19 December 2001 GST/HST Interpretation 37480 - Exports of Services of Designing and Implementing Custom Software

Dear XXXXX:

Thank you for your letter of September 27, 2001, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the export of software designing services. Your request has been transferred from the XXXXX GST/HST Rulings Unit to the Border Issues Unit of the General Operations and Border Issues Division for response. We regret the delay in responding.

We understand from your letter, the agreement dated XXXXX between yourself and XXXXX and our telephone conversations on November 26 and 27, 2001 that XXXXX is a sole proprietor. You have an agreement with XXXXX, a company based in XXXXX to provide software design and implementation services to XXXXX for computer products owned and sold by XXXXX. XXXXX sells its computer software products throughout the world by using distributors but has no permanent establishment in Canada. XXXXX is a non-registered non-resident.

According to your agreement with XXXXX, you will work on the development of XXXXX's software under its direction. You will receive a monthly emolument of $9,000 Canadian per month plus expenses involved in any journey that you undertake at the request of XXXXX (i.e., travel to XXXXX for meetings). This agreement is valid for one year and will be subject to automatic renewal unless written notice is given three week's prior to its termination by either party.

You develop software in Canada for XXXXX; all of the services are performed in XXXXX. You receive work specifications from XXXXX and you develop the software from these. You do not own or have any rights to the software you develop. The implementation services performed by you are rendered to XXXXX. You do not perform implementation services for or at XXXXX's Canadian customers' places of business. You do not have any dealings with XXXXX's Canadian customers.

In accordance with GST/HST Memoranda Series Section 1.4, an application ruling can only be issued with reference to a clearly defined fact situation of a particular registrant. 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. I am pleased to issue you an interpretation to elaborate on how the GST/HST applies to the supplies described in your letter.

Interpretation Requested

You wish to know the tax status of the supplies of developing and implementing custom software services that you provide to your client in XXXXX.

Interpretation Given

Based on the information provided, we offer the following interpretation:

Developing and implementing custom software where the client owns the software upon completion, is considered to be a supply of a service for GST/HST purposes. Pursuant to paragraph 142(1)(g) of the Excise Tax Act (the Act), a supply of a service is deemed to be made in Canada if the service is performed in whole or in part in Canada. A supply of a service made in Canada, is taxable for GST/HST purposes at the rate of 7% (15% where the supply is made in a participating province: Nova Scotia, New Brunswick, or Newfoundland) unless the supply is zero-rated.

Section 7 of Part V of Schedule VI to the Act zero-rates a supply of a service when made to a non-resident person provided none of the exclusions of the provision apply. It is the supplier's responsibility to verify that the recipient is a non-resident and to ensure that all of the remaining zero-rating criteria are satisfied. A service of developing and implementing custom software for a non-resident qualifies for zero-rating under this provision. For your information, we have enclosed GST/HST Memorandum 4.5.1, Exports - Determining Residence Status. Appendix B of this Memorandum describes the documentation that Canada Customs and Revenue Agency (CCRA) will generally accept as proof that the recipient is not resident in Canada and is not registered for GST/HST purposes.

In accordance with subsection 240(1) of the Act, every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada must register for the GST/HST, except where:

•   the person is a small supplier

•   the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business; or

•   the person is a non-resident person who does not carry on any business in Canada.

A person is a small supplier during any particular calendar quarter and the following month if the total value of the consideration for world-wide taxable supplies, including zero-rated supplies, made by the person (or an associate of the person at the beginning of the particular calendar quarter) that became due, or was paid without becoming due, in the previous four calendar quarters does not exceed $30,000 or, where the person is a public service body, $50,000.

Pursuant to paragraph (a) of the definition "commercial activity" in subsection 123(1) of the Act, the commercial activity of a person means a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person.

As confirmed by you during our telephone conversation on November 26, 2001, you are aware that you are required to register. You have obtained Form RC1(E), Request for a Business Number (BN). You may register for a BN by telephone at 1-800-959-5525, in person or by mail at XXXXX Tax Services Office, XXXXX, by fax at XXXXX or on-line through our website at www.ccra-adrc.gc.ca.

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/HST Memoranda Series, do not bind the CCRA 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) 952-4294.

Yours truly,

Michèle Routhier C.M.A.
Technical Analyst
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate