2002 GST/HST Interpretation 25287 - Supplies Over the Internet

Dear XXXXX:

Thank you for your letter of July 23, 1999 and November 30, 1999 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of XXXXX XXXXX. Your request has been transferred from the XXXXX to the Border Issues Unit of the General Operations and Borders Issues Division for response. We regret the delay in responding.

We understand that XXXXX is a Canadian resident corporation and a GST/HST registrant. XXXXX uses a Canadian Internet server in order to access the Internet. XXXXX is in the adult entertainment industry and makes the following supplies:

•   Designing a web site or designing computer graphics for a customer where the customer owns the web site or the computer graphics at the end of the process

•   Web hosting

•   Subscriptions to on-line magazines

We also understand from your letter that most of your clients are from the United States.

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 which will elaborate on how the GST/HST applies to the supplies described in your letter.

Interpretation Requested

You would like to know how GST/HST applies to the supplies made by XXXXX as described above.

Interpretation Given

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

Designing a web site or computer graphics is considered by the Canada Customs and Revenue Agency (CCRA) to be a supply of a service for purposes of the Excise Tax Act (ETA).

Web site hosting is considered by CCRA to be a supply of a service for purposes of the ETA.

Subscription to an on-line magazine is considered to be a supply of intangible personal property (IPP) for purposes of the ETA.

Design and Graphics

Pursuant to paragraph 142(1)(g) of the ETA, 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 ETA zero-rates (tax applies at the rate of 0%) 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. Services of designing websites or computer graphics and web hosting services provided to a non-resident qualify for zero-rating under this provision. For your information, we have enclosed GST/HST Memoranda Series Chapter 4.5.1 Exports - Determining Residence Status. Appendix A of this Memorandum describes the documentation that CCRA will generally accept as proof that the recipient is not resident in Canada. Also enclosed is GST/HST Memoranda Series Chapter 4.5.3, Exports - Services and Intellectual Property.

Where the supply is made in Canada and is not a zero-rated supply, 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. In order to determine whether the HST applies to the supply of services by XXXXX, the place of supply with respect to a province must be determined. For this determination, the relevant provisions of the ETA are section 144.1 and Part V of Schedule IX to the ETA. 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. 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 of the Canadian element of the service is performed in that province. Considering the fact that most services supplied by XXXXX are performed exclusively in the province of XXXXX these services are deemed to be made in that province. Consequently, the supplies of designing a web site or computer graphic services that are not zero-rated, are subject to GST at the rate of 7% if all or substantially all of the service is performed in that province.

Web-hosting

With respect to the place of supply of web site hosting service, 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 in which province the supply is made.

Section 3 of Part IX of Schedule IX provides that, notwithstanding any other Part of Schedule IX, 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 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" means "... a service involving the electronic storage of information and computer-to-computer transfer of information".

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

Therefore, where the final recipient of a web hosting service is located in one of the participating provinces, the supply is subject to HST at 15%. If the final recipient of a web hosting service is located in a non-participating province the supply is subject to GST at 7%.

Subscriptions

A supply of IPP is deemed to be made in Canada pursuant to paragraph 142(1)(c) of the ETA if the IPP may be used in whole or in part in Canada. Conversely, where the IPP may not be used in Canada the supply is deemed to be made outside Canada pursuant to paragraph 142(2)(g) of the ETA. A supplier is not required to collect tax in respect of a supply made outside Canada.

With respect to the supply in question (on-line subscription to a magazine), there does not appear to be any restrictions regarding where the IPP may be used. Where there are no restrictions, it will always be the case that the IPP may be used in Canada. Consequently, the supply of an on-line subscription to a magazine is a taxable supply for GST/HST purposes.

A taxable supply of IPP that is not zero-rated is subject to HST at 15% if it is deemed to be made in a participating province or subject to GST at 7% if it is deemed to be made in a non-participating province. Whether a supply of IPP made in Canada is made in a participating or non-participating province is determined by applying the rules in section 144.1 of the ETA and Schedule IX to the ETA. 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 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.

The place of supply rules for a supply of IPP not related to real property, tangible personal property or services are provided for in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA. Under these rules 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 to the ETA).

Where there are no restrictions regarding the province or groups of provinces in which the IPP can be used, 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 partly in, or relates partly to that province. Section 1 of Part I of Schedule IX to the ETA 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 the right can be used it will always be the case that the right can be used partly in, or relates partly to the province where the place of negotiation occurred. Therefore, where it is determined that the place of negotiation of the supply of the IPP is in a non-participating province XXXXX, the supply is deemed to be made in that province and subject to GST at 7%.

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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-5124.

Yours truly,

Gabrielle Nadeau
Border Issues Unit
General Operations & Border Issues Division
Excise and GST/HST Rulings Directorate