3 December 2002 GST/HST Interpretation 39421 - Tax Status of Supplies Provided Via the Internet

Dear XXXXX:

Thank you for your facsimile of XXXXX and the information provided on the telephone by XXXXX on XXXXX to XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made via the Internet. We apologize for the delay in responding to your request.

It is our understanding that XXXXX registered for purposes of the GST/HST effective XXXXX. XXXXX provides information technology related supplies including data backup and recovery, Web page design and general consulting.

Clients subscribe to XXXXX supply of data backup and recovery by accessing XXXXX Web site and making an electronic credit card payment. Once the account is activated, customers download their files to XXXXX data servers located in XXXXX. Customers can backup or recover their data files unassisted, using the Web site. XXXXX employees provide technical support only if necessary.

XXXXX also designs Web pages for clients. XXXXX does not retain ownership of these designs.

In addition, XXXXX plans to provide general consulting services. Such services would include assessing the information technology needs of clients, installing personal computer (PC) hardware and software, customizing and upgrading PCs and PC maintenance.

Interpretation Requested

You want to know:

1. if XXXXX is required to charge GST when providing data backup and recovery, Web page design and general consulting to non-residents; and

2. if XXXXX is required to charge HST when providing data backup and recovery, Web page design and general consulting to clients resident in the participating provinces.

Interpretation Given

Based on the information provided, the supplies of data backup and recovery, Web page design and general consulting are considered by the Canada Customs and Revenue Agency (CCRA) to be supplies of services for GST/HST purposes.

Pursuant to paragraph 142(1)(g) of the Excise Tax Act (the "ETA"), a supply of a service, other than a service in relation to real property, is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Conversely, paragraph 142(2)(g) of the ETA deems a supply of a service, other than a service in relation to real property, to be made outside Canada if the service is, or is to be, performed wholly outside Canada. If a supply of a service is deemed to be made outside Canada, it is not subject to the GST/HST.

Where all or part of the activities carried out by XXXXX in performing a service are carried out in Canada, XXXXX service is deemed to be made in Canada. A supply of a service that is made in the course of a commercial activity in Canada is taxable for GST/HST purposes at the rate of 7% (15% where the supply is made in a participating province (The three participating provinces are Nova Scotia, New Brunswick and Newfoundland and Labrador.)) unless the supply is zero-rated (i.e., taxable at the rate of 0%).

Section 7 of Part V of Schedule VI to the ETA zero-rates a supply of a service made to a non-resident provided none of the exclusions in paragraphs (a) to (h) of the provision apply. For example, the supply of a service made to a non-resident is excluded from zero-rating under this section when the service is rendered to an individual while that individual is in Canada or when the supply is made to an individual who is in Canada at any time when the individual has contact with the supplier in respect of the supply. "Individual" is defined in subsection 123(1) of the ETA to mean a "natural person" and would include sole proprietorships, trade-persons and professionals acting on their own account. A copy of GST/HST Memoranda Series Section 4.5.3, Exports - Services and Intellectual Property is enclosed and it provides further information with respect to the exclusions in section 7 of Part V of Schedule VI to the ETA. XXXXX data backup and recovery services, as well as its Web page design services supplied to non-residents may be zero-rated under section 7 of Part V of Schedule VI to the ETA provided that the services do not fall within the above-referenced exclusions.

The supply of an advisory, consulting or professional service made to a non-resident is also excluded from zero-rating under the provisions of section 7 of Part V of Schedule VI to the ETA. However, a supply of an advisory, consulting or professional service made to a non-resident is zero-rated by virtue of section 23 of Part V of Schedule VI to the ETA provided the service is, among other things, not a supply of a service in respect of tangible personal property that is situated in Canada at the time the service is performed or a service of acting as an agent of the non-resident person or of arranging for, procuring or soliciting orders for supplies by or to the non-resident. As such, the supply of XXXXX consulting service to a non-resident will be zero-rated under section 23 of Part V of Schedule VI to the ETA provided that the service does not fall within the exclusions of this provision. Section 4.5.3 of the GST/HST Memoranda Series also provides further information regarding this section and its exclusions.

Please note that it is the supplier's responsibility to verify that the recipient is a non-resident and to ensure that all of the zero-rating criteria are met. For your information, we have enclosed GST/HST Memoranda Series section 4.5.1, Exports - Determining Residence Status.

Appendix A of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient is not resident in Canada.

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 is necessary to determine the appropriate rate of GST/HST. 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 of the ETA deems a supply 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 provides 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 (i.e., 90% or more) of the Canadian element of the service is performed in that province. "Canadian element" of a service means the portion of the service that is performed in Canada. For example, if all or substantially all of a Web page design or general consulting service provided by XXXXX that is performed in Canada is performed entirely in XXXXX, the supply of the service is subject to the GST at the rate of 7% even if the recipient is located in a participating province.

Where paragraph 2(a) does not apply, paragraph 2(b) of Part V of Schedule IX to the ETA, deems a supply to be made in a province if the place of negotiation of the supply is in the province, and it is not the case that all or substantially all of the service is performed outside that province. The "place of negotiation" of a supply means 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 its duties relating to the supplier's activities in the course of which the supply is made. For example, if the place of negotiation for the supply of the service is in XXXXX and if greater than 10% of the service is performed in XXXXX, the supply is deemed to be made in XXXXX and is subject to GST at 7%.

Where paragraphs 2(a) and 2(b) of Part V of Schedule IX to the ETA fail to determine the place of supply of a service in a particular province, the supply may be considered to be made in a particular province pursuant to section 3 of Part V of Schedule IX to the ETA. This section provides that a supply is made in a participating province in the following circumstances:

•   the place of negotiation of the supply is in Canada and the Canadian element of the service is performed primarily (more than 50%) in the participating provinces; or

•   the place of negotiation of the supply is outside Canada, all or substantially all of the service is performed in Canada, and the Canadian element of the service is performed primarily in the participating provinces.

In either case, the supply of the service is made in the participating province in which the greatest proportion of the Canadian element of the service is performed.

With respect to XXXXX supply of a data backup and recovery service, this service is considered to be a supply of a "computer-related service" for purposes of the place of supply rules.

"Computer-related service" is defined in section 1 of the Place of Supply (GST/HST) Regulations (the "Regulations") to mean, in part, a service involving the electronic storage of information and computer-to-computer transfer of information. In this case, section 3 of Part IX of Schedule IX to the ETA together with section 10 of the Regulations are the relevant provisions for determining whether the supply of data backup and recovery is made in a particular province.

Section 3 of Part IX of Schedule IX to the ETA 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.

Subsection 10(1) of the Regulations provides, in part, that when there is to be a single final recipient of a supply of a computer-related service (such as a data backup and recovery service) made by a particular supplier, and the recipient acquires the supply under an agreement either with the particular supplier or another supplier, the supply is made in a particular province if the final recipient avails itself of the service at a single ordinary location in that 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.

If any one of the above criteria is not met, the supply of the data backup and recovery service will be made in a particular province if the mailing address of the recipient of the supply is in that province.

For purposes of the Regulations, a "final recipient" in respect of a data backup and recovery service means a person who is the recipient of the data backup and recovery service and who acquires it otherwise than for the purpose of supplying it to another person. Where consideration for a supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration is the recipient of the supply as defined in subsection 123(1) of the ETA.

Therefore, where a single final recipient of a data backup and recovery service provided by XXXXX does not avail itself of the service at a single ordinary location or where the conditions above with respect to information are not met, the determination of the place of supply is based on the mailing address of the recipient. For example, if the mailing address of the recipient of a taxable (other than a zero-rated) supply of data backup and recovery is in one of the participating provinces, such as Nova Scotia, the supply is made in Nova Scotia and subject to the HST at 15%. If the mailing address is in a non-participating province, such as, Alberta, the supply is subject to the GST at 7%, unless the supply is zero-rated.

There are special rules for situations that involve multiple recipients. More information regarding these rules may be found in the enclosed Technical Information Bulletin B-090, GST/HST and Electronic Commerce.

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) 954-7931.

Yours truly,

Anne Kratz
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate