Telephone #: (613) 954-8585
Fax #: (613) 990-1233
XXXXX File #: 11680-1(glr)
XXXXX HQR0000481
XXXXX s. 136, 144.1, 165, 354
XXXXX Sch. VIII, IX/II/ 2, IX/V/2, 3
XXXXX February 24, 1997
Dear XXXXX
I refer to your facsimile message of December 20, 1996, addressed to XXXXX XXXXX XXXXX and our telephone conversations on January 22, 1997, regarding the application of the proposed Harmonized Sales Tax (HST). Forwarded with your letter was a copy of a letter dated December 6, 1996, you sent to XXXXX[.] The following questions and statements are contained in your letter and message:
• Question #1 (Finance) & Statement #1 XXXXX
We have many national contracts that bundle the lease and service element of the contract into XXXXX[.] The location of the machines are traceable through the serial numbers but we are not sure which rules would apply to these contracts, the place of supply rules for leases or for services. We have just reviewed a pending contract where the lease rules provide XXXXX of the revenue streams into the HST block, but zero if the place of supply rules for services were applied, as we understand them. It seems reasonable that if the rules were based upon where the recipients received the service, the uncertainty of which place of supply rules to apply would be eliminated.
We propose to tax these contracts for HST purposes under the place of supply rules for leases. We are able to trace the location of our machines through the serial numbers which allows us to tax the contracts through estimated revenue streams. Should it be necessary to tax the contracts internally as multiple supplies and use a combination of the lease rules and the service rules, we would find this task most onerous. We would surely expend considerable time, cost, and administrative effort in an attempt to accomplish this feat for a tax differential that would likely be minor in effect. In addition, the service amount imbedded in the charges would vary from contract to contract.
• Question #2 (Finance) & Statement #2 XXXXX
We also have national equipment maintenance contracts where a fee is charged at the beginning of the contract to service a fleet of equipment. The services are performed on an "as needed" basis, with no further charges. In other words, the actual services to be performed will not be ascertained until the contract is fulfilled, and is therefore unrelated to the charges. How do we tax these contracts for HST purposes? Currently we use a reasonable estimate based upon historical information for provincial sales tax purposes. We suggest that this may also be appropriate for HST.
These contracts are consistent with the place of supply rules for services. We propose to allocate any HST to the contracts at the beginning of the billing cycle base, upon a historical or reasonable revenue allocation. Where the services are known at the fulfillment of the contract would recalculate the taxes based upon the actuals and reapply the services rules for HST purposes. Where the actual services performed are not determined, we would default to the original estimations.
• Question #3 (Finance)
It seems possible that financial institutions will be taxed twice on the same service, once under the HST place of supply rules and again under the QST, as services performed in whole, or in part? Is this understanding correct?
• Question #4 (Finance)
We will have leases that straddle the implementation date with intervals of more than one month. Please advise the transitional rules for taxing the periods that commence between February 1, 1997, and April 1, 1997, and end after April 30, 1997.
• Question #5 (Finance)
We understand that national catalogues are to be prescribed. What type of catalogues will be prescribed? Would national catalogues sent to only to business be included?
During our second telephone conversation on January 22, 1997, you indicated that the question was whether or not your firm's national catalogues, which are sent to various purchasing agents, are required to have tax-inclusive pricing.
• Question #6 (Finance)
Is software taxed as tangible personal property, or as intangible personal property?
Interpretation Given
• Question #1 & Statement #1
If the provision of the service element of a contract is contingent upon the lease of the equipment, the supply under the contract will usually be considered to be a single supply of tangible personal property (TPP). However, a determination as to whether a contract is for a single supply or a multiple supplies can only be made on a case-by-case basis.
If the supply is considered to be a single supply of TPP, the place of supply rules contained in proposed Schedule IX, Part II, section 2 will apply to determine if the supply is made in a participating province and subject to the proposed HST at 15% under the provisions of subsection 165(1) and proposed subsection 165(2) of the Excise Tax Act (Act).
• Question #2 & Statement #2
An equipment maintenance service contract is usually considered to be a single supply of a service (with the parts considered to be an incidental supply to the supply of the service).
Proposed Schedule IX, Part V, sections 2 and 3 sets out the rules for determining the province in which a supply of a (maintenance) service is made. Where the supply is deemed to be made in a participating province, the supply will be subject to the HST at 15%. These sections read as follows:
"2. Subject to Parts IV and VI to VIII, a supply of a service is made in a province if
(a) all or substantially all of the Canadian element of the service is performed in the province; or
(b) the place of negotiation of the supply is in the province and it is not the case that all or substantially all of the service is performed outside the province.
