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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
Case Number: 100736Business Number: XXXXX
Attention: XXXXX
November 17, 2008
Subject:
GST/HST INTERPRETATION
GST/HST on the supply of digitized products through a Web site
Dear XXXXX:
Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply by XXXXX of digitized products through a Web site.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that:
• XXXXX is registered for GST/HST under Business Number XXXXX.
• XXXXX will be distributing digitized products (i.e., electronic XXXXX books) through a Web site, XXXXX which is currently in a test phase and not fully operational.
• The servers used to facilitate the download of the books may be located outside of Canada, possibly in XXXXX.
• Customers can download a book to read on-line, to print or to save to an electronic device. The books are not available to customers on CD.
• Payment for the electronic books is voluntary; therefore a customer can download a book for free. Customers will be asked if they would like to make a donation when they download a book.
• When a book is downloaded, the logo of one of the Web site's corporate sponsors will be randomly assigned by the Web site and appear on the book.
• Customers can register for a subscription service which allows them to download books without any corporate sponsor's logo appearing on the book. The customers will use a log-in on the Web site to access the books without a logo.
• The subscription service will be available for a fee of approximately $XXXXX per month.
• Customers with the subscription service will also be asked if they would like to make a donation when an electronic book is downloaded.
• Typically, XXXXX will not be able to determine the residency of its customers.
• XXXXX has a draft XXXXX (the Agreement) for its contributors (i.e., authors and illustrators) that govern the works that they submit to XXXXX.
• Under the Agreement, contributors grant to XXXXX certain rights including a right and license to use their works and the right to grant to third parties non-exclusive licenses to access, download and use their works for non-commercial purposes.
• XXXXX is not acting as agent of the contributors.
• Also under the Agreement, contributors agree to pay XXXXX XXXXX% of the value of any compensation that they receive in connection with any commercialization (publication, etc.) of their works.
• According to the Agreement, the voluntary payments that XXXXX receives from the supply of the books will be divided XXXXX ways:
- XXXXX to XXXXX,
- XXXXX to the contributors, and
- XXXXX to the registered charity XXXXX.
• Also according to the Agreement, contributors will receive XXXXX of other revenues received by XXXXX, such as sponsorships connected to the contributors' works, and subscriptions and advertisements, which are determined by a calculation based on the number of downloads of their works.
We acknowledge your request for a ruling; however, in accordance with GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretation Service, rulings can only be issued with respect to a clearly defined fact situation of a person. Instead, we offer the following interpretation.
Interpretation Requested
1. Should XXXXX charge GST/HST only on the XXXXX of a voluntary payment that it retains or should XXXXX charge GST/HST on an entire voluntary payment that it receives?
2. Should XXXXX charge GST/HST on the subscription fees?
3. Does the tax status of the supply of the electronic books through a Web site change if the server for the Web site is not located in Canada?
4. Does XXXXX deduct GST/HST on the royalties paid to the contributors and on donations to the registered charity?
Interpretation Given
Question 1
A supply of a download of a digitized product, such as the electronic books available on your Web site, is a supply of intangible personal property (IPP) that is taxable when made by a person other than a registered charity. A voluntary payment made for an electronic book is consideration for the supply of that book. Where the electronic book is not restricted from being used in Canada, the supply is considered to be made in Canada and the entire voluntary payment would be subject to GST/HST unless zero-rated. Where the supply of the electronic book is made in Canada and there are no restrictions regarding the province or group of provinces in which it may be used, the supply will be deemed to be made in a non-participating province and subject to GST, provided that it is not a zero-rated supply.
Application of GST/HST
Pursuant to subsections 165(1) and 165(2), every recipient of a taxable supply made in Canada shall pay GST in respect of the supply calculated at the rate of 5% on the value of consideration for the supply or HST at 13% when the supply is made in a participating province (Nova Scotia, New Brunswick or Newfoundland and Labrador).
Supply
A "supply" is defined in subsection 123(1) as the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. A "taxable supply", also defined in subsection 123(1), is a supply that is made in the course of a commercial activity where a "commercial activity" is defined to include a business of a person except to the extent that the business involves making exempt supplies.
A supply of a digitized product made by electronic means is considered to be a supply of IPP for GST/HST purposes that would be a taxable supply when made by a person other than a registered charity. GST/HST Technical Information Bulletin B-090, GST/HST and Electronic Commerce, may be referred to for more information on the characterization and GST/HST consequences of supplies made by electronic means.
Place of supply
The general place of supply rules for GST/HST are found in section 142. Paragraph 142(1)(c) provides that a supply of IPP is deemed to be made in Canada if the property may be used in whole or in part in Canada.
Where the use of an electronic book is not restricted exclusively to outside Canada, the supply of the electronic book is deemed to be made in Canada.
Consideration
The term "consideration" is also defined in subsection 123(1). "Consideration" includes any amount that is payable for a supply by operation of law.
The meaning of consideration for GST/HST purposes is not limited to what is specifically listed as being included within the meaning of that term under subsection 123(1), but rather is broad enough to include any amount paid for a supply whether or not it is payable by law. Therefore, a voluntary payment would be included in the definition of consideration.
The term "donation" is not defined in the ETA, but it is generally understood to mean a voluntary transfer of money for which the donor does not receive any benefit in return, which is not the case here.
Zero-rated supplies
Pursuant to subsection 165(3), the tax rate in respect of a taxable supply that is a zero-rated supply is 0%. Zero-rated supplies are described in Schedule VI.
Section 10.1 of Part V of Schedule VI zero-rates a supply of IPP to a non-resident person who is not registered under Subdivision d of Division V of Part IX at the time the supply is made, but not including
a) a supply made to an individual unless the individual is outside Canada at that time;
b) a supply of intangible personal property that relates to
(i) real property situated in Canada,
(ii) tangible personal property ordinarily situated in Canada, or
(iii) a service the supply of which is made in Canada and is not a zero-rated supply described by any section of this Part or Part VII or IX;
c) a supply that is the making available of a telecommunications facility that is intangible personal property for use in providing a service described in paragraph (a) of the definition "telecommunication service" in subsection 123(1);
d) a supply of intangible personal property that may only be used in Canada; or
e) a prescribed supply.
To support the zero-rating of supplies of IPP under section 10.1 of Part V of Schedule VI, suppliers must verify and maintain satisfactory evidence of the registration and residency status of the recipients of the supplies. Specifically, suppliers must verify and maintain satisfactory evidence that the recipients are not registered and are non-residents of Canada when the supplies are made. Where the supply is made to an individual, the supplier must also verify and maintain evidence that the non-resident individual is outside Canada for the supply to be zero-rated under section 10.1. GST/HST Info Sheet GI-034, Exports of Intangible Personal Property explains what the Canada Revenue Agency (CRA) will generally accept as proof of registration and residency status. The info sheet also describes the method the CRA will accept for suppliers to verify that the individual is physically outside Canada when the supply is made.
Supply in a province
For a supply of electronic books that is made in Canada and not zero-rated, a further analysis with respect to the province in which the supplies are made is necessary to determine the appropriate rate of GST/HST.
Whether a supply of IPP made in Canada is made in a participating province or in a non-participating province is determined by section 144.1 and Schedule IX. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. In any other case, the supply is deemed to be made outside the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.
Where the supply of the electronic book is made in Canada and there are no restrictions regarding the province or group of provinces in which it may be used, subparagraph 2(d)(ii) of Part III of Schedule IX must be examined to determine the place of supply.
Under this provision, a supply of IPP (e.g., an electronic book) is 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 (i.e., 90% or more) outside the province. When there are no restrictions regarding the province in which the IPP may be used, it will always be the case that the IPP may be used otherwise than exclusively outside the province in which the place of negotiation occurs. Therefore, where the use of the IPP is not restricted to any province or group of provinces, the supply will be deemed to be made in a non-participating province and subject to GST, provided that it is not a zero-rated supply.
Please refer to GST/HST Technical Information Bulletin B-078, Place of Supply Rules Under the HST for more information on the determination of whether a supply is made in a participating province and subject to HST.
Question 2
Subscriptions to databases and Web sites typically involve a provider making digitized content available to customers for search, retrieval and use. They are generally characterized as supplies of IPP and, as such, would be subject to the same rules for GST/HST as described in our response to Question 1 above.
Question 3
The location of the servers that host a Web site from which supplies of IPP such as electronic books are made does not affect the tax status of the supplies.
Question 4
With respect to the question of whether XXXXX deducts GST/HST on the royalties paid to the contributors and on donations to the charity, we interpret this to be a question of whether XXXXX can claim input tax credits (ITCs) for GST/HST on payments to the contributors and registered charity.
Pursuant to subsection 169(1), a GST/HST registrant is generally eligible to claim ITCs for the GST/HST paid or payable on property and services acquired or imported by the registrant for consumption, use or supply in its commercial activities. These ITCs permit the registrant to recover the GST/HST paid or payable on property and services to the extent that it relates to taxable (including zero-rated) supplies of property and services made by the registrant. This is provided that the requirements of section 169, such as documentation, have been met. For more information on ITCs, please refer to the GST/HST Guide RC4022, General Information for GST/HST Registrants.
Generally, contributors that are GST/HST registrants would be required to charge GST/HST on the payments they receive from XXXXX and XXXXX would be able to claim an ITC for the GST/HST that it has paid (or is payable) to the contributors. The amount of the payment would either be tax-included or tax would be calculated on the amount of the payment, depending on the agreement. Contributors that are not registrants would not charge GST/HST and, in turn, XXXXX could not claim an ITC with respect to payments made to these contributors.
An amount for which an official donation receipt may be issued under the Income Tax Act is not regarded as consideration for a supply for GST/HST purposes and would not be subject to GST/HST. Therefore, ITCs cannot be claimed on amounts donated to a registered charity if such a receipt may be issued, as no tax is payable on that amount.
All publications referenced in this letter can be found at the CRA Web site at http://www.cra-arc.gc.ca/formspubs/typ/menu-eng.html.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call Michèle Routhier at 613-954-9700. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Michèle Routhier
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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