16 August 2001 GST/HST Interpretation 33384 - Place of Supply for a Services Contract

XXXXX

Thank you for your facsimile dated November 8, 2000 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a service contract XXXXX has entered with a supplier.

Interpretation Requested

Your letter states that XXXXX has a service contract with a supplier that is headquartered in XXXXX. The contract was originally let in XXXXX, however, the supplier has since opened an office in XXXXX. Resources from both of the supplier's offices have been used in carrying out the terms of the contract. You have asked whether the progress payments made pursuant to the contract for the taxable supply of services are subject to the GST or HST.

Interpretation Given

Subsection 165(1) of the Excise Tax Act (ETA) requires that every recipient of a taxable supply (other than a zero-rated supply) made in Canada pay tax to Her Majesty in right of Canada at the rate of 7% on the value of the consideration for the supply. Subsection 165(2) of the ETA requires that recipients of taxable supplies made in a participating province (i.e. New Brunswick, Newfoundland, Nova Scotia) pay an additional amount of tax equal to the provincial tax rate which results in a HST rate of 15%. Therefore, where a supply is taxable and not zero-rated, the applicable tax rate is based on where the supply made.

In this case, the supplier is making a supply of ongoing services to XXXXX. Pursuant to subsection 136.1(2) of the ETA, the supplier is deemed to be making a separate supply for each billing period. Therefore, the supplier will have to determine whether the supply of its service is made in a participating or non-participating province for each billing period.

Section 144.1 of the ETA 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 and that any supply that is made in Canada and not in a participating province is deemed to be made in a non-participating province. Schedule IX to the ETA provides the rules for determining the province in which a supply is made. Part V of Schedule IX to the ETA sets out the rules for the determination of the place of supply of services assuming that the supplies in question are not services in relation to real property, transportation services, telecommunications services or prescribed supplies under the provisions of the Place of Supply (GST/HST) Regulations.

Pursuant to Part V of Schedule IX to the ETA, where the "place of negotiation" of a supply of a service is in Canada, and the service is performed in whole in Canada the rules are as follows:

Paragraph 2(a) of Part V of Schedule IX to the ETA provides that a supply of a service is made in a province if all or substantially all (90% or more) of the service is performed in the province.

Paragraph 2(b) of Part V of Schedule IX to the ETA provides that a supply is made in a province if more than 10% of the service is performed in the province and the "place of negotiation" of the supply is in the province.

The "place of negotiation" is defined in section 1 of Part I of Schedule IX to the ETA to mean

"... 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, or to which that individual ordinarily reports, in the performance of the individual's duties in relation to the activities of the supplier in the course of which the supply is made and, for the purposes of this definition, "negotiating" includes the making or acceptance of an offer."

If the above paragraphs do not apply, section 3 of Part V of Schedule IX to the ETA sets out that where the supply of a service is made primarily (more than 50%) in the participating provinces, the supply is deemed to be made in the participating province in which the greatest proportion of the service is performed.

Note, as stated above, where the supply of a service is not deemed to be made in a particular province pursuant to the above rules, section 144.1 of the ETA deems that it is made in a non-participating province.

From the information submitted, the services provided continue to be based on the original contract that was let in XXXXX. Accordingly, the "place of negotiation" is XXXXX. Therefore, progress payments will be subject to the HST rate of 15% if at least 10% of the service provided by the supplier for a billing period is performed in the province of XXXXX. If less than 10% of the service is performed in Nova Scotia, the determination of the place of supply and corresponding tax rate will be based on the other provision listed above (i.e., The place of supply will be in XXXXX if 90% or more of the service provided is performed in XXXXX.).

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) 952-0370.

Yours truly,

Brent Fleming
Government Sectors Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate