29 October 1997 GST/HST Interpretation HQR0000558 - Right to Use Copyrighted Database

                                                                        GST/HST Rulings and
Interpretations Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
 XXXXX                                                                                K1A 0L5

Dear XXXXX

Thank you for your facsimile of February 12, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. Your facsimile has been forwarded to me for a response.

In your facsimile, you indicate that XXXXX is a registered company which supplies to its customers, upon receipt of the Annual Subscription Fee, diskettes containing computer software, CD-ROM discs containing the current version of the XXXXX . The computer software permits the search and retrieval of information contained on the CD-ROM discs bearing the XXXXX . The customer will continue to receive periodic CD ROM updates to the database for the duration of the agreement.

In consideration of the Annual Subscription Fee the customer accepts from XXXXX a non-exclusive, non-transferable licence to use the computer software and the CD-ROM discs bearing the database. In addition, the customer acquires no ownership of the computer software with all such ownership remaining vested in XXXXX . Further, a customer may not copy, modify, reverse engineer, disassemble or decompile the computer software or the CD-ROM discs bearing the database or create derivative works therefrom. Basically, a customer's use of the computer software is subject to all restrictions on use and disclaimers as are set out in the Subscription Agreement.

The computer software, the CD-ROM discs bearing the database and the User Manuals are the subject of copyright and as such any unauthorised use, copying or transfer is expressly prohibited.

Interpretation Requested

You wish to know the GST/HST implications of the supply of the right to use diskettes containing computer software, CD-ROM discs containing the current version of the XXXXX

Interpretation Given

Intangible personal property ("IPP") is generally a "right" rather than a physical object and includes such things as contractual rights, options, intellectual property, rights in relation to goods that are not in possession and other rights that are enforceable by the courts. Intellectual property includes patents, trade marks, trade names, industrial designs and know-how. Based on the information provided, the supply appears to be a supply of IPP, being a right to use copyrighted material. The provision of any tangible personal property ("TPP") that is necessary to make use of the IPP would likely be considered incidental to the supply of IPP, provided there is no charge for the TPP.

In relation to the place of supply, Technical Information Bulletin B-078 Place of Supply Rules Under the HST states that effective April 1, 1997 all GST registrants across Canada who make taxable supplies (other than zero-rated supplies) to customers in a participating province are required to collect and remit the 15% HST. In essence, HST will apply where a taxable supply is considered to be made in a participating province. A taxable supply made in a non-participating province will continue to be subject to the 7% GST.

Pursuant to the new section 144.1 of the Excise Tax Act (ETA), a supply made in Canada is deemed to be made in a particular province if it is determined under the rules of Schedule IX to the ETA to be made in that province. In addition, subsection 144.1 provides that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province. The place of supply rules for supplies of IPP that do not relate to real property, TPP or services is provided for in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA.

Subparagraph 2(d)(i) of Part III of Schedule IX to the ETA states that a supply of IPP is considered to be made in a province if all or substantially all of the Canadian rights in respect of the intangible property can be used only in a particular province. "Canadian rights" refers to that part of the intangible personal property that can be used in Canada. It appears that the use of the IPP is not limited in any manner to any specific province in order to make this provision applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA states that the place of supply of IPP will be considered to be made in a particular province if the place of negotiation of the supply is in the province, provided that the property can be used otherwise than exclusively outside the province. "Place of negotiation" of a supply is defined in Part I of Schedule IX to the ETA to mean the location of the supplier's permanent establishment (as defined in subsection 132.1(2) ETA) at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works, or to which that individual ordinarily reports, in the performance of the individual's duties in relation to the activities of the supplier in the course of which the supply is made and, for the purposes of this definition, "negotiating" includes the making or acceptance of an offer. While XXXXX permanent establishment is in XXXXX it appears that the IPP can be used exclusively XXXXX

Subparagraph 3(d)(i)of Part III of Schedule IX to the ETA states that the place of supply of IPP will be considered to be made in a participating province if the Canadian rights in respect of the IPP cannot be used otherwise than primarily in the participating province. Again, as above, it appears that the use of the IPP is not limited in any manner to any specific province in order to make this provision applicable.

Where the rules of Schedule IX to the ETA do not apply to deem the supply to be made in a province, the supply is deemed to be made outside that province. Further, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province. Thus, it appears that a supply of IPP made in Canada by XXXXX will be made in a non-participating province.

Finally, when dealing with the place of supply provisions, one must be mindful of new section 220.08 of the ETA which provides for self-assessment by persons resident of a participating province who are the recipients of certain taxable supplies of IPP when such is acquired for consumption, use or supply primarily in the participating province. In this regard subsections 220.08(1) and (2) outlines the mechanism and timing requirements of this process.

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 Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8360.

Yours truly,

Alan Arsenault
Border Issues Unit
General Operations and Border Issues Division Division
GST/HST Rulings and Interpretations Directorate

Legislative References: s. 144.1, 132.1, 220.08, s. 2 Schedule IX, Part III