1, Exports - Determining Residence Status. Appendix B of this Memorandum describes the documentation that the Canada Customs and Revenue Agency (CCRA) will generally accept as proof that the recipient is both not resident in Canada and is not registered for GST/HST purposes. Also enclosed is GST/HST Memoranda Series section 4.5.3, Exports - Services and Intellectual Property.

Additional comments on foreign currency

On XXXXX's Web site, it is noted that all of the charges are in U.S. dollars. Section 159 of the ETA will apply such that the value of the consideration for the supply shall be computed on the basis of the value of the U.S. dollars in Canadian currency on the day the tax is payable, or on such other day as is acceptable to the Minister. Tax is generally payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due by virtue of subsection 168(1) of the ETA. As indicated, the Minister may accept alternative days for computing the value of consideration for a supply in Canadian currency. For more information on these days, please refer to the enclosed copy of GST Memorandum 300-7-10 Foreign Currency. A copy of Policy Statement P-222 - "Acceptable Exchange Rate Sources for Converting the Value of Consideration Expressed in Foreign Currency to a Value in Canadian Currency for Purposes of Section 159 of the Excise Tax Act" is also enclosed for your reference.

The foregoing comments represent our general views with respect to the subject matter. Proposed amendments to the ETA, 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 the section 1.4 of the GST/HST Memoranda Series, do not bind the CCRA with respect to a particular situation.

To assist you, we have also enclosed a copy of our Technical Information Bulletin, B-[0]90 - GST/HST and Electronic Commerce, which provides further information on other electronic commerce supplies.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8806.

Yours truly,

Marjorie Stevens
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate