9 October 2001 GST/HST Interpretation 25957 - Supplies Over the Internet

Dear XXXXX:

Thank you for your letter of January 13, 2000 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of 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.

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.

We understand that XXXXX is a sole proprietorship. XXXXX provides the following supplies:

•   Intranet design and hosting

•   Web site design and hosting

•   Maintenance and programming for the sites

•   Technical support for the sites

•   Computer hardware and software sales

•   On-site consulting and training

XXXXX clients are in the United States and in Canada, its office is located in XXXXX, XXXXX and the Internet server that XXXXX uses to host the sites is located in XXXXX, United States. Development work is done in XXXXX.

Interpretation Requested

What is the tax status of the supplies that XXXXX provides in the following situations:

•   Client is located outside North America, server in XXXXX, development work done in XXXXX.

•   Client is in the United States, server is in XXXXX, development work done in XXXXX.

•   Client is located in Canada outside XXXXX, server is in XXXXX, development work done in XXXXX.

•   Client is located in XXXXX, server is in XXXXX, development work done in XXXXX.

•   Client is a multinational, with offices in the United States and Canada (including XXXXX), head office is in XXXXX. In this situation, you are working for XXXXX of XXXXX (which includes Canadian operations). XXXXX had been billing for US and Canadian ports separately, charging XXXXX on the Canadian invoices, and 0% XXXXX on the US ones. But now they want one invoice for all the work XXXXX does for them. You would like to know what tax to charge and at what rate.

You would also like to know the tax status of the different supplies XXXXX makes:

1. Programming involves three levels:

•   Purchasing "off the shelf" software to use on the client's site.

•   Modifying existing software to meet clients' needs.

•   Programming from scratch for a customized solution.

2. Web hosting on the server in XXXXX.

3. Site maintenance (upgrading software, fixing bugs, updating data, etc.).

4. Technical support services.

5. Hardware sales (to the US, in Canada, and in XXXXX).

6. On site consultation (in the US, in Canada, and in XXXXX).

7. Account coordination (e.g., arranging third-party subcontracts, etc.).

Interpretation Given

Based on the information provided we offer the following interpretation:

1. Programming

For GST/HST purposes, where the product is "off the shelf" software delivered on a tangible medium, it is characterized as a supply of tangible personal property (TPP). Where the software is supplied electronically (downloaded as a digitized product) it is considered to be a supply of intangible personal property (IPP). Programming which involves modifying existing software (client owned software) or programming from scratch a customized solution where the client owns the software upon completion, is characterized as a service.

2. Web hosting

Web site hosting is considered by the Canada Customs and Revenue Agency (CCRA) to be a supply of a service for purposes of the Excise Tax Act (the "Act").

3. Site maintenance (up grading software, fixing bugs, updating data, etc.)

Where the supply consists of technical services associated with a website owned by the client, the supply is characterized as a service.

4. Technical support services

The supply is considered to be a supply of a service where the supply consists of advising clients on their hardware and software needs. Note however, that where the supply consists of a right of access to pre-existing technical documentation or access to a database, the supply is characterized as a supply of intangible personal property. If there is a combination of technical advice and access to pre-existing material being provided, we would require further information in order to determine whether it is a single or multiple supply.

5. Hardware sales

This is considered to be a supply of tangible personal property.

6. On site consultation and training

Consulting and training provided by employees of your company are considered supplies of services for purposes of the GST/HST.

7. Account coordination (arranging third-party subcontracts)

This is considered a supply of a service.

Services

Pursuant to paragraph 142(1)(g) of the Act, a service is deemed to be made in Canada if the service is performed in whole or in part in Canada. The supply of a service 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) on the value for the consideration of the supply unless the supply is zero-rated.

Section 7 of Part V of Schedule VI to the Act zero-rates the 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 all the remaining zero-rating criteria are satisfied. Therefore, programming, web hosting, site maintenance, and technical support services could qualify for zero-rating under this provision.

Also, in certain cases, section 23 of Part V of Schedule VI to the Act zero-rates a supply of an advisory, professional or consulting service. Further details would need to be provided in order for us to tell you if the consulting services provided by XXXXX would be zero-rated under this section. 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 Act are section 144.1 and Part V of 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.

Paragraph 2(a) of Part V of Schedule IX to the Act 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, where the supply of a service is not zero-rated, it is subject to XXXXX at the rate of XXXXX.

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%.

Tangible personal property (TPP)

Where a supply of TPP is, or is to be, delivered or made available in Canada to the recipient of the supply, the supply is deemed to be made in Canada pursuant to paragraphs 142(1)(a) and (b) of the Act and therefore subject to tax at the rate of 7% (or 15% if the supply is made in a participating province). Where a supply of TPP is delivered or made available outside of Canada, the supply is deemed to be made outside of Canada pursuant to paragraphs 142(2)(a) and (b) of the Act. A registrant is not required to charge and collect tax in respect of a supply made outside Canada.

Where a taxable supply of TPP is made in Canada, pursuant to Part II of Schedule IX to the Act, the supply is made in a province if the supplier delivers the property or makes it available in the province to the recipient of the supply. Therefore, the consideration for a supply of hardware or software sold on a tangible medium is subject to GST at the rate of 7% if made in a non participating province or at a rate of 15% if the TPP is provided in a participating province.

Intangible personal property (IPP)

In the case of a supply of IPP, as it appears that the IPP may be used in whole or in part in Canada, the supply is deemed to be made in Canada under the provisions of subparagraph 142(1)(c)(i) of the Act. The fact that the software supplied by electronic means is supplied to clients outside of Canada is irrelevant when determining the place of supply of IPP. The supply is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Act if the IPP may be used in whole or in part in Canada.

Section 10 of Part V of Schedule VI to the Act is the only zero-rating provision for the supply of IPP made in Canada to a non-resident recipient. This section is only relevant in circumstances that involve the supply of IPP that is intellectual property or the supply of IPP that is a right to use intellectual property. We consider a supply of software that is IPP to qualify for zero-rating.

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 Act 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 to the Act, 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 Act. 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 Act).

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 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 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 participating province (e.g. XXXXX), the supply is deemed to be made in that province and subject to HST at 15%.

With respect to the work XXXXX does for XXXXX XXXXX (which includes Canadian operations), the tax status will depend on the type of supplies provided (i.e. services, TPP or IPP), as described previously. Therefore, if the work involved is characterized as a service and that service is performed in XXXXX, the XXXXX will apply at a rate of XXXXX unless the service is zero-rated. If the work involved is characterized as IPP, XXXXX will apply at XXXXX unless section 10 of Part V of Schedule VI to the Act applies. If the work involved is a combination of more than one supply, we would have to determine if it is a single supply or multiple supplies.

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 and Border Issues Division
Excise and GST/HST Rulings Directorate