10 December 2002 GST/HST Interpretation 31560 - Supply of Digitized Music Files

Dear XXXXX XXXXX:

Thank you for your letters of XXXXX and XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supplies made by your client. We apologize for the delay in providing you with a response.

The following information was presented in your letter:

•   Your client ("the Company") is a company located in the United States (US) and is not registered for purposes of the GST/HST.

•   The company will be selling digitized music files over the Internet to consumers, resident in Canada.

•   The purchaser of the music files will download a digitized data file that is a music track. The purchaser will not receive a tangible product. The purchaser will only receive the right to download and use the digitized data file.

•   The purchaser will only be able to play this music for personal use and will not be permitted to resell it or use it for any commercial application.

•   All electronic files will be downloaded from a server site in the US. All business will be conducted through this US site.

Interpretation Requested

What is the tax status of the supplies made by your client?

Interpretation Given

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. We are pleased to issue you an interpretation that will elaborate on how the GST/HST applies to the supply described in your letter.

Based on the information provided, the supply by your client of the digitized music files that may be downloaded as described above is considered to be a supply of intangible personal property (IPP) for purposes of the Excise Tax Act ("the Act"). The purchasers are provided with a copy of the product and the right to use the product.

A taxable (other than zero-rated) supply of IPP made in Canada is subject to GST at a rate of 7% or, HST at a rate of 15% if made in the participating province of Nova Scotia, New Brunswick or Newfoundland and Labrador. A registrant (a person who is registered or required to be registered for GST/HST purposes) who makes such a supply is required to collect the tax payable by the recipient in respect of the supply and to account for and remit any resulting net tax remittable.

The general rules for determining whether a supply of IPP is made in or outside Canada are set out in section 142 of the Act as explained below. However, section 143 of the Act overrides these general rules. Specifically, subsection 143(1) of the Act provides that a supply of personal property or a service made in Canada by a non-resident person who does not make the supply in the course of a business carried on in Canada and who has not voluntarily registered for GST/HST purposes is deemed to be made outside Canada. The non-resident is therefore not required to collect tax on such supplies.

Under subsection 240(1) of the Act, every non-resident person, other than a small supplier, who is carrying on business in Canada and is making taxable supplies in Canada, including supplies made by electronic means, is required to register for GST/HST purposes. Also, a non-resident person who has a permanent establishment in Canada (which could include a server in certain circumstances) is treated as a resident of Canada under subsection 132(2) of the Act, and is consequently subject to the same GST/HST obligations as a domestic supplier in respect of activities carried on through that permanent establishment.

As can be seen from the above, it is important to determine whether a non-resident person is carrying on business in Canada for purposes of determining the person's obligations in relation to registration requirements and for purposes of determining the tax status of supplies made in Canada by the person. The factors that the CCRA will consider, both in a traditional and electronic commerce environment, in determining whether a non-resident person is carrying on business in Canada in a particular situation include:

•   the place where agents or employees of the non-resident are located;

•   the place of delivery;

•   the place of payment;

•   the place where purchases are made;

•   the place from which transactions are solicited;

•   the location of an inventory of goods;

•   the place where the business contracts are made;

•   the location of a bank account;

•   the place where the non-resident's name and business are listed in a directory;

•   the location of a branch or office;

•   the place where the service is performed; and

•   the place of manufacture or production.

The importance of a given factor in a specific case depends upon the nature of the business activity under review, and, as always, the particular facts and circumstances of each case.

In general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. Isolated transactions carried on in Canada as part of a business that is carried on by a non-resident person outside Canada may not result in the person being considered to be carrying on business in Canada, given that the above-noted factors will usually not be met to a sufficient degree.

The enclosed GST/HST Technical Information Bulletin B-090 GST/HST and Electronic Commerce contains examples that illustrate the above-noted approach to determining whether a non-resident making supplies by electronic means is carrying on business in Canada without having a permanent establishment in Canada.

A non-resident person who is not required to register for the GST/HST may voluntarily register under subsection 240(3) of the Act if, among other things, in the ordinary course of carrying on business outside Canada, the non-resident has entered into an agreement for the supply by the person of IPP to be used in Canada.

Subject to the previously explained rule under section 143 of the Act, a supply of IPP is deemed to be made in Canada pursuant to paragraph 142(1)(c) of the Act if the IPP may be used (meaning "allowed to 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)(c) of the Act.

A supply of IPP can be deemed made in Canada under section 142 of the Act even if it is not actually used in Canada. The fact that the supply may be made to a recipient who is outside Canada has no bearing on whether the supply is made in Canada. In determining whether IPP may be used in Canada, reference may be made to such things as any written agreement for the supply that contains terms governing the place of use of the IPP or a general restriction that may be explained on the supplier's Web site as to the use of the IPP, to which the recipient agrees either expressly or implicitly upon acquisition of the supply.

As previously indicated, a taxable (other than zero-rated) supply of IPP that is made in Canada is subject to HST at 15% if deemed to be made in a participating province or subject to GST at 7% if 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 and Schedule IX to the Act. Section 144.1 of the Act 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. A supply that is made in Canada and that is not made in a participating province is deemed to be made in a non-participating province.

Subparagraph 2(d)(i) of Part III of Schedule IX to the Act states that a supply of IPP is considered to be made in a province if all or substantially all of the "Canadian rights" ("Canadian rights" refer to that part of the IPP that may be used in Canada.) in respect of the IPP may be used only in the province. Subparagraph 2(d)(ii) of Part III of Schedule IX to the Act states that a supply of IPP will be considered to be made in a province if the "place of negotiation" ("Place of negotiation" is 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 reports to in the performance of his or her duties relating to the supplier's activities in the course of which the supply is made and "negotiating" includes the making or acceptance of an offer.) of the supply is in the province, and the property may be used otherwise than exclusively outside the province. 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 otherwise than exclusively outside the province where the place of negotiation occurred. Therefore, where there are no restrictions regarding where the "Canadian rights" in respect of the IPP may be used and it is determined that the "place of negotiation" is outside Canada, the supply of the IPP that is made in Canada is considered to be made in a non-participating province.

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