GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, Ontario
XXXXX K1A 0L5
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Case: HQR0000849
File: 11640-2(RMcK)
Sch.: VI/V/7
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Attention: XXXXX
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July 20, 1998
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Subject:
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GST/HST INTERPRETATION
Application of Section 7 of Part V of ScheduleVI
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Dear XXXXX
I refer to your letter of September 3, 1997, to Mr. Daniel Chamillard, of this office requesting an interpretation of the application of section 7 of Part V of Schedule VI of the Excise Tax Act in relation to the following fact situations. I apologise for the delay in responding.
Statement of Facts
1. USCO, a corporation incorporated in the United States, is a non-resident of Canada.
2. USCO makes available free of charge on the internet software products which it develops. USCO, however, will charge its clients a fee for services it provides in customizing software products to meet a specific customers need.
3. All marketing for the Canadian market is conducted from the United States and all service contracts are accepted by USCO in the U.S.
4. USCO will incorporate a wholly-owned Canadian subsidiary, CANCO. CANCO will open an office in Canada and will employ a number of software engineers. The software engineers will develop new software products for USCO as well as provide software customization services to USCO. The software customization services which CANCO will provide may be as a result of a request for software customization to USCO by clients of USCO located outside of Canada, as well as Canadian clients of USCO.
5. CANCO will invoice USCO for its services in an amount equal to its costs plus a percentage mark-up on its costs. USCO is CANCO's client for all the services it provides.
6. CANCO is registered for purposes of collecting the GST.
Interpretation Requested
Is the supply by CANCO to USCO, of developing new software products as well as customizing software products, zero-rated pursuant to section 7 of Part V of Schedule VI of the Act?
Interpretation Given
Based on the information provided, in the above scenario we supply the following interpretation:
Where CANCO is developing new software products as well as customizing the products for USCO, if the agreement between CANCO and USCO is for a supply of services, the service may be zero-rated under section 7 of Part V of Schedule VI to the Act. The service would not be considered to be in respect of tangible personal property that is situated in Canada at the time the service is performed. However, if the agreement between CANCO and USCO is for a supply of IPP, the supply would be zero-rated under section 10 of Part V of Schedule VI to the Act as intellectual property or any right licence or priviledge to use such property provided all the terms and conditions of the section are met.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the 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.
For your convenience, enclosed is a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-4294.
Yours truly,
Roy McKain
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Encl.:
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