23 July 1999 GST/HST Interpretation HQR0001679 - Tax Status of Music Royalties

Dear XXXXX

Thank you for your letter of February 25, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to music royalties earned outside of Canada.

On September 5, 1997, and January 28, 1998, XXXXX of your office requested the Department's position regarding the subject noted above. In response to your current interpretation request and the additional information provided, our previous interpretations (XXXXX) have been re-evaluated and are to be replaced by this letter.

The following information in addition to that provided and contained in our previous interpretations was provided in your letter and our subsequent telephone conversations:

•   XXXXX administers musical copyrights on behalf of their clients, some are resident in Canada and others are not.

•   XXXXX supplies rights to music copyrights administered and/or owned by them to sub-publishers (SP) located in foreign jurisdictions in order to facilitate the collection of royalties generated outside Canada.

•   The supply of the copyrights include performing rights and reproduction rights.

•   The SP's collect public performance royalties (for radio and TV play) and mechanical royalties (for CD sales) generated for uses of the musical property earned in these foreign jurisdictions.

Interpretation Requested

What is the GST/HST status of the supply between XXXXX and its sub-publishers?

Interpretation Given

In order to determine the GST/HST status of the supply, the place of supply must first be established. The supply of a copyright is considered to be a supply of intangible personal property (IPP) for purposes of the Excise Tax Act (the "Act"). The relevant rules relating to the place of supply of IPP are found in subparagraphs 142(1)(c)(i) and 142(2)(c)(ii) of the Act and are reproduced below to facilitate your review:

142(1) General rule - in Canada - For the purposes of this Part, subject to sections 143, 144 and 179, a supply shall be deemed to be made in Canada if

(c) in the case of a supply of intangible personal property,

(i) the property may be used in whole or in part in Canada,

142(2) General rule - outside Canada - For the purpose of this Part, a supply shall be deemed to be made outside Canada if

(c) in the case of a supply of intangible personal property,

(i) the property may not be used in Canada.

The supply of a copyright that does not include the Canadian rights (the right to use it in whole or in part in Canada) is always deemed to be made outside Canada regardless of who the supply is made to. If the supply of the copyright by XXXXX to the sub-publishers excludes Canadian rights the supply will be deemed to be made outside Canada pursuant to subparagraph 142(2)(c)(i) of the Act. Supplies that are made or deemed to be made outside Canada are not subject to the GST/HST under Division II of the Act.

If the supply of the copyright by XXXXX ts sub-publishers includes Canadian rights, the supply will be deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Act. The supply of a copyright made in Canada will be zero-rated pursuant to section 10 of Part V of Schedule VI to the Act unless the recipient is either resident in Canada or where not resident in Canada is registered for GST/HST purposes. Subsection 165(3) of the Act imposes GST/HST at a rate of 0% on taxable supplies made in Canada that are zero-rated pursuant to Schedule VI to the Act.

Without a thorough analysis of the relevant contract between XXXXX and its sub-publishers we are unable to make a determination as to whether the supply of the copyright includes or excludes Canadian rights and therefore the location of the place of supply. While it is recognized that XXXXX supplies the right of administration of the copyright for a particular region to a sub-publisher, it remains unclear as to whether the copyright may be used elsewhere. The fact that the sub-publisher only collects and forwards royalties earned in their jurisdiction does not determine the place of supply. The place of supply must be determined pursuant to the rules presented earlier. It should be noted however that the supply by XXXXX to its sub-publishers will only attract GST/HST (at 7% or 15%) when supplied to a recipient who is resident in Canada or where not resident in Canada is registered for GST/HST purposes.

Subsection 177(2) of the Act provides that where a prescribed registrant, in the course of a commercial activity, makes a supply on behalf of another person in respect of a copyright of an artist, the registrant is deemed to be the supplier of that copyright. Subsection 177(2) has been reproduced below for your review:

177(2) Supply for artists, etc. - For the purposes of this Part other than sections 148 and 249, where a prescribed registrant, acting in the course of a commercial activity, makes a supply on behalf of another person of intangible personal property in respect of a product of an author, performing artist, painter, sculptor or other artist, the following rules apply:

(a) the other person shall be deemed not to have made the supply to the recipient;

(b) the registrant shall be deemed to have made the supply to the recipient; and

(c) the registrant shall be deemed not to have made a supply to the other person of a service in relation to the supply to the recipient.

Prescribed registrants for purposes of subsection 177(2) of the Act are listed in the XXXXX provided to you in earlier correspondence. XXXXX may request to be prescribed for purposes of subsection 177(2) of the Act by submitting a formal request outlining in detail its business operations and reasons for requesting prescribed status to:

Department of Finance
Sales Tax Division
Attn: Andrew Marsland
140 O'Connor St., L'Esplanade Laurier
Ottawa, ON K1A 0G5

However, whether XXXXX is a prescribed registrant is irrelevant when determining the GST/HST status and the place of supply of the copyright between XXXXX and its sub-publishers.

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/HST 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) 952-8532.

Yours truly,

J. Frobel
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate