1 July 1997 GST/HST Interpretation 11680-1 - Application of GST to a Supply of Internet Access and Web Page to Non-Residents

This is in response to your memorandum dated October 31, 1996 concerning the application of Goods and Service Tax (GST) on exported internet services.

Our understanding of the facts is:

1. XXXXX is an internet server located in XXXXX

2. XXXXX is a GST registrant that supplies internet access and rental of web sites in the non-participating provinces of Canada. These supplies are taxed at the rate of 7%.

3. A corporate account for internet access and rental of a web site was requested and obtained by XXXXX es (a customer) with a XXXXX work and home phone number. In order for a person to obtain access to the internet or rent a web site, a "server" (service provider) is required. The server can rent out space (referred to as the "web site") on its hard drive, which can be used to convey information. The supply of access time allows one to "surf" the internet.

4. Subsequently, XXXXX advised that the customer moved to XXXXX and the invoices are now made out to a new company under the name of XXXXX and invoices are mailed to XXXXX

5. XXXXX is presently charging the GST on the invoices that are billed and issued from their facility located in Canada.

6. XXXXX is XXXXX only customer outside of Canada.

It should be noted that someone calling from XXXXX and paying long distant charges for the use of the internet access appears to be unreasonable. XXXXX has been asked to verify if the invoicing is being sent to XXXXX but the access is still being made in Canada. They are not sure if they can verify this but will have their systems people look into it. The question should still be answered since it is an issue that has not been previously approached. Though this situation would be rare it still may be applicable to XXXXX or other registrants in the future.

Interpretation Requested:

 XXXXX has requested if they should use the criteria in the two out of three rule for telecommunications services to determine if the GST is applicable.

Interpretation Given:

Subsection 123(1) of the Excise Tax Act (ETA) defines telecommunication service as:

a) the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system, or

b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supply services referred to in paragraph (a);

Subsection 123(1) of the ETA defines telecommunication facility as any facility, apparatus or other thing (including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof) that is used or is capable of being used for telecommunications.

In our view, a server is a facility which is used for telecommunications and therefore is a telecommunication facility. Provision of access to internet and rental of a web site is considered "making available telecommunication facility for emission, transmission or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system". Therefore access to internet and provision of a web site are considered supplies of telecommunication services pursuant to paragraph (b) of the definition of telecommunication service.

Access to the internet and the provision of a web site would appear to fall under the definition of telecommunication service, paragraph (b) in subsection 123(1).

We now have to determine the place of supply in accordance with subsection 142.1(2) of the ETA which states:

Notwithstanding section 142, and subject to section 143, for the purpose of the supply of a telecommunication service is deemed to be made in Canada where

(a) in the case of a telecommunication service of making telecommunications facilities available, the facilities or any part thereof are located in Canada; and

(b) in any other case,

(i) the telecommunication is emitted and received in Canada, or

(ii) the telecommunication is emitted or received in Canada and the billing location for the service is in Canada.

As the server, which is a telecommunication facility is located in Canada XXXXX the supply of telecommunication services is considered to be made in Canada, pursuant to paragraph 142.1(2)(a) of the ETA. In accordance with section 22.1, Part VII of Schedule VI to the ETA the supply would be zero-rated when made to an unregistered non-resident who is in the business of supplying telecommunications services. It appears that XXXXX does not carry on such a business, therefore, the supply to XXXXX would not be zero-rated.

If you require further clarification of the issues in this letter, please contact Leslie White directly at (613) 952-8532.

Legislative References: ss. 123(1), section 142.1

NCS Subject Code(s): 11680-1