23 April 1999 GST/HST Interpretation HQR0001206 - GST/HST Tax Status of Electronic Services Sold by Over the Internet

Dear XXXXX

I refer to your facsimile of June 4, 1998, and our subsequent telephone conversations concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. We apologize for the delay in our response.

In accordance with GST Memoranda Series Section 1.4, an application ruling can only be issued where reference to a clearly defined fact situation of a particular registrant can be made. Rulings are issued upon request and where the taxpayer has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services or property involved, the parties involved in all transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. We are pleased to issue you an interpretation which will elaborate on how the GST/HST applies to the questions raised in your letter.

The following information was provided in your letter and telephone messages:

XXXXX  is registered for GST/HST purposes XXXXX

•   XXXXX  is engaged in the commercial activity of providing access to a software application called XXXXX through the internet for a fee ranging from $XXXXX  The software application is stored on servers located in XXXXX a and is accessed through the website "XXXXX. These servers are connected to the internet. The rate charged is dependent upon the sample exam the client requests to access.

•   The client must pay the access fee prior to receiving access to the desired exam. To gain immediate access the client must pay for the service by providing his/her credit card information over the internet. Once the credit card charge has been accepted by the appropriate clearing agency XXXXX issues a password to the client which allows access to the requested exam.

•   While some of XXXXX clients are residents of Canada, a significant number are non-residents for purposes of the Excise Tax Act (the "Act").

Interpretation Requested

1. You wish to know the GST/HST tax status of the supply of access to sample examinations via the internet.

3. You wish to know the responsibilities XXXXX has with respect to determining the residency status of its clients.

Interpretation Given

Question 1

Supply of information over the internet is considered to be a supply of a service. Tangible Personal Property (TPP) cannot be delivered over the internet. Paragraph 142(1)(g) of the Act deems a service that is or is to be performed in whole or in part in Canada to be made in Canada. If the computer servers which contain the software application and supporting information are located in Canada, and the service involves providing access to the information stored at that location, the service is considered to have been performed in Canada and subject to Division II tax.

If a supply is deemed to be made in Canada, section 144.1 of the Act and Schedule IX to the Act provide the rules for determining if the supply is deemed to be made in a participating or non-participating province. Section 2 of Part V of Schedule IX to the Act sets out the rules for determining if a service, other than a telecommunication or transportation service is deemed to be made in a province. This section reads as follows:

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.

The service of providing access to sample exams over the internet would be considered to be performed in the province where the computer server that holds the information is located.

Section 165 of the Act imposes Division II GST/HST on taxable supplies made in Canada at rates of 7%, 15% or 0% (i.e. zero-rated). Section 7 of Part V of Schedule VI to the Act zero-rates most services supplied to non-residents. The relevant paragraphs of this section are as follows:

A supply of a service made to a non-resident person, but not including a supply of

(a) a service made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply;

(a.1) a service that is rendered to an individual while that individual is in Canada.

If the exclusions found in paragraphs (a) and (a.1) do not apply and the service is provided to a non-resident, the provision of access to the server via the internet in XXXXX will be zero-rated.

If the service is not zero-rated, subsection 165(1) imposes GST/HST at 7% on taxable supplies made in Canada, subsection 165(2) imposes an additional tax with a resulting combined GST/HST rate of 15% on taxable supplies made in a participating province. If the server were located in a participating province: Nova Scotia, New Brunswick or Newfoundland the fee for accessing the exams on that server would be subject to GST/HST at 15% when provided by a registrant. Conversely, the fee for the service (unless zero-rated) would be subject to GST/HST at 7% if the server were located in a non-participating province.

Question 2

In all circumstances where section 7 of Part V of Schedule VI to the Act apply, a Canadian registrant must determine the residency status of the recipient of the supply and, where the recipient is an individual, determine if the individual is outside Canada throughout the time the service is being performed. Memoranda Series chapter 4.5.1 Exports - Determining Residency Status and 4.5.3 Exports - Services and Intellectual Property have been provided to assist XXXXX  in their determination of the residency status of their clients and to provide samples of acceptable documentary evidence to support the determination.

While it appears that every reasonable effort has been made to determine the residency status of your clients, the acceptability of your specific method is an issue to be decided upon at the time of XXXXX  XXXXX[.] The representatives from XXXXX  were in agreement with the conclusion that the system in place appeared reasonable on the surface, however, the adequacy of documentary evidence can only be assessed after a review of all available relevant information at the time of XXXXX It is suggested that XXXXX  continually review their systems and procedures in the interest of improving the accuracy with respect to residency determination.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 along with sections 4.5.1 and 4.5.3 of Chapter 4 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) 952-8532.

Yours truly,

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