3. Subject to section 2, where the Canadian element of a service is performed primarily in the participating provinces, the supply of the service is made in the participating province in which the greatest proportion of the Canadian element is performed, unless the place of negotiation of the supply is outside Canada and it is not the case that all or substantially all of the service is performed in Canada."
The Department interprets "substantially all" as generally meaning "more than 90%" and "primarily" as generally meaning "more than 50%".
You state that your firm proposes to allocate any HST to the contracts at the beginning of the billing cycle base upon a historical or reasonable revenue allocation. Where the services are known at the fulfillment of the contract, your firm would recalculate the taxes based upon the actuals and reapply the services rules for HST purposes. Where the actual services performed are not determined, your firm would default to the original estimations.
Subsection 136(1) of the Act provides that where an agreement is entered into to provide services, the entering into of the agreement shall be deemed to be a supply of the services made at the time the agreement is entered into. It is, therefore, necessary to determine the place of supply of the maintenance services in order to determine the tax status of the supply.
The proposal, as outlined in the message dated December 20, 1996, may not result in the correct application of the proposed place of supply rules for services. I would suggest that a more reasonable approach to determine the place of supply of services could be based on the actual location of the equipment at the time the equipment maintenance service contract is entered into.
For example, a registered resident company enters into an agreement with your firm to service the company's photocopiers. At the time of the agreement, the company has 3 photocopiers in New Brunswick, 3 photocopiers in Nova Scotia, 1 photocopier in Newfoundland, 10 photocopiers in Manitoba and 11 photocopiers in Ontario. In this example, only 25% (7 out of 28) of the photocopiers are located in the participating provinces. Therefore, the supply of the service is deemed, under proposed section 144.1 of the Act, to be made in a non-participating province. The supply of the service would be subject to the GST at 7% under the provisions of subsection 165(1).
• Question #3
We are unable to comment on taxes imposed by a provincial government, such as the QST imposed by the Government of Quebec. Any questions relating to QST should be directed to the Ministère du Revenu du Québec, 3800, rue de Marly, Saint.-Foy (Québec).
• Question #4
Proposed subsection 354(3) of the Act provides that where a taxable supply of property by way of lease, licence or similar arrangement is made in a participating province, or is an imported taxable supply (within the meaning of section 217 of the Act) made to a resident of a participating province or, in the case of a supply of property, made to a person who receives delivery or possession of the property in a participating province, the provincial component of the HST does not apply to any rent, royalty or similar payment attributable to a period before April 1997, provided that the payment for that period becomes due or is paid before August 1, 1997. The provincial component of the HST is 8%.
Proposed subsection 354(4) provides that the provincial component of the HST does not apply to a taxable supply of property by way of lease, licence or similar arrangement made in a participating province or an imported taxable supply made to a resident of a participating province or, in the case of a supply of property, made to a person who receives delivery or possession of the property in a participating province, where the payment is attributable to a period that begins before April 1, 1997, and ends before April 30, 1997. For example, where a monthly lease period starts on March 15, 1997, and ends on April 14, 1997, the provincial component of the HST is not payable for the period April 1, 1997, to April 14, 1997.
• Question #5
Section 366 of Bill C-70 as passed by the House of Commons deals with interprovincial written advertisements. Since your catalogue would not be directed to one or more consumers in a participating province this subsection would not apply. It should be noted that detailed rules for Tax-Inclusive Pricing are currently being developed. These rules may affect your situation.
• Question #6 (Department of Finance)
A supply of software can be regarded as a supply of intangible personal property, tangible personal property or a service, as follows:
• If software is sold and is transmitted electronically, such as by telephone, to the recipient of the supply, the supply is regarded as a supply of intangible personal property.
• Prepackaged software sold off the shelf at retail stores is regarded as a supply of tangible personal property.
• A contract to write a software program for a client would be regarded as a supply of a service.
The foregoing comments represent our general views with respect to the proposed amendments to the Act relating to the subject matter of your letter. These comments are not rulings and, in accordance with the guidelines set out in the GST Memoranda Series (Section 1.4), do not bind the Department with respect to a particular situation.
Please contact me at (613) 952-6743 if you have any questions or require further information.
Yours sincerely,
Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST Rulings and Interpretations
Policy and Legislation Branch
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