26 May 1998 GST/HST Interpretation HQR0001140 - Non-resident Selling Property into the Canadian Market

                                                                        GST/HST Rulings and Interpretations
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, Ontario
K1A 0L5

Dear XXXXX

Thank you for your facsimile messages of April 16 and 20, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your client's operations.

You provided the following information:

•   Your client XXXXX, a software developer located in XXXXX entered into an agreement to install some systems for a corporation XXXXX in XXXXX. These systems include some custom designed and developed software by XXXXX and some hardware.

•   XXXXX[.] The hardware is shipped directly by XXXXX to XXXXX[.] During the process of installation, the employees of XXXXX make certain changes in the hardware so that it interfaces with the new software.

•   XXXXX invoice to XXXXX consists of two parts the first part is for the custom designed software and the second part is for the hardware (which has been marked up by XXXXX.

Interpretation Requested

•   Is XXXXX required to register for purposes of the GST/HST?

•   What disclosures does XXXXX need to make with both Revenue Canada and the respective Canadian provincial tax authorities?

•   If there is a GST issue, who will pay and on what value? If XXXXX charges XXXXX XXXXX for the hardware, and XXXXX charges XXXXX for the hardware, on what value will XXXXX have to pay the GST?

•   There are possibilities that XXXXX will develop and supply the same systems to customers in other Canadian provinces. Does this make anything different?

Interpretations Given

Based on the information contained in your messages, the following interpretations are given:

•   A non-resident person who is carrying on business in Canada may be required to register for GST/HST purposes. In determining if a non-resident is carrying on business in Canada, the Department considers various criteria. These criteria are outlined in paragraphs 13 to 19 of the enclosed copy of Chapter 2.5 of the GST Memoranda Series. You will note that, in general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. From the information provided in your messages, it appears that the only presence XXXXX will have in Canada is when its employees are in Canada installing the hardware and software at the premises of XXXXX[.] This presence would not be significant. Therefore, as XXXXX does not appear to be carrying on business in Canada, your client would not be required to register for purposes of the GST/HST.

•   XXXXX will be required to provide sufficient documentation to XXXXX to enable XXXXX to obtain release of the custom software from Revenue Canada, Customs, when the software arrives in Canada (e.g., the value of the software). For information concerning provincial sales taxes, you will have to contact the appropriate provincial authorities.

•   Subsection 179(2) of the Excise Tax Act (Act) deals with a scenario where a registrant (a person who is registered for GST/HST purposes, or who is required to be registered), under an agreement between the registrant and an unregistered non-resident, makes a supply of tangible personal property by way of sale to the non-resident. If the registrant transfers physical possession of the property at a place in Canada to a GST/HST registered third party, and the third party gives a drop-shipment certificate to the registrant, the supply by the registrant to the unregistered non-resident will be deemed to be made outside Canada. As a result, the registrant does not have to charge and collect the GST or the HST. For purposes of the following discussion, I am making the assumption that both XXXXX and XXXXX are registered for GST/HST purposes and that your client, XXXXX, is an unregistered non-resident. A registrant XXXXX will supply tangible personal property (the hardware) by way of sale to an unregistered non-resident XXXXX[.] Physical possession of the hardware will be transferred at a place in Canada to a third party XXXXX. If XXXXX gives a drop-shipment certificate to T Ltd., the supply of the hardware by XXXXX to XXXXX will be deemed to be made outside Canada under the provisions of subsection 179(2). XXXXX will, therefore, not be required to charge and collect the tax from XXXXX However, if XXXXX does not issue a drop-shipment certificate, XXXXX will be required, under the provisions of subsections 179(1) and 165(1) of the Act, to charge and collect the GST from your client, calculated on the fair market value of the hardware at that time. In addition, because the supply of the hardware (and the software) by XXXXX to XXXXX would be deemed to be made outside Canada under the provisions of subsection 143(1) of the Act, there is no requirement for XXXXX to charge and collect the tax from XXXXX[.]

•   The fact that XXXXX may develop and supply additional systems to customers located in other Canadian provinces will not effect the interpretations provided above.

The foregoing comments represent our general views with respect to the subject matter of your messages. Unannounced proposed or future amendments to the Act may result in changes to this interpretation. 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.

Also enclosed for your client's information are the following Departmental publications:

•   Technical Information Bulletin B-037R dated November 1, 1994 entitled "Imported Computer Software",

•   Policy Statement P-107 entitled "Certificate for Pre-retail Drop-Shipments", and

•   Doing Business in Canada - GST/HST Information for Non-Residents.

As requested in your message of April 16, 1998, this letter is being faxed to you. The original copy of the letter, together with the enclosures, is being sent by mail.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6743.

Yours truly,

Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Encl.: