23 May 2000 GST/HST Interpretation 26857 - Supply of Computer Games Electronically Through the Internet

Dear Sir:

Thank you for your facsimile dated January 28, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of computer games which are sold and delivered electronically through the internet. Your request has been transferred from XXXXX XXXXX to the Border Issues Unit of the General Operations and Border Issues Division for response.

The following information was taken from your letter and a review of the information available on your web sites:

•   XXXXX (CANCO) is a GST/HST registered Canadian resident corporation XXXXX[.]

•   CANCO is in the business of developing and supplying computer gaming software that is designed to operate on a personal computer.

•   CANCO markets the software to consumers through its web sites which are stored on a web server located in XXXXX CANCO leases space from a third party server provider for this purpose. XXXXX XXXXX[.]

•   To purchase the software, a potential client would access CANCO's web site select the desired software and click on the "buy it" icon. The customer must then choose the desired method of delivery and payment. The customer may make payment by supplying their credit card information and authorization electronically or by mailing a cheque to CANCO. With respect to delivery, the client may elect to receive the software by: an electronic download, electronic mail or a physical copy sent to the recipient on CD rom.

•   CANCO claims that approximately 97% of its supplies are made to non-residents of Canada. The remaining 3 to 4% are made to Canadian residents.

Interpretation Requested

What is the GST/HST status of the supply of gaming software developed by CANCO in XXXXX where it is supplied and delivered to the recipient electronically through the Internet?

Interpretation Given

Based on the information provided we offer the following interpretation:

The supply of the right to use software that is not custom software may be a supply of intangible personal property (IPP) or tangible personal property (TPP) depending upon the medium by which it is supplied. The fact that the supply is of gaming software rather than general application software has no bearing on our characterization of the supply. Considering that the software is not customized for any particular purchaser and is supplied and delivered by electronic means through the Internet, the supply will be considered by the Canada Customs and Revenue Agency (CCRA) to be the supply of IPP.

The supply of the software by CANCO is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act (the "Act") as the software may be used in whole or in part in Canada. The fact that the supply may be made to a recipient who is outside Canada at the time the supply is made will not impact the determination of whether the supply of IPP is made in Canada. Since the software may be purchased for use in laptops or other computers that are located in Canada or may be relocated to a place in Canada, the software may be used in whole or in part in Canada.

Every recipient of a taxable supply made in Canada is required to pay GST/HST in respect of the supply at the rate of 7% (15% where the supply is deemed to be made in a participating province) on the value of the consideration for the supply unless the supply is zero-rated (taxed at 0%). The three participating provinces are Nova Scotia, New Brunswick, and Newfoundland.

The supply of intellectual property or any right, license or privilege to use any such property is zero-rated when supplied to a recipient who is not resident in Canada and who is not registered for GST/HST purposes at the time the supply is made. The CCRA considers the supply of software that is a supply of IPP to be intellectual property. Consequently, the supply of software by CANCO to a non-resident recipient will be subject to GST/HST at a rate of 0% provided the non-resident recipient is not registered for GST/HST purposes. Under these circumstances CANCO must verify and maintain evidence that the recipient is not resident in Canada and is not registered for GST/HST purposes. GST/HST Memorandum Series Chapter 4.5.1 Exports - Determining Residence Status has been enclosed for your review. Appendix B of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is both a non-resident and is not registered.

Where the supply of the software is made in Canada and is not zero-rated, a further analysis with respect to the province in which the supply is made or deemed to be made is necessary to determine the appropriate rate of GST/HST. Where a taxable supply that is not zero-rated is deemed to be made in a participating province, the supply will be subject to HST at 15%, where the supply is determined to be made in a non-participating province, it will be subject to GST at 7%. Whether a supply of IPP made in Canada is made in a participating or non-participating province is determined by section 144.1 and Schedule IX to the Act. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

The place of supply rules for a supply of IPP not related to real property, TPP or services are provided for in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the Act. Subparagraph 2(d)(i) of Part III of Schedule IX to the Act states that a supply of IPP is considered to be made in a province if all or substantially all of the Canadian rights in respect of the IPP can be used only in the province. "Canadian rights" refers to that part of the IPP that can be used in Canada (section 1 of Part III of Schedule IX of the Act). Since it appears that the use of CANCO's software is not limited in any manner to any specific province or groups of provinces, subparagraph 2(d)(i) and paragraph 3(d) of Part III of Schedule IX would not be applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the Act states that a supply of IPP will be considered to be made in a province if the place of negotiation of the supply is in the province, and the property can be used otherwise than exclusively outside the province. Section 1 of Part I of Schedule IX to the Act defines the "place of negotiation" of a supply to be "... the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works ...". Where there are no restrictions regarding the province in which CANCO's software can be used, it will always be the case that the property can be used otherwise than exclusively outside the province where the place of negotiation occurs. Therefore, where it is determined that the place of negotiation of the supply of the software is in a non-participating province XXXXX, subparagraph 2(d)(ii) of Part III of Schedule IX to the Act would deem the supply to be made in that province and subject to GST at 7%. Based on the information provided, and the fact that CANCO's only permanent establishment is in XXXXX, it appears that the place of negotiation is in the province of XXXXX. Where the application of the place of supply rules in Schedule IX to the Act provide an inconclusive result, section 144.1 of the Act would deem the supply to be made in a non-participating province and subject to GST at 7% provided the supply is made in Canada.

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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed 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) 952-8532.

Yours truly,

Jeffrey A. Frobel
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate