25 October 2002 GST/HST Interpretation 36992 - Sale of E-Books Over the Internet

Dear XXXXX:

Thank you for your letter of XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of e-books over the Internet. Please accept my apology for the delay in replying to your letter.

At issue is the sale of books on your web site.

The following information was presented in your letter.

•   XXXXX is resident in Canada and is registered for GST/HST purposes. XXXXX is headquartered in XXXXX.

•   XXXXX intends to sell e-books on a web site at XXXXX.

•   XXXXX

•   The web site will be available to both residents and non-residents. All sales will be shown in U.S. dollars to reflect the international nature of the site.

•   All electronic versions of the books will be produced using your own XXXXX XXXXX XXXXX

Interpretation Requested

Does XXXXX have to charge GST/HST on every order for an e-book, which originates in Canada?

Interpretation Given

XXXXX must charge GST at a rate of 7% on its supply of e-books made to both residents and non-residents.

The supply of the e-books is a supply of intangible personal property (IPP) for purposes of the Excise Tax Act ("the Act"). Customers who order the e-books are being provided with a copy of the product, as well as the right to use the product.

A taxable supply of IPP made in Canada is subject to GST at the rate of 7% (15% when made in a participating province; Nova Scotia, New Brunswick or Newfoundland and Labrador) of the value of the consideration for the supply unless the supply is zero-rated (taxed at 0%).

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. 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.

It appears that the supply of IPP in question may be used in Canada and is therefore made in Canada. There does not appear to be any restrictions regarding where the IPP may be used and the fact that the supply may be made to a recipient who is not resident in Canada does not affect the determination of whether the supply is made in Canada. Where there are no restrictions, it will always be the case that the IPP may be used in Canada.

We note that there is no provision in the Act that would zero-rate the supply of IPP in question.

A taxable supply of IPP that is made in Canada and is not zero-rated 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. 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 paragraph 2(d) of Part III of Schedule IX to the Act. 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 in respect of the property may be used only in the province. "Canadian rights" refer to that part of the IPP that may be used in Canada (section 1 of Part III of Schedule IX to the Act). Where there are no restrictions regarding the province in which the IPP may be used, subparagraph 2(d)(i) is not applicable.

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 of the supply is in the province and the property may be used otherwise than exclusively outside the 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 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 occurred. Therefore, where it is determined that the place of negotiation of the taxable (other than zero-rated) supply of the IPP is in a non-participating province such as XXXXX, subparagraph 2(d)(ii) deems the supply to be made in that province and the supply is consequently subject to GST at 7%.

We note that you intend to show your prices in U.S. dollars. Pursuant to section 159 of the Act, when the consideration for a supply is expressed in foreign currency (e.g., U.S. dollars), the value of the consideration shall be calculated based on the value of the foreign currency in Canadian currency. The determination of the value of the consideration in Canadian currency is made on:

1. the day that GST/HST is payable; or

2. such other day as is acceptable to the Minister.

Consideration expressed in a foreign currency must, therefore, be converted into Canadian currency using either the exchange rate on the day GST/HST is payable or on such other day as is acceptable to the Minister.

GST/HST becomes payable on the earliest of the day on which consideration is paid or becomes due. Consideration generally becomes due on the earliest of the day on which the supplier first issues an invoice for the supply, the date of the invoice and the day the recipient is required to pay the consideration pursuant to an agreement in writing.

The following days are also acceptable for determining the value of the consideration for a supply in Canadian currency: the day the consideration for the supply is paid, the day the foreign currency was acquired and the average rate of exchange for the month in which tax is payable. Enclosed for your further information is GST Memorandum 300-7-10, Foreign Currency.

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