21 November 2002 GST/HST Interpretation 30957 - Application of GST/HST to Fees for Access to Mainframe Computer and Consulting Services

Dear XXXXX:

Thank you for your letter of XXXXX, addressed to Gunar Ozols, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees charged for access to a mainframe computer in the United States (U.S.) and to services mainly supplied in the U.S. with the Canadian component supplied in one Canadian province. I apologize for the delay in replying to your letter.

The following information was presented in your letter.

•   X Co. is a non-resident and is registered for purposes of the GST/HST.

•   X Co. is engaged in the provision of consulting and data processing services and the supply of computer software. In addition, X Co. is an application service provider.

•   As an application services provider, X Co. allows Canadian businesses to access software situated on its mainframe computer in the U.S. for all of their daily business needs without having to purchase a sophisticated computer hardware system.

•   The software is used by the client for inventory control, accounting, sales documentation and other business purposes.

•   The client uses X Co.'s software and facilities in order to carry out its data processing function.

•   X Co. and the client enter into a separate agreement with respect to the use of the software.

•   In the course of setting up the connection to its mainframe, X Co. will install networking equipment at the client's premises in Canada so that the client is able to access the mainframe in the U.S.

•   X Co. issues a separate invoice for the installation of the networking equipment at the client's site. In addition, X Co. issues a separate invoice for a customer needs analysis, system design (recommending the type of system to set up) and setting up the mainframe in the U.S. to allow access by the client (i.e., adding a port). This latter charge is called an upfront fee.

•   The access fee is also invoiced separately and is a monthly fee paid by the client for access to the mainframe.

Interpretation Requested

What is the GST/HST status of the upfront and access fees?

Interpretation Given

Based on the information provided, it appears that the supply being made by X Co. is a single supply of the right to use software, which is a supply of intangible personal property (IPP). Although X Co. is also hosting the software, and undertaking the necessary steps in order to allow the client to access that software, the supply is essentially the provision of a right to use software. As a result, the various charges would be subject to tax at the same rate.

The determination that a single supply is involved is based on our enclosed policy, P-077R Single and Multiple Supplies. In this regard, we note that if X Co.'s clients did not receive all of the elements involved, it does not appear that each element, in itself, and in the context of the transaction, would be of any use to the clients. As indicated in your letter, in essence, the client needs and intends to use both X Co.'s software and facilities in order to carry out its data processing function. As further indicated in your letter, X Co. allows its Canadian clients to access software on its mainframe without having to purchase a sophisticated computer hardware system.

A further indication that a single supply is involved in this case based on the policy, is that the provision of each of the elements appears to be contingent on the provision of the others. Specifically, based on the information provided, it does not appear that X Co.'s clients may acquire the software from X Co. without obtaining from X Co. what the upfront and access fees are being charged for.

As the supply made by X Co. is a supply of IPP, it is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act (ETA), if it may be used (meaning "allowed to be used") in whole or in part in Canada. Conversely, if the IPP may not be used in Canada, it is deemed to be made outside Canada under subparagraph 142(2)(c)(i) of the ETA.

As you know, a taxable (other than zero-rated) supply of IPP made in Canada is subject to GST at a rate of 7% if deemed made in a non-participating province, or HST at a rate of 15% if deemed made in the participating provinces of Nova Scotia, New Brunswick or Newfoundland and Labrador.

Section 144.1 of the ETA provides in part that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out under Schedule IX, made in the 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 Part III of Schedule IX to the ETA. Subparagraph 2(d)(i) of Part III of Schedule IX 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 IPP may be used only in the province. "Canadian rights" means that part of the IPP that may be used in Canada.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA states that a supply of IPP is 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 property can be used otherwise than exclusively outside the province where the place of negotiation occurred.

Where subparagraphs 2(d)(i) and 2(d)(ii) of Part III of Schedule IX fail to locate the place of supply of the IPP in a particular province, paragraph 3(d) of Part III of Schedule IX may apply. Paragraph 3(d) applies where

•   the place of negotiation of the supply is in Canada and the Canadian rights that relate to the property can only be used primarily in the participating provinces; or

•   the place of negotiation of the supply is outside Canada, the property can only be used exclusively in Canada, and the Canadian rights can only be used primarily in the participating provinces.

In either case, the supply of IPP is considered to be made in the participating province with the greatest proportion of the Canadian rights that may only be used in the participating provinces.

As a general response to the issue raised in your letter in relation to the application of HST to services, we would like to confirm that pursuant to subsection 2(a) of Part V of Schedule IX, if all or substantially all of the "Canadian element" of a service is performed in a province, the supply of the service is made in the province. As indicated in your letter, the "Canadian element" of a service is defined under section 1 of Part V to mean the portion of the service that is performed in Canada. Therefore, based on this definition and the rule under subsection 2(a), if a registered supplier that has no permanent establishment in Canada performs 100% of the Canadian element of a taxable (other than zero-rated) service in a participating province, the supply will be deemed to be made in the province and consequently subject to HST at 15%. This is the case even if the "Canadian element" of the service represents 5% of the total service to be performed.

We would like to further confirm that under section 3 of Part V, if the Canadian element of a service is performed primarily in the participating provinces, the supply of the service is made in the participating province in which the greatest proportion of the Canadian element is performed. However, this rule does not apply where the place of negotiation of the supply is outside Canada and it is not the case that all or substantially all of the service is performed in Canada. Therefore, even if 50% or more of the Canadian element of a service is performed in the participating provinces, section 3 does not apply to deem that supply in a participating province if the supplier does not have a permanent establishment in Canada and less than all or substantially all of the total service is performed in Canada (such as where only 5% is performed in Canada).

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