8 November 2001 GST/HST Interpretation 7787 - Supplies Over the Internet

Dear XXXXX:

Thank you for your letter of October 3, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of XXXXX. We regret the delay in responding.

Please note that in accordance with section 1.4 of Chapter 1 of the GST/HST Memoranda Series, 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 all the relevant facts are presented such as the nature of the transactions undertaken, detailed descriptions of the services or property involved, the parties involved in all the transactions as well as the relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts and documentation are not provided, an interpretation may be issued. I am pleased to issue you an interpretation, which will elaborate on how the GST/HST applies to the supplies described in your letter.

You have requested how the GST/HST would apply in two separate, but similar, situations.

Situation # 1

1. A Canadian company (CANCO-A) has contracted with a company operating in the XXXXX (the XXXXX customer) whereby CANCO-A has agreed to design, construct, maintain and host an Internet website for the customer;

2. CANCO-A has designed and written the website, but the construction, maintenance and hosting of the website has been subcontracted to XXXXX;

3. XXXXX has constructed the website and maintains it, but has subcontracted the hosting of the website to a company in the United States;

4. The website resides on a computer in the United States;

5. Both XXXXX and CANCO-A access the website computer through their own computers located in Canada; and

6. When XXXXX invoices CANCO-A for its services, the invoice shows a monthly fee for hosting the website and an hourly fee for other work performed.

Situation # 2

1. In this situation, XXXXX has been contracted by a company in the XXXXX (the XXXXX customer) to construct, maintain and host a web site;

2. XXXXX has subcontracted substantially all of the work out to another Canadian company (CANCO-B), including the hosting of the website;

3. The website is located on CANCO-B's computer in XXXXX; and

4. When XXXXX invoices the customer for its services, the invoice shows a monthly fee for hosting the website and an hourly fee for other work performed.

Interpretation Requested

With respect to situation #1, you have requested what the tax status is of the website construction, maintenance and hosting supplies made by XXXXX to CANCO-A.

With respect to situation #2, you have requested what the tax status is of the website construction, maintenance and hosting supplies made by XXXXX to the XXXXX customer. You have also requested whether XXXXX is required to pay tax on the supplies of website construction, maintenance and hosting services made by CANCO-B to XXXXX.

Interpretation Given

Based on the information provided and the assumption that the XXXXX customer and the XXXXX customer owns the website, the following supplies are considered to be supplies of services for GST/HST purposes:

•   Constructing a website or providing a customized software solution, where the client owns the website upon completion;

•   Website maintenance (upgrading software, fixing bugs, updating data, etc.), where the supply consists of technical services associated with a website owned by the client; and

•   Website hosting.

A taxable supply of a service made in Canada is taxable at the GST rate of 7% (or the HST rate of 15%, if made in a participating province: New Brunswick, Nova Scotia or Newfoundland) unless that supply is zero-rated i.e., taxed at 0%.

Pursuant to paragraph 142(1)(g) of the Excise Tax Act (ETA), the supply of a service is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada and is deemed, pursuant to paragraph 142(2)(g) of the ETA to be made outside Canada if it is, or is to be, performed wholly outside Canada.

The website construction, maintenance and hosting services are considered to be made in Canada pursuant to paragraph 142(1)(g) of the ETA if they are performed in whole or in part in Canada.

Therefore, a particular supply made by XXXXX in situations #1 and #2 or by CANCO-B in situation #2 of constructing, maintaining or hosting a website is considered to be made in Canada if the particular service is, or is to be, performed in whole or in part in Canada. If the supplier (e.g., XXXXX in situations #1 and #2 and CANCO-B in situation #2) performs, or is to perform, any activities at or from a location in Canada in relation to a particular supply of a service, be it constructing, maintaining or hosting a website, that supply is considered to be made in Canada.

Section 7 of Part V of Schedule VI to the ETA zero-rates a supply of a service when made to a non-resident person provided none of the exclusions of the provision apply. For example, the supply of a service to a non-resident is zero-rated provided it is not rendered to an individual while that individual is in Canada or made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply. 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.

Information regarding the criteria is available in section 4.5.3 of Chapter 4 of the GST/HST Memoranda Series, Exports - Services and Intellectual Property, a copy of which is enclosed. For your information, we have also enclosed section 4.5.1 of Chapter 4 of the GST/HST Memoranda Series, Exports - Determining Residence Status. Appendix A of this Memorandum describes the documentation that the Canada Customs and Revenue Agency will generally accept as proof that the recipient is not resident in Canada.

Although a service of constructing, maintaining, or hosting a website can be zero-rated under section 7 of Part V of Schedule VI to the ETA, it will not be zero-rated if the supply is made to a resident person, such as the supplies made by XXXXX to CANCO-A. However, if the supply is made to a non-resident person, such as the supplies made by XXXXX to the XXXXX customer, it is zero-rated under section 7 of Part V of Schedule VI to the ETA provided none of the previously mentioned exclusions of that section apply.

Where the supplies, made by XXXXX and by CANCO-B are considered to be made in Canada and are not zero-rated, it must be established whether those supplies are made in a participating province in order to determine the applicable rate of tax (7% GST or 15% HST) for those supplies.

Section 144.1 of the ETA provides, in part, 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 to the ETA, 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.

With regard to the supplies of website construction or maintenance services made by XXXXX and by CANCO-B, paragraph 2(a) of Part V of Schedule IX to the ETA deems a supply of a service to be made in a province if all or substantially all (90% or more) of the Canadian element of the service is performed in that province. Therefore, if 90% or more of a website construction or maintenance service supplied by XXXXX or CANCO-B is performed in a non-participating province, it will be considered to be made in the non-participating province and subject to GST at 7%. Where 90% or more of the service is performed in a participating province, it will be considered to be made in the participating province and subject to HST at 15%.

Where the application of paragraph 2(a) of Part V of Schedule IX to the ETA is inconclusive, paragraph 2(b) of Part V of Schedule IX to the ETA deems a supply of a service to be made in a province if 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. Section 1 of Part I of Schedule IX to the ETA defines, in part, 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 ...". Therefore, where the place of negotiation, for the supply of a website construction or maintenance service made by XXXXX or by CANCO-B, is in a participating province and greater than 10% of that service is performed in the participating province, the supply of that service is subject to 15% HST.

Section 3 of Part IX of Schedule IX to the ETA together with section 10 of the Place of Supply (GST/HST) Regulations are the relevant provisions for determining whether a supply of web hosting is made in a particular province. Section 3 of Part IX of Schedule IX to the ETA provides that, notwithstanding any other Part of Schedule IX to the ETA, a supply of property or a service is made in a province if the supply is prescribed to be made in the province. Section 10 of the Place of Supply (GST/HST) Regulations provides, in part, that;

When a particular supplier makes a supply of a computer-related service and there is one final recipient of the service, who acquires it under an agreement either with the particular supplier or another supplier,

(a) if there is a single ordinary location at which the final recipient avails themselves of the service, that location is in a particular province and either the particular supplier maintains information sufficient to determine that location or it is the normal business practice of the particular supplier to obtain information sufficient to determine that location, the particular supply is made in that province; and

([b]) in any other case, the particular supply is made in a particular province if the mailing address of the recipient of the particular supply is in that province.

For purposes of the Place of Supply (GST/HST) Regulations, a "computer-related service" includes "... a service involving the electronic storage of information and computer-to-computer transfer of information". As such, web hosting is considered a computer-related service for the purposes of the Place of Supply (GST/HST) Regulations.

With respect to a computer-related service, a "final recipient" means a person who is the recipient of a supply of the service and who acquires it otherwise than for the purpose of supplying it to another person.

Therefore, if the final recipient of the web hosting is located outside the participating provinces, e.g., the XXXXX (web hosting supplied by XXXXX to CANCO-A in situation #1) and the XXXXX (web hosting supplied by CANCO-B to XXXXX in situation # 2), the web hosting service will not be considered to be supplied in a participating province and, as a result, the web hosting service will not be subject to 15% HST. The web hosting service supplied by XXXXX to CANCO-A and by CANCO-B to XXXXX, would consequently be subject to 7% GST if they are made in Canada but not zero-rated.

As such, provided that CANCO-B is a GST/HST registrant, XXXXX is required to pay the GST/HST on the supplies of construction, maintenance or hosting services provided by CANCO-B.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9700.

Yours truly,

Donato Licursi
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate