6 November 2001 GST/HST Interpretation 6277 - Supply of Products and Services Through the Internet

Dear XXXXX:

Thank you for your letter of October 23, 1999 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supplies described below. I apologize for the delay in replying to your letter.

The following information was provided in your letter and subsequent telephone conversation.

•   Your client has an Internet business, which specializes in custom programming software for the home consumer. The business provides its services across Canada and the U.S.

•   Your client also creates and manages web sites for companies that advertise on the Internet.

•   Any work performed by your client, as part of the business, is performed entirely in the province of XXXXX.

Interpretation Requested

Are the services and products provided to and for customers in the U.S. subject to GST/HST?

Interpretation Given

Based on the information provided, the following interpretation is provided.

Supply of Software

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. Considering that your client supplies and delivers the software electronically over the Internet, the supply is treated as a supply of IPP.

The supply of the software by your client is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act ("the Act") if 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.

If the supply of the software may not be used in Canada, then the supply of the software by your client is deemed to be made outside Canada pursuant to subparagraph 142(2)(c)(i) of the Act. A supply made outside Canada is not subject to GST/HST. Whether the supply is made in or outside Canada is dependent on the terms of the license or purchase agreement.

Where the supply is deemed to be made in Canada, the supply of intellectual property or any right, license or privilege to use any such property is zero-rated (taxed at 0%) under section 10 of Part V of Schedule VI to the Act 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 your client to a non-resident recipient is zero-rated provided the non-resident recipient is not registered for GST/HST purposes. Under these circumstances, your client 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 Section 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 recipient of the supply, made in Canada, is resident in Canada, the zero-rating provisions of Part V of Schedule VI to the Act do not apply and the supply is subject to GST at 7% (15% HST where the supply is deemed to be made in a participating province: Nova Scotia, New Brunswick or Newfoundland) on the value of the consideration for the supply.

Supply of Custom Designed Software

The CCRA considers "custom designed software" to be software that is specially designed, developed or modified for a particular customer and that the customer has ownership at the end of the process. Generally, this means that the customer owns all the rights to the software. Since the supplier of the design or development services does not retain any rights to the software, the supply of the design of the software is not a supply of IPP, but rather a supply of a service of designing the software.

Pursuant to paragraph 142(1)(g) of the Act, a service of this nature is deemed to be made in Canada if the service is performed in whole or in part in Canada.

The supply of a service of designing software, made in Canada, is taxable for GST/HST purposes at the rate of 7% (15% where the supply is deemed to be made in a participating province: Nova Scotia, New Brunswick or Newfoundland) on the value of the consideration for the supply unless the supply is zero-rated.

The supply of a custom software service by your client is zero-rated when supplied to a non-resident person under section 7 of Part V of Schedule VI to the Act (the general zero-rating provision for the supply of such a service made to a non-resident person) provided none of the exclusions of the provision apply. For example, the supply of a service 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. For additional information regarding this zero-rating provision GST/HST Memoranda Series Section 4.5.3, Exports - Services and Intellectual Property, is attached.

The supplier must verify and maintain evidence that the recipient is not resident in Canada for the supply to be treated as a zero-rated supply. GST/HST Memoranda Series Section 4.5.1, Exports - Determining Residence Status, has been enclosed for your review. Appendix A of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is not resident in Canada.

Where the recipient of the supply is resident in Canada, the zero-rating provisions in section 7 of Part V of Schedule VI to the Act do not apply and the supply is subject to GST at 7%. Due to the fact that the supply of a custom software service is performed entirely in the province of XXXXX, the supply is deemed to be made in a non-participating province and, as such, is not subject to HST at 15%.

Creation and Management of Web sites

The supply of creating and managing a web site usually consists of designing the web pages or updating the information on a web site. The supply of designing a web site or updating information on a web site is considered to be a supply of a service where the supplier does not retain any rights to the design or the web site. Since the web site design and maintenance service, supplied by your client, is performed entirely in the province of XXXXX, the supply is deemed to be made in that non-participating province and subject to GST at 7% unless it is zero-rated. The relevant zero-rating provision for a taxable supply of such a service is section 7 of Part V of Schedule VI to the Act.

Again, the supplier must verify and maintain evidence that the recipient is not resident in Canada for the supply to be treated as a zero-rated supply.

Advertising

The term advertising is not defined in the Act, however, the CCRA has provided an explanation of what it generally considers to be an advertising service in Memorandum 4.5.3, Exports - Services and Intellectual Property. The explanation in the Memorandum refers to a service of creating a message and a service directly related to the communication of such a message. The message must be oriented towards soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement or other similar communication.

The provision of advertising space on a web page, or the development of a web page advertisement is considered to be a supply of an advertising service for purposes of the Act. The supply of an advertising service made in Canada is zero-rated pursuant to section 8 of Part V of Schedule VI to the Act provided it is supplied to a non-resident who is not registered for GST/HST purposes at the time the service is performed. A supplier must verify and maintain evidence that the recipient is not resident in Canada and is not registered for GST/HST purposes in order to zero-rate the services. Again, Appendix A of GST/HST Memoranda Series Section 4.5.1, Exports - Determining Residence Status, describes the documentation that the CCRA will generally accept as proof that the recipient is not resident 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) 952-6743.

Yours truly,

Cheryl R. Leyton
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate