18 December 2002 GST/HST Ruling 33383 - Supplies Made Via the Internet

Dear XXXXX:

Thank you for your letter to XXXXX of XXXXX XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your company's supplies made via the Internet. Your request was forwarded to us for response and we apologize for the delay in replying to your enquiry.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

XXXXX (XXXXX) is a GST/HST-registered company based in XXXXX (XXXXX) that specializes in providing information, such as currency conversions, over the Internet and has a global client base. Its server is physically located in XXXXX, XXXXX.

Under a Licence Agreement (the Agreement), XXXXX will grant a client a non-exclusive, non-transferrable licence for the right to permit visitors to the client's Web site (end-users) to access and use XXXXX software, the XXXXX (tm) (XXXXX), and XXXXX data [hereafter, collectively referred to as "the XXXXX"]. Regardless of the location of the server that hosts the client's Web site, each and every attempt by an end-user to access or use the XXXXX involves communication with XXXXX servers in XXXXX.

For example: A client in Italy enters into an Agreement with XXXXX. Pursuant to the Agreement, XXXXX enables the XXXXX to appear as part of the client's Web site. End-users from around the world accessing the client's Web site are able to use the customized version of the XXXXX as if it were part of the client's Web site; however, regardless of the location of the end-user or the client, the relaying of the information to the end-user always involves communication with XXXXX servers in XXXXX.

The licence granted to the client is not limited to any particular country or province. Pursuant to the Agreement, XXXXX reserves all rights, titles and interest in the XXXXX, together with all intellectual property rights and goodwill therein and the client agrees to cooperate with XXXXX and to protect XXXXX intellectual property rights.

XXXXX charges a fee of USXXXXX for this right to permit end-users to access and use the XXXXX.

The place of negotiation (Section 1 of Part I of Schedule IX to the ETA defines "place of negotiation" 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, 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 ...") of the supply is in XXXXX.

In addition to providing the above information to its clients, XXXXX supplies a portion of its Web page for advertising purposes to XXXXX (XXXXX), a non-resident company that is not registered for purposes of the GST/HST. When an individual visits XXXXX Web page(s), the individual is able to view advertisements on XXXXX Web page that originate from XXXXX servers in the U.S.A.

XXXXX XXXXX, XXXXX XXXXX XXXXX[.]

Ruling Requested

What is the tax status of XXXXX supply under the Agreement and XXXXX's supply to XXXXX?

Ruling Given

Based on the facts set out above, we rule as follows:

1. XXXXX supply under the Agreement is a taxable supply of intangible personal property (IPP) and is deemed to be made in Canada under subsection 142(1) of the Excise Tax Act (ETA);

2. XXXXX supply of IPP under the Agreement made to a client who is a resident or non-resident of Canada is subject to the GST at a rate of 7%, pursuant to subsection 165(1) of the ETA, and,

3. XXXXX supply to XXXXX is a taxable supply of an advertising service and is zero-rated under section 8 of Part V of Schedule VI to the ETA.

These rulings are subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

The supply of IPP under the Agreement

XXXXX supply under the Agreement is essentially the supply of the right to permit end-users to access and use the XXXXX. Although the Agreement provides the client with the use of the XXXXX for internal purposes among other things, the principal object of the Agreement is the supply of the right indicated above. As such, XXXXX supply under the Agreement is a supply of IPP for purposes of the ETA. A taxable [other than zero-rated] supply of IPP made in Canada is subject to GST at the rate of 7% or HST at the rate of 15% [where made in a participating province (Nova Scotia, New Brunswick, and Newfoundland and Labrador)]. A taxable supply that is zero-rated is taxed, under subsection 165(3) of the ETA, at a rate of 0%.

As stipulated in paragraph 142(1)(c) of the ETA, a supply of IPP, that is not related to real property, tangible personal property or a service, is deemed to be made in Canada if the IPP may be used [meaning "allowed to be used"] in whole or in part in Canada. As the Agreement between XXXXX and a client does not restrict use of the IPP exclusively to "in Canada" or "outside Canada", under this paragraph, the supply is deemed to be made in Canada since the IPP may be used in Canada.

Once it is determined that XXXXX supply of IPP is made in Canada, it is necessary to determine the applicable tax rate. To do that, the province in which the supply is made has to be established. For that, section 144.1 of the ETA works in conjunction with the rules set out in Schedule IX to the ETA to make this determination.

As XXXXX supply of IPP is not related to real property, tangible personal property or service, and that there are no restrictions regarding the province or groups of provinces in which the IPP may be used, to subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA must be examined when ascertaining the place of supply. Under this provision, 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 IPP may be used otherwise than exclusively [90% or more] outside the province. Where there are no restrictions regarding the province in which the IPP may be used, it will always be the case that the IPP may be used otherwise than exclusively outside the province where the place of negotiation occurs. As the place of negotiation is in XXXXX, XXXXX supply of IPP is deemed to be made in that province. As such, XXXXX is required to collect the GST at a rate of 7% on its supply of IPP even if the person licensed under the Agreement is located in a participating province.

There are no provisions in Schedule VI to the ETA that would zero-rate XXXXX supply of IPP under the Agreement.

The supply of an advertising service

The term advertising is not defined in the ETA, however, the Canada Customs and Revenue Agency has provided an explanation as to what is generally considered to be an advertising service for GST/HST purposes in section 4.5.3, Exports - Services and Intellectual Property of the GST/HST Memoranda Series (copy enclosed). The explanation in this section refers to a service of creating a message and a service directly related to the communication of such a message. Further, 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.

There are occasions where the person communicating a message will not be the same person creating or supplying the message. Generally, the person supplying the broadcast or communication service will be in possession of the message or will have received sufficient information as to the content of the message prior to the supply of the service to know that the message is in the nature of advertising. In these situations, the supply of the broadcast or communication service will be considered to be a supply of an advertising service.

The supply to XXXXX of space on XXXXX Web pages that allows XXXXX to place an advertisement is considered to be a service directly related to the communication of a message. Given that XXXXX is providing the space for advertising purposes, the supply of the service is considered to be a supply of an advertising service made by XXXXX to XXXXX.

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, or is to be, performed in whole or in part in Canada. Based on the information provided, the advertising service provided by XXXXX is made in Canada.

A taxable (other than zero-rated) supply of an advertising service made in Canada is subject to the GST at the rate of 7% or HST at the rate of 15%, where made in a participating province. A taxable supply of an advertising service that is zero-rated is taxed at 0%.

Section 8 of Part V of Schedule VI to the ETA zero-rates a supply of an advertising service that is made to a non-resident person who is not registered for purposes of the GST/HST at the time the service is performed. As you have indicated that XXXXX is a non-resident that is not registered, XXXXX supply of the advertising service is zero-rated.

It is the supplier's responsibility to verify that the recipient is a non-resident and is not registered for GST/HST purposes. For your information, we have enclosed section 4.5.1, Exports - Determining Residence Status of the GST/HST Memoranda Series. Appendix B of this Memorandum describes the documentation that the Canada Customs and Revenue Agency will usually accept as proof that a person is a non-resident and not registered for purposes of the GST/HST.

Foreign currency

On XXXXX Web site, it is noted that the licensing fee is charged in U.S. dollars. Section 159 of the ETA will apply such that the value of the consideration for the supply shall be computed on the basis of the value of the U.S. dollars in Canadian currency on the day the tax is payable, or on such other day as is acceptable to the Minister. By virtue of subsection 168(1) of the ETA, tax is generally payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. As indicated, the Minister may accept alternative days for computing the value of the consideration for a supply in Canadian currency. For more information on these days, please refer to the enclosed copy of GST Memorandum 300-7-10 Foreign Currency. A copy of Policy Statement P-222 - Acceptable Exchange Rate Sources for Converting the Value of Consideration Expressed in Foreign Currency to a Value in Canadian Currency for Purposes of Section 159 of the "Excise Tax Act" is also enclosed for your reference.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8806.

Yours truly,

Marjorie Stevens
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate