29 October 2002 GST/HST Interpretation 42270 - Application of GST/HST to Prepaid Telephone Cards Purchased by Indians on Reserve

Thank you for your query concerning prepaid telephone cards. The general scenario that your query is based on can be described in the following manner.

Company "A" sells prepaid telephone phone cards to company "B," who in turn sells them to company "C." Company "C" then sells them to an Indian individual who lives on a reserve, and "C" delivers them to the reserve. "C" does not charge GST to the Indian on the sale of the cards, but claims input tax credits with respect to the purchase of the cards from "B." "C" has no way of knowing where the cards end up being used. However, third party verification indicates that a number of these cards end up being purchased by non-Indian individuals at various off-reserve retail outlet locations.

First, we address the nature of the supply of prepaid telephone cards. Subsection 123(1) of the Excise Tax Act (ETA) defines a "telecommunication service" as

(a) the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system, or

(b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a).

An amount paid for a prepaid telephone card is considered to be an amount paid for a supply of a "telecommunication service," under the above ETA definition. The service is considered to be provided when the card is used by the purchaser.

Under Technical Information Bulletin B-039R (TIB-039R), entitled "GST Administrative Policy: Application of GST to Indians," a service acquired by an Indian is relieved of tax if it is performed totally on reserve. For telecommunication services, CCRA has taken the position that tax-relief will apply to a supply of a telecommunication service acquired by an Indian if there is sufficient evidence to connect the supply to a reserve. For example, a supply of a telephone service will be considered to be located on a reserve if an Indian acquires the service and the hook-up is on a reserve.

It is CCRA's position that the supply of the telecommunication service is made in the province where the telephone card is provided to the recipient who has purchased the card. The supplier of the telephone card collects the GST/HST at the time the card is provided to the recipient. GST/HST does not apply at the time when the recipient uses the card to obtain the telecommunication service.

For purposes of administering TIB-039R, however, CCRA has taken the position that the supply of telephone cards, whether acquired on or off reserve by an Indian, is taxable as there are insufficient factors to connect the use of a telephone card to a reserve at the time of supply (i.e., the cards can be used anywhere).

Section 87 of the Indian Act provides relief for "personal property of an Indian or band situated on a reserve." It has been suggested that because "personal property" in section 87 of the Indian Act encompasses both tangible and intangible personal property (IPP), CCRA could take the position that for purposes of administering TIB-039R, a telephone card is a supply of IPP, as it may be viewed as conveying the right to the service of emitting, transmitting or receiving signs, signals, etc. However, as IPP is not a physical object that can be delivered to a reserve, the telephone cards - as IPP - would still have to meet the requirements of section 87 of the Indian Act, (i.e., be situated on a reserve) in order for tax relief to apply. For administrative consistency, CCRA treats the supply of a telephone card made to an Indian, band or band-empowered entity as a telecommunication service, and not as personal property.

Recently, CCRA issued a GST/HST Application Ruling letter dealing with the supply of IPP made to Indians. The IPP in this case was memberships. CCRA took the position that where rights to property or services in respect of a membership can be used or exercised by an Indian or band exclusively on a reserve, that membership will be situated on reserve and tax relief will apply. The supply of a membership acquired on or off reserve by an Indian or band is relieved of GST/HST if all the rights to property or services in respect of the membership can be used or exercised exclusively on a reserve and other conditions set out in TIB-039R are met, including the provision of appropriate documentation.

The following is an example that illustrates the position taken by CCRA with respect to memberships that could apply to other supplies of IPP made to Indians.

A ticket to a sporting event is evidence that its holder has the right to attend that sporting event. A ticket to a sporting event held off reserve is subject to tax even if an Indian acquires it and the ticket is delivered to a reserve by the vendor. This is because the right to attend the event is exercised off reserve. However, if the ticket entitles its holder to attend a sporting event on a reserve, its acquisition by the Indian would be relieved of tax no matter where the ticket is acquired since the right to attend the event is exercised exclusively on a reserve.

Applying the above approach to telephone cards supplied to Indians would provide tax relief only in those instances where the right to a telecommunication service is restricted to use or exercise on a reserve.

Since the right conferred to the holder of a telephone card can be used or exercised anywhere and, at the time of its supply, there are insufficient factors to connect its supply to a reserve, the supply of a telephone card is taxable when acquired by an Indian.

Dwight Kostjuk
Indian Affairs Unit
PSBs & Govts Division
Excise and GST/HST Rulings Directorate